Comply or Close The New Reality for Industrial Facilities in China - - PowerPoint PPT Presentation

The business of sustainability

“Comply or Close”

The New Reality for Industrial Facilities in China

Piers Touzel Country Manager, ERM China

piers.touzel@erm.com

Cherry Hu Partner, ERM China

cherry.hu@erm.com

The business of sustainability

Background

Over the last 12 months:

• MEP issued 230,000 violation notices
• Most involved fines
• Some resulted in plant managers and/or local officials jailed
• ~10,000 factories shut down
• Business interruption, chaos with supply chains, etc
• MNCs caught by surprise. They should not have been
• Part of a well-signaled shift from permitting & approvals to
• perational compliance

The business of sustainability

Inspections have been well-signaled

http://english.sepa.gov.cn/News_service/news_release/index.shtml

The business of sustainability

Areas of focus: Environmental

Priorities differ by region and include:

• Air emissions, particularly in three degraded airsheds
• Hazardous waste treatment and disposal
• Surface water and drinking water protection areas

The business of sustainability

Areas of focus: Industrial

Industries targeted for particular focus include:

• Cement
• Steel mills
• Chemicals
• Mining
• Oil production and refining
• Electroplating
• Tanneries (leather production)
• Waste to Energy

The business of sustainability

• Government has drawn up “Supervision Lists of Polluting

Enterprises” for each Province and City.

• These lists have been published on the EPB’s website.
• Individual facilities named as “Key Polluting Enterprises”

Areas of focus: Individual Companies

• Facilities named on this list can expect:
• Increased inspection, monitoring and

public reporting requirements

• Possibly having to convey real time

monitoring data direct to EPB

• To be a focus of environmental actions,

eg during air quality alerts.

The business of sustainability

Number of Key Polluting Enterprises Number of Wholly Owned Foreign Enterprises Number of Chinese /Foreign JVs Water Polluters 672 151 142 Air Polluters 287 75 87 Soil Polluters 398 145 119 Noise Polluters 7 1 Other Polluters 119 18 17 TOTAL 1,068 264 242 *Published 7 January 2018 http://www.sepb.gov.cn/fa/cms/shhj/shhj2133/shhj2136/2018/01/98067.htm

Shanghai Supervision List for Key Polluting Enterprises*

Areas of focus: Individual Companies

In Shanghai alone, over 1,000 companies are named as “key polluting enterprises”. Half of them are foreign-invested

The business of sustainability

All follow a similar pattern:

• 1. Review of compliance with environmental permits
• 2. Environmental sampling; and
• 3. Investigation of community complaints, such as odour.

What do Inspections Involve?

The business of sustainability

How will this play out over 2018?

• MEE has signaled that the focus of 2018 is to follow up on

the 2017 inspections and those on current supervision lists

• Not expecting to see more facilities added to “Supervision

Lists” in 2018. Next lists to be published early 2019

• Any companies on a “Supervision List” should closely

monitor MEE website as new requirements for these companies will be issued from time to time.

• From 1 July 2018, Key Soil Polluters may be required to undertake

soil and groundwater sampling and to report this to Govt

Looking Forward

The business of sustainability

More Information

www.erm.com Piers Touzel Country Manager, ERM China

piers.touzel@erm.com

Cherry Hu Partner, ERM China

cherry.hu@erm.com

G

Beyond Compliance

Weathering China’s Environmental Storm

庄博闻/ Johnny Browaeys Director International Business

Presented at AmCham Shanghai's Environmental Committee AmCham Shanghai Conference Center, April 17th, 2018

Executive Summary

1) A 3-year environmental storm started which is reshaping the industrial landscape in China 2) The storm will impact your sites, and likely even more so your local supply chain 3) The impact will be very different for different locations, depending on regional sensitivities 4) You will have to abide with national interests but can/should protect against local interests 5) It requires cross-checking various data sources to truly understand your situation 6) Tactical actions may suffice to mitigate risks, critical business decisions may be required 7) Planning is required to minimize damages and maximize benefits 8) Using DRMT, the vulnerability of your site can be assessed by its address, without visiting

