New Chinese law could force rethink of sustainability due diligence
Government may penalise companies it believes are discriminating against Chinese suppliers
The Chinese government recently unveiled a law that could force a total rethink of supply chain due diligence around the world.
On April 8th, the Regulations of the State Council on Industrial and Supply Chain Security was introduced with immediate effect.
According to a translation, the law says that when overseas entities violate market principles of fair trade, interrupt normal business activities for Chinese companies, or adopt discriminatory measures towards Chinese citizens or entities, the government has the authority to conduct an investigation.
If it finds those actions have increased risks for Chinese supply chains, it may impose countermeasures on the firms that undertook them – including restrictions on doing business with China, and potential travel bans.
Implications for sustainability due diligence
The regulation is intended mainly to combat the growing number of import bans being placed on Chinese products, especially those with links to the Xinjiang Uyghur Autonomous Region, and it doesn’t explicitly mention anything about sustainability or due diligence.
But it has big implications for both, says ethical trade expert Francisca Sassetti.
“It essentially increases scrutiny on how supply chain-related information is gathered by foreign entities,” she explains. “What’s being collected, how it’s being used, and whether that will impact Chinese industry.”
Whilst many companies in Europe, the UK and North America have shifted their supply chains to China for cost reasons, most sustainability due diligence frameworks class the country as ‘high risk’.
“And more risk requires additional due diligence,” says Sassetti.
‘Discriminatory’ country-risk screens
It’s precisely this treatment that Chinese policymakers are trying to address, suggests Brian Chen, a sustainability consultant at Danish advisory firm Global CSR.
“There are a lot of sustainability practices in the West that start from the assumption that Chinese companies are involved in human rights or environmental impacts,” he tells Real Economy Progress.
That results in Chinese firms having to fulfil “excessive and intrusive” demands from their downstream partners in order to maintain their business relationships, which is “hurting the country economically,” Chen says.
“From a Chinese perspective, these practices are highly discriminatory – they’re undignified and offensive.”
Chen believes companies in other emerging economies are experiencing similar assumptions, and similar laws may therefore be introduced elsewhere.
Realities and next steps
“The rules may conflict with a lot of compliance culture, which is built on supplier questionnaires and audits covering labour practices and carbon emissions and so on,” Sassetti points out.
“Those are all topics that might be restricted under this legislation.”
It may also affect companies that want to terminate Chinese suppliers as a result of information they receive, she adds, as well as foreign firms that require transparency from their Chinese subsidiaries.
But Chen says there are ways around the new rules.
“The law doesn’t stop you asking for information from Chinese companies – the key phrase in the legislation is ‘discriminatory measures’,” he says.
Due diligence frameworks based on Eurocentric, country-specific risk assessments are innately discriminatory, he argues, because they treat certain companies differently simply because of where they’re based.
“So companies should now be aware of the legal risks of excluding suppliers from their value chains or applying additional scrutiny on suppliers just because they’re Chinese,” he says.
“But there are other ways to do sustainability due diligence that adhere to the basic principles of equality.”
For one, Chen says, companies should check whether Chinese firms have fulfilled their own due diligence duties, “rather than assuming they’re incapable of respecting human rights, and that companies need to do it on their behalf”.
For Sassetti, the first step is for global companies to start engaging with their local teams and experts in China.
“They need to work out what’s still feasible, and whether it’s enough to fulfil requirements in their own markets,” she tells Real Economy Progress.
“If not, then what does the company do?”