A long and rocky road to ESG for Chinese overseas mining

Nickel is a key material for making EV batteries, wind turbines and solar panels. The leading role China has played in Indonesia’s industry has delivered much investment and many jobs. Yet concerns remain.

Chinese nickel processors in the Southeast Asian country are doing relatively well on setting and following environmental and carbon emissions standards, but weakly on community communication and relationship management. That’s according to a recent report by Canadian think-tank the International Institute for Sustainable Development (IISD).

This situation is not confined to Indonesia, with the social aspect the main ESG challenge for China’s overseas mining companies generally, experts told Dialogue Earth.

US finance company MSCI is one of the world’s leading providers of ESG rating systems. It ranks 80% of Chinese mining firms as “laggard” on ESG management, hampering its overseas investments and operations.

So, what progress are they making? How far do they have to go to meet international standards? What do they find difficult to adapt to when working overseas?

International standards, Chinese characteristics

Over the last decade, the central government has been focusing on setting domestic ESG standards and increasing compatibility and mutual recognition. The Ministry of Finance and stock exchanges have also put sustainability disclosure rules in place for listed companies.

In 2022, a Chinese industry group called CCCMC updated its guidelines for how companies should responsibly source minerals – checking their supply chains for conflict, human rights abuses, corruption. These points were modelled on similar rules from the OECD, a group of developed countries that sets many global standards.

That July, the London Metal Exchange conditionally approved the CCCMC guidelines – the first time it had approved a standard from a non-OECD country.

In 2022, the Chinese government published the Guidelines for Environmental Protection during Foreign Investment and Construction Projects, requiring both information disclosure and substantive community participation.

Then, last year, the China Mining Association published two industry standards, for ESG disclosures and assessment, intended to promote regular standardised ESG reporting.

This May, the Zhongguancun Green Mine Industry Alliance published another industry standard, Guidelines on Green Minerals, regarding supply chain traceability and due diligence. It plans to issue an international standard this year for companies operating outside of China.

Some Chinese mining companies working overseas have undergone international certification, setting up governance systems that meet OECD due diligence standards, said Shan Qiulin, deputy director of the alliance’s international section.

Li Wei, not his real name, works for a Chinese ESG consultancy and says that China’s own ESG systems are working to align with international standards, while still taking China’s own circumstances into account. For example, to protect suppliers, stock exchange rules emphasise the importance of prompt payment, which is of particular importance to smaller businesses in China’s supply chains. Pushing for fair treatment of such businesses reflects a sustainable development principle “with Chinese characteristics”, Li Wei says.

To help companies with implementation, the Ministry of Finance and the stock exchanges have followed up their frameworks with handbooks, guides, best practice case studies and benchmarking research.

Gaps on principles and content

Despite steady progress, China’s voluntary sustainability standards still differ from those in the European Union. They align quite well with international norms on the environment but, as mentioned, are behind on social issues.

The IISD report points out, for example, that Chinese standards lack a specific way of identifying Indigenous peoples. Plus there are no specific rules on economic displacement, resettlement and livelihood restoration.

They have no requirements on compensation for work-related injuries and illnesses, or clear requirements on accommodation for workers and contractors, or on allowing them to stop working if they deem a situation dangerous.

A worker rides home after finishing work at a nickel-processing facility in Sulawesi (Image: SOPA Images /Alamy)

Hans Baumgarten, one of the report authors, said that China’s ESG standards and practices don’t yet completely meet international market expectations for transparency and traceability. Li Wei said: “China’s standards need more detail on due diligence and social issues.”

He thinks the gap is down to fundamental differences when setting ESG standards. In the EU, ESG governance considers both “financial materiality” – meaning impact on the bottom line – and environmental, human and social impacts. Whereas in China, financial materiality is favoured, with less attention paid to environmental impact and social responsibility.

Shan Qiulin explains that China’s project management approach has traditionally focused on profit and progress, putting efficiency first. While the EU’s due diligence systems require companies to set up supply chain traceability and check each stage – from the mine, to processing, to trading.