庄博闻/ Johnny Browaeys

Director International Business

• Masters in Bio-engineering & in Environmental Policies
• 25 years experience with EHS consulting in Asia, Africa,

Europe and Latin America, based in China since 2003

• Previously worked for ERM, CH2M Hill and DuPont
• Profile: https://www.linkedin.com/in/johnnybrowaeys/

Mobile & Wechat: 13761894720

Personal Introduction

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GREENMENT originated in 2012 when Fortune 500 Company CH2M Hill decided to localise their environmental Business Unit, their operational procedures are embedded in our operations. GREENMENT now is owned and managed by China’s pioneers in Environmental Management, serving MNC’s since the early nineties. We are the largest environmental consultancy in China with close to 100 staff and have offices in Shanghai, Beijing, Guangzhou and satellite offices in US Sacramento and Europe Antwerp and delivery partners in 36 countries. We also offer EHS due diligence and permitting services via local delivery partners in several other countries, both for foreign and Chinese companies. Clients include 80% of Fortune 100 manufacturers.

Company Origin and Locations

Transaction Services Impact Assessment and permitting Contaminated Site Management Sustainable Operations and Supply Chains

From investment

• ver operation to

divestiture

Areas of Expertise

Outline

1 2 3

Change of Environmental Policy Business Impact Choices to Make

4

Case Studies

Part01 Change of Environmental Policy

The New Environmental Era in China

China started organizing environmental sweeps, closing, relocating & upgrading factories in line with the 13th 5-year plan & China’s 2020 Milestone to become a « 全面建成小康社会» (*) Compliance with regulations is no longer enough. Local Government KPI and new Environmental Initiatives all focus on:

– Improving « regional environmental quality »` – Reducing industrial impact until the « regional environmental quality » goals are achieved – Taking environmental « emergency response measures », eg. at times of heavy pollution weather – Closely monitor companies that are published in the «Supervision Lists for Key Polluting Enterprises»

(*) 全面建成小康社会: the 13th Five-Year Plan aims to build a moderately prosperous society in all aspects. Xi JinPing raised “three tough battles”

preventing and defusing financial risks, targeted poverty alleviation and pollution control (http://skill.qsbdc.com/mobile/?mid=3&aid=20749).

Part02 Business Impact

Companies are Expected to Participate

Unexpected requirements from local governments to reduce environmental impacts, and to reduce, relocate or even close operations. Sharp increase in local initiatives that require companies to upgrade, move reduce or even close operations

« Shandong Chemical Industry Special Action » moving factories « Suzhou 263 & 4 batches » upgrading SME « Nanjing Two reductions » reducing chemical and coal industries « Six Uprisings » cleaning black rivers and Taihu Lake & ….. « Zhejiang 61 Entreprise License Cancellations » « Sichuan and Hubei relocations of Dangerous Chemical Factories » and many more…

This is linked with a bigger plan of addressing over-capacity, re-organising the industrial landscape (old – new industry) and other more local motives (tax, land use…) The Good News: Policies instruct a planned approach,with disclosure, compensation and even financial support, BUT companies are often unaware (for example: « Instruction 77 ») And the country is getting rid of « old, polluted, messy, and scattered » factories…

Instruction 77, from the General Office of the State Council to local governments (Sept. 2017)

Streamline the relocation of hazardous chemical enterprises from heavily populated areas to specialised locations Timeline

– Develop plan to relocate and improve hazardous enterprises by the end of 2017 – Improve and relocate small, medium-sized and large enterprises with significant potential risks between 2018 and 2020 – Improve and relocate other large enterprises between 2020 and 2025

Objectives

– Make inventory and shut down those who refuse – Develop relocation plan with scope, objectives, schedule and arrangements for industrial parks, workers, security… – Sollicit opinions from related enterprises, disclose relocation plan to the public before implementation

Support

– Fiscal Support – Financing and investment

Part03 Choices to Make

Environment : sensitivity Policy/planning: conformance Site: compliance

First Understand Your Vulnerability

Environmental risk results from 3 dimensions: § The factory/site itself (compliance) - S § Its surrounding environment (sensitivity) - E § Industrial and regional policies (conformity) - P

Targeting compliance (S) is NOT enough to protect yourself. Requirements that come from (E) and (P) are dynamic and go “BEYOND COMPLIANCE”

Be Aware of Sensitivity (E) & Conformity (P)

Is your industry in that part of the country still in line with the most updated industrial planning? Is your industry still on China’s preferred investment list? How is your site affected by Urban & Ecological Development and Planning?

