LAC Shorts: Chinese responsible business in overseas contexts

This article highlights the main findings of a new LeidenAsiaCentre research report on Chinese approaches to responsible business in overseas contexts. Click here for the full report.

Societies across Europe find it increasingly important that products that reach the EU common market are produced in socially and environmentally sustainable ways. Responsible business conduct (known by different labels, such as ‘CSR’, ‘RBC’ or ‘ESG’, each representing somewhat different aspects of business) is far from a new concern in Europe. However, the recent introduction of due diligence regulations by various European governments has drawn renewed attention to the topic, particularly regarding the supply chains of European businesses and consumers, which have become increasingly complex and internationalised, spanning a wide range of regulatory frameworks across various countries. On a regional level, the EU is currently also in the process of developing due diligence regulations that will potentially apply to all companies that want to do business in the common market.

Responsible business is a popular topic in China as well. The Chinese public demands that companies in the country operate in ways that are less harmful to the local environment, while China’s government expects companies to contribute to poverty alleviation projects. In fact, Chinese laws have highlighted the ‘social responsibility’ of companies since 2006. Companies in China are responsive to these demands and the number of Chinese companies publishing CSR reports has increased significantly over the years.

Notwithstanding China’s embrace of ideas on responsible business, European due diligence regulations have the potential to significantly impact Chinese supply chains that are indispensable to products of European companies and consumers. European governments and societies are increasingly concerned about potential irresponsible business practices in China, such as forced labour in the textile industry, as well as practices of Chinese companies outside of China that operate in weakly regulated environments. There seems to be a gap between European expectations on responsible business and Chinese approaches and practices. As China is the largest supplier of goods to the European market, and accounts for as much as 52% of the total value of strategic goods on which the EU is highly dependent, it is essential to increase European knowledge about the causes of this mismatch. This can provide valuable insights into how responsible business practices of Chinese companies can be more readily facilitated and encouraged.

In light of these issues, the LeidenAsiaCentre has conducted research on Chinese approaches to responsible business. More specifically, the focus of this study is on the ideas and practices of Chinese actors in contexts outside of China, notably the ‘upstream’ segments of international supply chains. This refers to activities that take place relatively early on in the production process, such as the sourcing and processing of raw materials. These activities often take place in developing countries with precarious regulatory environments. While domestic Chinese ideas and practices on responsible business are relatively well studied, the Chinese approaches in overseas contexts that form part of transnational supply chains are less well understood. The increasing prominence of such complex supply chains, as well as the oft-associated irresponsible business behaviour found along them, makes such a focus particularly  relevant. Given the development of new European due diligence regulations, this is all the more timely. Based on a study of academic literature, interviews and primary source material, the research provides insights into the Chinese approaches to overseas responsible business.

 Cobalt that is sourced irresponsibly is used in batteries that power smartphones and electric cars

The cobalt industry in the DRC

In order to investigate this issue, the research uses the cobalt industry in the Democratic Republic of Congo as a case study. This case study was selected for a few reasons. First of all, cobalt is a critical material for current economic, environmental and technological developments. It is used in batteries that power many modern products, such as electric vehicles and smartphones, and that are used to store green energy. The EU has estimated that for the batteries used in energy storage and mobility alone, it will need 3-15 times more cobalt in 2050 than what is currently supplied. Cobalt is classified by the EU as one of the products on which it is strategically dependent.

Secondly, the worldwide industry for the mining and refining of cobalt is dominated by Chinese companies. 66% of the global refined cobalt output is produced by Chinese companies. Up to 70% of the world’s cobalt is mined in the Democratic Republic of Congo (DRC), which is home to about half of the global cobalt reserves. Chinese companies play a major role in the DRC cobalt sourcing and trading. At least eight of the fourteen largest cobalt mines in the DRC are Chinese-owned or partially Chinese-owned, and practically all cobalt mined in the DRC goes to China for further processing. In 2019, 97.9% of the cobalt sourced in the DRC went to China.

Thirdly, the cobalt industry in the DRC is plagued by widespread problems of irresponsible business behaviour, such as unsafe working conditions, child labour, environmental degradation and forced labour. These problems are industry-wide, not Chinese per se, and take place mostly at unregulated mine sites. Through middlemen, cobalt sourced under these conditions ends up in the streams of regulated cobalt of larger companies. A lack of supplier transparency makes it challenging to trace the source of certain streams of cobalt, and is therefore another major issue of irresponsible business behaviour in the DRC cobalt industry. Large international firms that use cobalt-based products are sued over these problems, and multiple companies have looked into alternatives for cobalt from the DRC, and to cobalt based batteries in general.