Obstacles to implementation

It isn’t just those differences that are causing problems. For Chinese mining companies, the biggest problem implementing ESG principles is a lack of mutual recognition leading to repeated work and inadequate disclosures.

For example, although the CCCMC’s updated guidelines were given conditional approval, they haven’t been widely adopted on international markets and by downstream manufacturers.

Shan Qiulin says this is because the EU’s ESG standards carry legal force, being backed by full legislative, judicial and enforcement systems. China’s equivalents are still mostly voluntary industry standards, although there are mandatory disclosure requirements for listed firms.

She said: “Another challenge is the lack of a domestic system for checking ESG performance. In the EU, companies are required to use a designated certification body. But China lacks an internationally trusted third-party certification system or standards for the certification – which makes mutual recognition hard.”

Another obstacle is inadequate reporting. China was one of the first countries to set requirements for domestic, facility-level corporate environmental disclosure. The Ministry of Ecology and Environment, for example, requires companies to disclose the location of their production facilities, their emissions of carbon and other pollutants and any regulatory breaches.

However, there are no rules specific to Chinese mining companies working overseas. “That means there’s often a difference between what companies disclose at home and abroad; a Chinese subsidiary of one listed company might publish mine/factory level data at home, while an overseas branch of the same company does nothing,” said Li Meng, Green Supply Chain Corporate Information Transparency Index manager with the Institute of Public and Environmental Affairs (IPEA), a Beijing-based think-tank.

Cultural differences

Li Wei, who is familiar with the leading Chinese mining firms at work in Indonesia, said they have been working overseas for some time and built up experience. Compared with smaller companies, they have more ESG staff and specialised teams for community communication, sustainable development and standards compliance, he said. “Also, at the leadership and governance level, such companies recognise the value of ESG management and actively take part in international dialogue and the training and consultations organised by standards agencies,” he added.

Nevertheless, some hard-to-spot differences will continue to hamper ESG implementation by Chinese mining companies.

In China, companies usually go through local government when dealing with communities. But in many countries, local government doesn’t get involved.

According to Li Meng, Chinese companies tend to see the “social” aspect of ESG as meaning practical measures like poverty relief and building roads and schools. But overseas stakeholders think more in terms of “informed consent” and “participation”. Shan Qiulin points out that, internationally, companies are expected to engage fully with Indigenous groups and local communities in the project planning stage, to gain their informed consent. This is in stark contrast to the “plan first, communicate later” approach Chinese companies use at home.

Chinese companies usually regard community relations as an external issue that can be dealt with after the fact. In the EU, it is a precondition for getting a project operating licence. Failing to meet ESG standards isn’t just a reputational risk – it can have legal and financial consequences.

Research has also found a mismatch between international ESG rating systems and China’s corporate culture. For example, when state-owned enterprises target poverty alleviation and rural revitalisation, this is not recognised as corporate social responsibility work.

Better implementation

When it comes to the mining industry specifically, Li Meng suggests much better disclosures at the mine and company level would help keep local communities and Indigenous people informed. Ma Jun, founder and director of the IPEA, says more openness of information and disclosures are needed.

Li Wei says companies need to have a clear understanding of the risks they face and identify ESG issues and challenges. They should improve their understanding and application of international standards and procedural requirements, for example on labour relations and balancing business and human rights. The particular challenges faced when operating overseas need to be tackled. Simply doing what is done at home will not work.

He also pointed out that the various global sustainable development standards are coming into alignment with each other, and there is huge potential for pushing mutual recognition with China’s own standards. The IISD report said that more interoperability and mutual recognition will help companies win local trust and reduce accounting costs.

Shan Qiulin said global mining governance systems are constantly being improved, and her organisation wants to see a more inclusive, scientific and practical system.

“Mutual recognition isn’t a zero-sum game of who recognises who,” she said. Countries of the Global South should be more involved in the setting of those standards, contributing their own experience and expertise and having more of a say.