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The Great Overhaul of China

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On February 24, the China Banking Regulatory Commission released its Green Credit Guidelines, securing China's global leadership in advancing environmental principles and rules across its banking sector.

Uniquely covering corporate as well as project finance, the guidelines are mandatory and establish the basis for oversight of the financial sector's handling of environmental issues, explicitly linked to licensing arrangements. Implementation will undoubtedly be a slow and challenging process, but let no one doubt the seriousness of this move.

Today, the U.S. Chamber of Commerce launches its first report on corporate responsibility in China. Co-authored by myself and titled "Corporate Responsibility and Sustainable Economic Development in China," the report aims to shed some light on where responsible business practices fit into China's rapidly changing operating environment.

The report explores whether China's visible embrace of what it calls 'corporate social responsibility' is a side activity of marginal relevance to business behaviour and China's development, or whether it is part of a deeper strategy to move China towards becoming the world's leading green and inclusive economy.

The report concludes that while there are inevitably examples of the former, broadly comparable to international experience, it is the latter option that best describes current developments. Responsible, green business practice is required for China's domestic stability, its moral mandate as an emerging super-power, and its hope for a economy that is currently in environmental free-fall.

China's newest five-year plan sets out ambitious intentions for advancing a more balanced domestic economy, framed by out-going Premier Wen's characterization of the current economic model as "unbalanced, unstable, uncoordinated, and unsustainable." Evidence of the seriousness of China's stance includes its commitment over the plan period to invest in environmental protection to the tune of US$450 billion, to put an extra US$450 billion into renewable energy and to add US$600 billion into smart grids.

Ambitiously, China has recently announced plans to pilot seven domestic carbon markets in Beijing, Tianjin, Shanghai, Chongqing, Shenzhen, Hubei and Guangdong, covering hundreds of millions of people, and hundreds of thousands of companies.

Alongside macro-economic and fiscal measures, the Chinese government has steadily raised the regulatory stakes in what it expects from business. In 2006, the new company law stated, "Corporations in their business operation must abide by the laws, regulation, social and business morality and good faith rules, must accept supervision by government and the public, and must undertake social responsibilities."

In 2007, the Ministry of Commerce (MOFCOM) issued the "Circular on Enhancing Environmental Surveillance on Exporting Enterprises," to restrict socially irresponsible enterprises from conducting foreign trade.

In 2008, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) published the "Guidelines on CSR Fulfilment by Central-Level Enterprises." These guidelines (which are, in effect, mandatory) present CSR as the way for state-owned enterprises to contribute to China's national development goals.

As a member of the UN Human Rights Council, China, perhaps to some unexpectedly, endorsed the UN Guidelines on Business and Human Rights, which provides a framework of principles on the state's duty to protect human rights, the corporate responsibility to respect human rights, and the need for remedy when corporate-related abuses have occurred.

Despite China's caution toward international standards, it eventually signed-off on ISO's new CSR framework, ISO 26000, and plans to adopt it as a national standard. Other selected international standards have also made inroads. The Forest Stewardship Council, set up in China in 2007, had by 2011 certified two million hectares of China's forests as sustainably managed, and is issuing new certification to companies using forest products at a rate of one new company every three days.

Practice is as always hard to measure systematically. Rhetorically, it is developing from its early roots in philanthropy and compliance into a strategic concern addressing the efficiency and security of supply chains, development of new products and services, the competition for talent, and the reputation and other gains from credible governance and accountability.

The World Economic Forum's recent report, Emerging Best Practices of Chinese Globalizers, provides more than a dozen vignettes of responsible business practices of Chinese companies, especially in their international operations.

At least 60 major Chinese companies use the international Global Reporting Initiative Guidelines, with the China Overseas Shipping Company (COSCO) securing the GRI's most stringent "A+" level rating for its sustainability report.

The China Entrepreneur's Club, an alliance of CEOs and Presidents of leading private Chinese companies publishes an increasingly robust annual green rating, as do several other groups including the state-sponsored Chinese Academy of Social Science's CSR Unit.

Inevitably there is anecdotal evidence of, often very poor social and environmental practice below the waterline, including by self-declared sustainability leaders. Internationally visible cases include most recently the abysmal working conditions in Apple's main supplier, Foxconn, and the ghastly case of Sanlu Dairy, whose Chief Executive was sentenced to death following her conviction for knowingly selling tainted milk that killed several children and sickened thousands more.

Yet equally, there is a growing push-back by citizens against health and safety failures. Tens of thousands of students and white-collar workers of the affluent coastal city of Dalian successfully demonstrated last year against the Fujia factory, which produces paraxylene, a mildly toxic chemical used in plastics. And while there is arguably less success in rural and working class demonstrations against corporate irresponsibility, this is also likely to change given the increasingly vocal portion of China's 81 million bloggers drawn from a community of 340 million internet users.

The Chinese Ministry of Civil Affairs reported that, as of 2008, China had around 400,000 registered NGOs. Unofficial estimates put the figure closer to three million. Environmental NGOs are increasingly active in raising public awareness, evidenced by their role in catalyzing recent public debate about the health hazards of urban pollution.

China's success, indeed its very survival, depends on these fragmented developments cohering into a powerful transformation of its economy. State policy will be crucial in driving forward more responsible business behaviour and the greening of investment and all-important value chains.

But civil regulation, the internationally familiar nexus of sustainability standards, citizen action and business engagement, will become increasingly important in delivering credible sustainability outcomes. This will be true internationally as China's burgeoning outward investment seeks legitimacy, access and success. But it will also be true domestically, as the state allows for, and seeks to harness, the forces of civil regulation.

Directionally, there is a vision and a plan. But the challenges of transforming so huge, complex and dynamic a system in real-time makes 'blueprint-style' planning impossible and increasingly unhelpful. Practical experience is therefore increasingly valued in policy formation, rather than the more abstract, top down traditions of earlier generations of policy think tanks and policy makers.

Evidence-based, effective practice that can be scaled has growing currency in Chinese policy development and planning. That in turn raises the potential for non-state actors, including international business and non-profit organizations, to have a growing voice in advancing China's policy and practice towards sustainability.