Cobalt therefore should be seen as a critical product with a complex global supply chain that is dominated by Chinese companies and which is infamous for problems of irresponsible business conduct. The DRC cobalt industry thus  is a very suitable case study for this research. Based on this case study and earlier academic research, the following features of Chinese approaches to responsible business in overseas contexts stand out.

State-centric responsible business

Responsible business approaches of Chinese companies are relatively state-led. The Chinese government concluded in the early 2000s that businesses in China have an important role to play in realising more sustainable economic development. It therefore took several steps to shape and promote responsible business conduct. First of all, laws and regulations were introduced which called upon Chinese companies to practice their business responsibly. While the ‘social responsibility’ of companies was included in the 2006 Company Law, most regulations are in the shape of non-binding guidelines which mainly depend on political support for their implementation. Important institutions publishing such regulations include SASAC, the agency overseeing state-owned enterprises (SOEs), and Chinese stock exchanges. For Chinese companies in the DRC cobalt mining industry, the guidelines by the China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters (CCCMC), affiliated with China’s Ministry of Commerce, are specifically relevant. These companies acknowledge the significance of such regulations and guidelines, both during interviews with the researchers as well as in their public responsible business reporting.

The state-centric approach to responsible business is also apparent from the leading role SOEs play in publishing reports and setting standards. Because of their close links to the government and Communist Party, the strategies of these companies are relatively aligned with those of the state. Furthermore, the space for civil society, an important driver for responsible business elsewhere, is limited in China and allows primarily for activities that support the agenda of the government. While Chinese civil society organisations face less restrictions in overseas context, the limited interest of the Chinese public in the behaviour of Chinese companies overseas, means they are not a powerful force.

The Chinese state is concerned with the business conduct of Chinese companies in overseas contexts, as it carefully looks to protect China’s international image. Negative publicity caused by Chinese companies hinders political relations with other countries and threatens China’s access to valuable resources in such regions. Furthermore, irresponsible behaviour can put substantial financial investments by state-backed financial institutions at risk. In contrast, the Chinese state believes that responsible business practices (especially related to the environment) can give Chinese companies a competitive advantage. For such reasons, the Chinese government has created frameworks of international cooperation with Africa and the DRC in which it reassures these regions of China’s commitment to responsible business. One example is the Chinese Alliance for Corporate Social Responsibility in Africa. Furthermore, the Chinese embassy in the DRC plays a pro-active role in the responsible business policies of Chinese companies operating in the country. For instance, it coordinates the Union of Mining Companies with Chinese Capital and its responsible business program.

In part as a result of the major role of the state, Chinese interpretations of what constitutes responsible business generally reflect state priorities. For example, the Chinese state believes that the ‘social responsibility’ of companies consists to a large extent of contributing to community development and poverty alleviation through charitable activities. This explains the existence of initiatives such as the so-called Taobao Villages in China, named after the e-commerce website, where villagers are helped to set up online shops on Taobao to sell their local goods online. Both Chinese state institutions and companies in the DRC cobalt industry emphasize charitable activities in their approach to responsible business, for example by constructing schools or donating equipment to fight Covid-19 and framing this as CSR. This contrasts sharply with European understandings of the concept, which articulate that responsible business is about companies earning profits in a sustainable way, and not about how they spend this money on charitable activities.

Furthermore, topics such as human rights, transparency and corruption often feature less prominently in Chinese guidelines and company policy reports, as opposed to subjects of responsible business that are less sensitive to the Chinese state, such as environmental protection. While this is generally true within China, Chinese companies in the DRC cobalt industry have adopted an interpretation of responsible business that is more in line with international standards. By including their human rights and anti-corruption policies in their communication on responsible business, these companies appear responsive to international expectations.

The impact of international interactions

Another factor that shapes Chinese responsible business in overseas contexts are interactions with international actors. First of all, interactions with governments and communities in countries that host Chinese investments promote responsible business conduct of Chinese companies. While local community engagement by many companies is often inadequate, including in the DRC where it is hindered by a language barrier, the risk of litigation, social conflicts, and environmental degradation encourage Chinese companies to operate more responsibly. Authorities in the DRC have in September 2021, for example, suspended the operations of several Chinese mining companies for breaking local laws and not living up to international standards. The Chinese government responded by ordering these companies to leave the DRC, stating that “We will never allow Chinese companies in Africa to violate local laws and regulations.”

Such a statement is reflective of an emphasis by Chinese companies and state institutions on respecting local regulations, which is also apparent in the DRC cobalt industry. This approach can be problematic, however, as law enforcement and accountability mechanisms can be inadequate in the developing countries in which Chinese companies operate, such as the DRC. Continuing and increasing European support for such countries in strengthening their institutional and legislative systems, through mechanisms such as the African Legal Support Facility or supporting local civil society, is therefore an effective way to encourage overseas responsible practices of Chinese companies. A positive development has been the publication by two Chinese ministries in July 2021 of the ‘Guidelines for Green Development in Foreign Investment and Cooperation’. These guidelines stand out because they for the first time encourage Chinese companies to adopt international standards in case local laws and regulations are inadequate.

