Over the past few decades, since China embarked on a series of economic
reforms
led by former Premier Deng Xiaoping, the world’s most populous country has
become central to the supply chains of nearly every major global brand. Whether
it was garment and
apparel
companies such as Nike and Adidas, technology giants Apple and
HP, or carmakers including Ford and Toyota, Chinese suppliers —
often subcontracted via complex supply chains — produced apparel, electrical
components,
auto
parts
and all manner of other products for export. To this day, no other country or
region
can match China’s productivity, labor force and high-quality infrastructure.
Unfortunately, in their quest for profits or market access, many brands turned a
blind eye to the social and human rights costs that come with doing business
with an authoritarian regime; and for the most part, investors did not care.
That, increasingly, is changing, says Matthew
Zimmer — director of
research at Newday Impact
Investing — a financial
services company focused on socially responsible portfolios.
“For a variety of reasons, Chinese companies score poorly on ESG metrics or fail
to report such data altogether,” Zimmer told Sustainable Brands®.
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Why does this matter? Because we’re seeing
ESG
— a framework to understand how companies are managing risks and opportunities
related to environmental, social and governance criteria — grow from a niche
consideration to one central to investment
decisions; the Securities
and Exchange Commission has even proposed an ESG disclosure
mandate
for businesses.
“While issues like labor and environmental violations in Chinese supply chains
... have been present for some time, they are increasingly coming to the fore as
investors demand more transparency about the impact of their investments,”
Zimmer says.
This means global brands have to take their ESG efforts more seriously. And that
means they need to reassess relationships with companies in China and their
lagging
ESG
scores. And that is easier said than done.
How did this happen, and why were so many corporations so willing to build such
strong relationships with a country known to be violating human rights? Back in
the ’80s and ’90s, it was believed that economic progress would eventually lead
to political liberalizations and increased civil and human rights in China. And
for a time, it seemed to be happening — there was growing space for media and
civil society in some parts of China; though, notably, not in regions such as
Tibet or Xinjiang — homeland of the
Uyghurs.
In recent years — and especially, since severe crackdowns after protests in
Tibet in 2008 and Xinjiang the
following
year;
and especially, after Xi Jinping came to power in 2013 — the trend has
shifted for the worse. Independent media outlets have all but ceased to operate.
Labor non-profits, too, have mostly been shut
down.
As Michael J.
Abramowitz, president
of the nonprofit Freedom House explained in a press
statement:
“During Xi’s tenure, [the Chinese government] has systematically jailed and
silenced critics, journalists and independent media; tightened restrictions on
social media and access to internet outside China; cracked down on
rights-focused NGOs; clamped down on religious practice; and committed heinous
atrocities against the Uyghur population including mass arbitrary detentions and
enforced disappearances.”
There might be a lesson in another global market where there were warning signs
about poor ESG for years that were ignored by many global brands: Russia.
When Russia invaded Ukraine last year, numerous brands
decided
it was time to withdraw from the country. But the invasion was only the latest
in a series of worrying provocations — including assassinations of journalists
and critics; the attempted poisoning and subsequent jailing of the leading
opposition figure, Alexei
Navalny; and widespread
allegations of discrimination against minorities, the LGBTQ community, and much
more.
“In the past years, I have seen many cases when Russian human rights defenders
were criminalized for their legitimate work and exercising the freedom of
expression,” said the United Nations Special Rapporteur on the situation of
human rights defenders, Mary
Lawlor, in a press
statement.
For brands that pulled out of Russia, the cost was huge — $59 billion in
losses.
But Russia, despite its size, is a tiny economy compared to China; and the costs
of inaction on ESG issues could be multitudes of magnitude bigger.
Of course, China is not the only country where brands face labor, human rights
and environmental risks in their supply chains. Bangladesh, Indonesia,
Pakistan and the Democratic Republic of Congo are just a few that are
known for being riddled with
corruption
and substandard working
conditions,
including documented worker
deaths
in facilities sourcing western brands.
But one thing that makes China different from these countries is the role of the
government in perpetuating these abuses and limiting the impact of real ESG
strategies. In 2021, China passed a law that restricted the sharing of
corporate
data
with non-Chinese judicial or law-enforcement authorities, if it might “damage
national security, public interest.” Some saw this as specifically limiting the
ability of companies to share
data
about their supply chains, and potential labor violations, with those outside of
China.
This, Zimmer says, could limit any future ESG push from within China.
“There have been proposals put forward for ESG standards in China, which could
in theory improve the coverage and consistency of such reporting. However, if
fidelity to such standards were to conflict with the government’s priorities,
there is little doubt that the government would prevail,” he says.
Which brings up another point: Unlike in the United States, Europe or
even much of Asia, there is a lack of independence when it comes to Chinese
companies — which often have to allow for the government, or the Chinese
Communist Party, to have a direct say in business decisions.
“In a country such as China, it is difficult to separate individual companies
from the broader government,” Zimmer says. “The government ultimately calls the
shots.”
Zimmer warns of an ESG reckoning, as companies lagging progress on diversifying
their supply chains or dealing with issues such as Uyghur forced
labor
comes to a head with increasing ESG requirements and new due-diligence
regulations
in the US and Europe.
“Investors are demanding ... more transparency about impact,” Zimmer says. “They
are [increasingly] looking at investing through an ethical lens and not solely
focusing on expected returns.”
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Media, Campaign and Research Consultant
Nithin is a freelance writer who focuses on global economic, and environmental issues with an aim at building channels of communication and collaboration around common challenges.
Published Feb 14, 2023 1pm EST / 10am PST / 6pm GMT / 7pm CET