Understand Your Assets

§ MNC’s have led EHS in China over the last 30 years § Industrial Best Practices and Technical Solutions Your solution for your wastewater or your waste

• r air emissions etc. maybe valued much more

than you realize… especially if you are willing to move inland and become a leader in the industrial upgrade

When the Inspector Knocks At Your Door

§ Show your « compliance » status and implementation plan § Be confident and constructive, ask detailed feedback & advice § Offer support to help implement new policies and solve China’s (and also the Inspector’s) challenges § Balance relations to cross-verify what you hear, abide with the national interest, but don’t be abused by the local interest § Be ready to negotiate, based on what you have and whom you are dealing with, leverage your assets § Ensure you know enough to take tactical measures and make strategic decisions (see cases below)

Part04

Case Studies

Cases are illustrated using GREENMENT’s Dynamic Risk Management Tool (DRMT)

STRATEGIC

ADVANCED

DYNAMIC RISK MANAGEMENT

COMPLIANCE MANAGEMENT PRIMARY RISK MANAGEMENT

Green-brand building road map design Permitting and field verification Stakeholder survey and communication

Strategic service and brand building

Specific focus beyond the compliance Best practices

Customized service

“Big” Data processing multiple information sources comprising regulations, violations, policies, planning, … using an “Intelligent” evaluation of dynamic business criteria

Dynamic Risk Management Tool

Thorough identification of compliance issues (specific) Root cause diagnosis On-site testing and follow-up

Supply chain risk identification and solutions

High risk screening Applicable regulations identification

Risk screening and emergency management

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Compliance & Violations Regional Environmental Quality Emissions & Discharges Policies & Permits Industrial Policies Key Monitoring Enterprises

Input Cross-checking

Violations Regulatory Compliance Regional Policies Industrial Planning Land Planning Regional Sensitivity Local Initiatives Emergency Measures

Without visiting the site, DRMT allows to foresee where to expect what next and allows to:

• identify, categorize sites that are at risk, and tactically mitigate key risks
• Re-evaluate the China business and take strategic business decisions

Processing

Out In

Site Address S-E-P- scoring

DRMT helps to ensure that your sites and supply chain keeps operating

2017

• 2018

Global Manufacturer

• Lost one Key Supplier
• Could not meet business orders

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Illustration – case 1

City/Industry Electroplating Painting Steel xxx E2P2 E4P3 E4P5 xxx E1P1 E2P1 E2P1 xxx E6P6 E5P6 E5P6 xxx E2P2 E3P2 E3P2 xxx E5P5 E5P4 E6P5 xxx E2P1 E2P2 E3P3 xxx E4P3 E4P3 E5P4 xxx E3P2 E3P2 E3P3 xxx E6P5 E4P4 E4P6 xxx E6P6 E5P4 E3P2 xxx E6P6 E5P6 E5P5 xxx E2P1 E2P1 E3P1

For each industrial activity

Risk Level Score Color High 9~12 Red Medium 5~8 Yellow Low 1~4 Green

DRMT Screened about 200 sites in 80 Chinese cities for related industrial activities (extract below)

Upon request, findings were made based on the cities where the sites are located without revealing specific suppliers details (EP scoring). Sites in 15 cities were identified at “high risk”, meaning factories and suppliers are likely to phase out over time. Sites in 6 provinces were categorized as “safe” places which indicates they over time will take over the industry.

City names made invisible for confidentiality reasons

Evaluation and regional visualization of operational sites and suppliers

Key Outcomes The company quickly got an overall picture of their suppliers and operational sites without visiting them. Sites with a <2 year high risk outlook were identified and categorized. Tactical Mitigation of Supply Chain Risks ü Find alternatives for 4 high risk sole suppliers to avoid interruption of the business ü Find and pre-negotiate additional suppliers for 12 high risk suppliers to prevent costs impacts Strategic Considerations for the Business ü Moving part of business activities from one site to another site in a safe zone closer to a long term secure supply chain will save costs. ü Moving to a specialized zone instead of upgrading one of their factories in line with government planning and leveraging company assets creates fiscal and financial benefits subsidizing transformation of the China business.