The demands from customers in exporting markets, resulting in global market pressures for certain standards, is another important factor shaping Chinese approaches to responsible business. In response, various mechanisms to verify responsible business practices are used by Chinese companies. In some cases, Chinese actors develop their own standards. Other times, international standards are adapted “according to China’s national conditions and customs”. For example, several adjustments were made to the Chinese adaptation of ISO26000:2010 (see the textbox) by the state-backed Standardization Administration of China (SAC). Other international standards have been adopted more directly. In any case, foreign third-party auditing firms that audit and certify companies in China often work with Chinese joint-venture partners and have to meet the requirements of SAC to operate in China in the first place. Finally, Chinese state institutions play an active role in shaping international standards, during which they articulate China’s priorities. In fact, as of October 2021, China is the most active participant in the committees that develop ISO standards.

As a result of how certifications and audits in China are organised, European companies and consumers are not always confident about the responsible business reports and certificates of Chinese suppliers. This lack of trust goes both ways, as European companies only want to work with European auditors, while Chinese companies are hesitant to accept such demands for fear of partiality. Furthermore, European companies report a lack of transparency and inadequate collaboration when practicing due diligence. Especially smaller companies are confronted with a shortage of leverage to make demands and a reported unwillingness from Chinese partners to provide information. On sensitive issues, the operations of international third-party auditors are restricted, while European companies risk retaliation from Chinese consumers and the government when expressing their concerns. Chinese companies themselves can face political pressure as well to not comply with requests. Nonetheless, many Chinese businesses are prepared to meet the expectations from European customers and allow international auditors to perform examinations, primarily because of economic incentives.

Chinese companies in the DRC cobalt industry, for example, have demonstrated a particularly high level of responsiveness to international responsible business demands. The responsible business reports of these companies indicate that they have been drafted based on internationally acknowledged practices, which is checked by international certifiers. Chinese companies in this industry also state that their business practices are aligned with those of the OECD and the UNGP, which is again verified by international third-party auditors as well as multi-stakeholder industry platforms. The guidelines by CCCMC that direct the operations of these companies, which are discussed above, are also relatively aligned with international standards. These guidelines have been drafted with support of a Sino-German Corporate Social Responsibility Project, which is one of several official partnerships between China and other countries (including the Netherlands) to enhance Chinese responsible business practices.

The relative alignment of Chinese companies in the DRC cobalt industry with internationally acknowledged practices does not nullify all concerns of European clients and the mutual lack of trust. However, existing industry-wide associations, in which Chinese and non-Chinese businesses cooperate to overcome risks that face the complete DRC cobalt industry, can help to solve these  problems. Such platforms promote transparency by mapping the supply chain and offering assessments and certification for their members. They also provide smaller European companies with the opportunity to strengthen their bargaining power in a strong ‘supplier’s market’.

Towards building responsible supply chains

Considering the dominant role of the Chinese state in shaping Chinese responsible business in overseas supply chains, Europe should continue its government-to-government engagement with China. These interactions have proven successful in the past and the publication of recent guidelines demonstrates that the Chinese state is open to promote adherence to international standards in overseas contexts. During such interactions, the European side should stress the internationally acknowledged understanding of responsible business, as defined by the OECD. The proposed text of the Comprehensive Agreement on Investment (CAI), the ratification of which was frozen by the European Parliament due to Chinese counter-sanctions over Xinjiang, demonstrates that this can be realised.

However, China and Europe also have to create systems for auditing and certification that are trusted by companies from both sides. The CAI, as well as European due diligence regulations, should provide these mechanisms, such as the announced ‘white list’ of responsible parties in the EU Conflict Mineral Regulation. The DRC cobalt industry has demonstrated that acknowledging and working with industry-wide platforms could offer solutions in this regard.

At the same time, it must be acknowledged that due diligence alone will not resolve the challenges that many industries, such as that of cobalt, face. These sectors require structural transformation and large-scale, multi-stakeholder initiatives to engender transformative and long-term change. Many of the responsible business challenges in these industries are deep rooted and industry-wide. It is furthermore important for both European companies and policymakers to acknowledge that realising improvements in complex supply chains, such as that  of cobalt, takes time. A cooperative and collaborative approach that takes into account the deep-rooted and multifaceted nature of the challenges involved is increasingly necessary.

Jonas Lammertink

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Published On: October, 2021