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Is China Going Green, Part XV -- Environmental Liability Clarified: Be Afraid. Be Very Afraid.

By Dan Harris and Steve Dickinson

Very important article in today's China Daily, entitled, "Government targets land pollution to ensure food security." Far more important than the reason for this targeting is the who and what of the targeting. China's Ministry of Environmental Protection has announced that the "company which inherits the debts and rights (of the polluter) should shoulder the responsibility for providing financial assistance to restore the productivity of polluted land." The article notes that the previous policy on this "was unclear." This jibes with what we have been telling our clients for years: when buying a Chinese company, your due diligence must include reviewing its potential environmental liability. We have been saying this both because the law on this has been unclear and because this is the case in the United States and (as far as I know, in many other countries as well) and this will likely eventually become the case in China as well. I tend to be paranoid about this because around ten years ago, a number of my clients were required to pay huge amounts for having transported waste to what became a superfund site. What they did was entirely legal at the time, but under US superfund laws, they were liable for the environmental cleanup. This liability extended to companies that had purchased companies that had transported the waste. The trend worldwide is to expand liability for pollution and there is no reason to think China will be fighting this trend. More than two years ago, I had this to say about the benefits to/need for foreign companies to exceed China's current environmental regulations:

We are aware of a large Fortune 500 retail company that is opening units in China that meet or exceed the toughest United States environmental laws. I estimate this company's environmental sensitivity will cost them at least an additional $25,000 per unit, yet I am firmly convinced this company is doing the right thing. This company's actions make sense because the odds are good that China's environmental laws and enforcement will get tougher over time, and building environmentally sound units now will almost certainly cost less than having to retrofit existing units a few years from now. On top of this, people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere. This is obviously even more likely to be the case if there were to be some sort of environmental disaster.

The environmental risk assessment is going to vary for each foreign company doing business in China, but an assessment that considers only China's current environmental laws, regulations and standards will almost certainly be inadequate.

Full post as published by China Law Blog on June 22, 2008 (boomark / email).