China’s mining firms to adopt higher standards overseas

New guidelines for China’s mining industry on sustainable and responsible business conduct overseas are welcome. But implementation must include smaller mining firms, says Anna Bulzomi

One of China’s main extractive industries groups recently issued new guidelines on responsible business conduct, pointing the way to improvements in some of China’s most controversial overseas industries.

The government-affiliated China Chamber of Commerce for Minerals, Metals and Chemicals Importers and Exporters released a new framework document in October 2014 to regulate overseas mining investments and operations. It sets out guidelines for Chinese companies to improve their corporate social responsibility (CSR) practices, and risk management systems covering environmental, social and governance (ESG) issues.

The Guidelines for Social Responsibility in Outbound Mining Investment are in line with a trend towards greater acknowledgement of corporate social responsibility in China’s foreign investment.

The annual meeting of the National People’s Congress in 2005 officially endorsed the need for Chinese firms to incorporate social responsibility when developing outward investment strategy; in 2006 the matter was written into Chinese company law. The latest Guidelines take a holistic approach, encouraging Chinese firms investing overseas to engage actively with issues of labour, environmental protection, supply chain due diligence and human rights and was developed in conjunction with German development agency GIZ, Global Witness and the Organization for Economic Co-operation and Development.

China’s direct overseas investment reached US$90 billion in 2013, with the lion’s share of outbound capital flowing towards mineral extraction projects. Mining is one of the most sensitive areas to invest in: projects may pollute or deplete the public water supply, displace populations and strengthen entrenched elites. Relations with trade unions are often fraught with tension; operations may face criticism if mineral deposits are in, or near to, areas of great conservation value. For instance, Conservation International has red-flagged a list of Chinese mining projects in Liberia, South Africa and Madagascar.

Chinese mining companies are often active in conflict-affected or high-risk areas (or, from the Chinese perspective, markets with low entry barriers). Hence, they are regularly exposed to ESG and human rights issues.

Until recently, most of these companies failed to fully appreciate the extra risks that differentiate these areas from stable operating environments. A 2009 study from the Multilateral Investment Guarantee Agency of the World Bank found only 18% of Chinese companies surveyed had implemented measures to deal with political risk – the lowest rate in the world.

In fragile contexts, an extra layer of complexity comes in and companies have to conduct enhanced due diligence to ensure they steer clear of conflict-financing and human rights abuses. The former UN Special Representative on Business & Human Rights, John Ruggie, has spoken of a “negative symbiotic relationship” between company involvement in human rights abuses and conflict zones.

The new guidelines therefore have a key role to play: they can help to create a level playing field for Chinese mining companies overseas, including those operating in particularly difficult environments.

This is an extremely daunting task, since “Chinese companies” is a catch-all label that hardly captures the fragmented business reality on the ground. On one end of the spectrum there are State-Owned Enterprises (SOEs), whose operations tend to be better run and often have ESG elements embedded in their risk management systems. At the other end are small mining operations, owned and run by individuals who happen to be Chinese nationals. Currently, only large SOEs possess the capital, talent and technology to advance the corporate responsibility agenda.

Since 2012, IPIS Research has analysed the behavior of a number of small and medium-sized Chinese companies (SMEs) active in conflict-affected provinces in Democratic Republic of Congo. Most lack knowledge and skills to properly handle ESG and human rights risks across their sourcing and trading operations.

In May 2012, the Congolese government sanctioned two Chinese-owned tin trading houses, Huaying Trading and Congo Minerals and Metals, for not carrying out proper supply chain due diligence, accusing the two firms of indirectly supporting rebel groups through their mineral purchases.

Effective implementation of the Guidelines should target SMEs just as much as larger players, and ensure that those operating in conflict and high-risk areas are able to manage ESG risks efficiently and secure the legal (and social) license to operate. Only by giving these matters adequate consideration, can China truly make sustainability mainstream in outbound mining investment.