Safe! Low Risk At Risk Challenge No future

Note: some of the information in this map was deliberately changed for reasons of confidentiality

2018

Pulp & Paper Manufacturer

• Increasing compliance pressure
• Increasing operational costs
• Decreasing local support

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Illustration – case 2

Requested Support ü Compliance auditing and compliance support for 10 factories in China ü Regulatory development review to evaluate future requirements for their business in China Key Findings ü Compliance issues related to wastewater, air and waste expected to grow, no matter how much investments are made in treatment, because… ü All factories are located in cities where replacement of old and traditional industry with new value or high tech industry is happening. Strategic Recommendations ü Evaluate options for moving / upgrading considering regional and national policies ü Develop stakeholder analysis, engagement and compensation planning and obtaining guarantees for future business

2017

Automotive Manufacturer

• Important suppliers shut down
• Serious impacts on profits

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Illustration – case 3

Requested Support ü Audit 40 suppliers within a month ü Screen and categorize risks according to S-E-P Key Findings ü 4 suppliers were categorized “High Risk” ü 2 weeks after the client received the report, 2 out

• f these 4 suppliers were closed down

Tactical Mitigation of Supply Chain Risks ü Company adapted overall supplier purchase program to avoid future losses and delays in the

• perations

2015

• 2018

Electronics Brand Company

• Increasing reputational pressure

because of supplier environmental issues

• Business Sales Figures down

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Illustration – case 4

Requested Support ü Existing client for EHS Compliance auditing and Performance Improvement support ü Asked support to develop Environmental Risk Factors to add into the company’s Sourcing Strategy Outcomes ü Supply Chain EHS performance improved and environmental violations reduced Business Benefits ü Company reputation and government relations improved ü Sales figures went up again

Key Takeaways

1) A 3-year environmental storm started which is reshaping the industrial landscape in China 2) The storm will impact your sites, and likely even more so your local supply chain 3) The impact will be very different for different locations, depending on regional sensitivities 4) You will have to abide with national interests but can/should protect against local interests 5) It requires cross-checking various data sources to truly understand your situation 6) Tactical actions may suffice to mitigate risks, critical business decisions may be required 7) Planning is required to minimize damages and maximize benefits 8) Using DRMT, the vulnerability of your site can be assessed by its address, without visiting

Weathering the environmental storm

1) Don’t fight the storm 2) If you need to fight, fight the right battle, only start a fight if you can win 3) Take shelter for the rain, prepare for sunshine after rain 4) Playing fields will be much more levelled after the storm

格林曼环境是全球最大的环境咨询及工程公司之一西图集团（

CH2M）北亚区环境事业部于2012年改制组建的一家独立的环境 咨询及工程公司。格林曼环境专业领域包括环境管理咨询、工 程、技术服务和项目实施。格林曼环境拥有环保部颁发的环境影 响评价资质，是国家认定的高新技术企业，同时也是上海市环保 局考核合格的污染场地调查评估、修复方案编制、环境修复工程 以及环境修复项目监理的从业单位。 如需了解更多信息，请联系我，或加入上方的微信号: 庄博闻| Johnny Browaeys Mobile / Wechat: 137 6189 4720 Email: johnny.Browaeys@greenment.net Profile: https://www.linkedin.com/in/johnnybrowaeys/

格林曼环境

上海办公室 地址：上海市黄浦区延安东路700号港泰广场1605单元 Tel: +86 (21) 5321 0780

Backup slides

30

1. High level - which way the wind blows : slogans about the future and official newspapers announce what the government wants you to know and act upon 2. Medium level

– Notifications and measures announce you regulations and laws to be expected and actions to be taken (timelines mostly in line with framework policies such as the 5-year plans) – Don’t wait for the laws & regulations to come out, China tests new policies on the way (“摸着石头 过河”) – Instructions from central to local governments show you action plans and timelines for execution and enforcement (the amount of time given mostly depends on how critical the issue is being considered)

3. Ground level

– Your trusted local government contacts often know ahead of time what is coming as they often are the ones having to get it done

How could I have seen this coming?

31

1. “Notification” of the Comprehensive Management Plan on Safety of Hazardous Chemicals (Dec. 2016) 2. Objectives

– Investigate and control safety risks and major hazardous sources of hazardous chemical industry – Prepare relocation of hazardous chemical enterprise in the heavily populated areas – Establish information sharing mechanism of hazardous chemicals – Consolidate the results for potential safety risks

3. General Timeline and Working Arrangement (Dec 2016 – Nov 2019) 4. December 2016: Deployment 5. Jan 2017 – Oct 2019: Renovation: conduct regular supervision and inspection, promptly solve identified issues

– Jan 2017 – March 2018: in depth rectification and achieve periodic results – Apr 2018 – Oct 2019: Deepen and enhance the results

6. Nov 2019: submit summary report to the Office of the State Council’s Security Committee

“Notification” – example

32

“Measures” of Soil Environmental Management for Contaminated Sites, announced by MEP on Dec. 31 2016 & valid since July 2017 1. Get overview of contaminated plots of land and the environmental risk conditions from key industries and enterprises’ land before the end of 2020 2. Focus on non-ferrous metal mining, non-ferrous metal smelting, oil extraction, petroleum processing, chemical, coking, electroplating, tanning and other industries 3. Regions should determine a list of key enterprises to be supervised, open to public, enterprises must conduct soil environmental monitoring every year, before the end of 2017

“Measures” – example

33

“Notification” of publication of Pollution Prevention Plan and Control of VOCs during the 13th FYP (Sept. 14th 2017) 1. Make inventory of “scattered, messy and polluted factories” in 28 cities by the end of 2017 (Beijing, Tianjin and Hebei by the end of September) 2. Focus on petrochemical, chemical, packaging, printing and industrial coatings, as well as the prevention and control of VOCs pollution of transportation sources such as motor vehicles, storage and transportation of oil products 3. Details e.g. By the end of 2017, complete issuance of the VOCs discharge permit for petrochemical industries located in the key areas of Beijing, Tianjin, Hebei, Shandong, Yangtze River Delta and Pearl River Delta; b) by the end of 2018, complete issuance of the VOCs discharge permit for pharmaceuticals and pesticides industries; c) By the end of 2020, complete issuance of the VOCs discharge permit for electronics, packaging, printing and automobile manufacturing industries.

“Notification” - another example

1st round 2nd round 3rd round 4th round pilot

Distribution of Environmental Protection Inspections

Timeline of Environmental Protection Inspections

2015.7.1 2016.1-2016.2 2016.7-2016.8 2016.11-2016.12 2017.4-2017.5 Release ‘Environmental Protection Inspection Plan (trial)’ 1st round pilot 2nd round 2017.8-2017.9 3rd round 4th round

Result of Environmental Protection Inspections

Round Total Case Assigned Case Completed Number Rectification Required Number Punishment Number Fine (ten- thousand yuan) Investigation Number Detention (person) Interview (person) Account ability (person) Pilot not found 2856 not found 123 65 366 First 11474 9163 6738 1927 13502 192 219 1602 3048 Second 5462 1893 2425 1479 6614.16 213 112 1100 687 Third 28966 23599 20359 7086 33587.86 354 355 6079 4018 Fourth 39586 35039 32602 9181 46583.84 297 364 4210 5763

37

1. The information presented in this document is not specific legal advice and is not to be acted on as such. 2. Furthermore, it shall not be quoted, distributed, broadcasted, reproduced, published, transferred

• r sold partially or completely without prior written agreement.

3. Use for self-study purposes and quoting with reference to the Author are permitted. 4. This document aims to support and facilitate the process for everyone involved.

Contributors: Ma LiQiang (SEP methodology, Dr. Liu (cross-reference data processing), Jian Qiao (DMRT visualization), Irene Xu, Pluex Peng, Jack Liu, John Yang and Xu YongPan (Environmental Inspection Policies), Feng WeiQing and Liu Yang (data sourcing) Johnny Browaeys

Disclaimer and Credits