Hong Kong''s Role in Confronting Disclosed Records.pdf

Hong Kong’s Role in Mending the Disclosure Gap Ma Jun Christine Loh Wang Jingjing Wuwei March 2010 Sponsored by 1 Contents Acknowledgements ................................................................................................................................................... 1 Multiple violations are clearly evident ...................................................................................................................... 3 HKEx listed companies found to have major gaps in disclosure................................................................................ 4 Improving enforcement in the mainland ................................................................................................................... 4 Increased requirements to report and disclose environmental ination ............................................................ 5 Hong Kong’s role ........................................................................................................................................................ 7 HKEx’s role ................................................................................................................................................................. 7 New Listing Rules for mining companies ............................................................................................................... 7 Recommendations for HKEx’s new CSR Code for Listed Companies .................................................................... 8 Conclusion ................................................................................................................................................................. 8 Endnotes .................................................................................................................................................................... 9 Acknowledgements Institute of Public and Environmental Affairs and Civic Exchange would like to thank the following people for their assistance in producing this research report ? Duan, Yongqiao ? Genasci, Lisa ? Lau, Patrick ? le Clue, Sophie ? Liu, Shiqi ? Liu, Zhao ? Pozon, Ina ? Wong, Michelle ? Xu, Shuangchen ? Yip, Yan-yan ? Zeng, Ying ? Zhang, Chao 2 Since 2006, the Institute of Public and Environmental Affairs IPE, a Beijing-based nongovernment organization, has operated the China Water and Air Pollution Database1. This web-based resource is the first of its kind in China to publish air and water quality data and feature a government-sourced list of companies cited for environmental violations in the mainland. By March 2010, IPE has uploaded more than 58,000 records of monitoring and enforcement from official mainland sources to its water and air pollution databases.2 On 1 March 2010, IPE identified 175 companies listed on the Hong Kong Exchanges and Clearing Limited3 HKEx with environmental infraction records in the mainland. Figure 1 reveals that 16 percent of companies listed on the main board of HKEx have publicly available records of violations in their mainland operations.4 Figure 1 Environmental violations of HKEx listed companies5 To date, the total number of environmental violations by these 175 companies exceeds 750, revealing that many are repeat offenders. These are Hong Kong-owned companies, as well as companies incorporated in mainland China, traded on the HKEx H-shares and companies based in mainland China but incorporated internationally and listed on the HKEx Red Chips. Figure 2 reveals that of the companies with violation records, about two- thirds are Hong Kong-owned. H-share companies, however, have the highest total number of violations overall. Figure 2 Multiple violations of companies on the HKEx 84 16 Percentage of listed companies not found to have violation records Percentage of listed companies found to have violation records 0 50 100 150 200 250 300 350 400 450 500 Red Chips HK owned H-share Number of violation records Number of listed companies with violation records 3 Multiple violations are clearly evident Among the Hong Kong-owned companies, subsidiaries of Kingboard Chemicals Holdings Ltd.6 KINGBOARD CHEM148 and Kingboard Laminates Holdings Ltd. KB LAMINATES 18887 have multiple environmental violation records on the mainland. In May 2009, the Guangdong Provincial Oceanography and Fishery Administration highlighted one of Kingboard Laminate’s factories for having exceeded permitted levels of wastewater discharge into the Pearl River Estuary for two consecutive years.8 The same year, the Guangzhou Municipal Environmental Protection Bureau EPB also placed Kingboard Laminates on its list of major polluters requiring monitoring and correction.9 Moreover, when the Guangdong Provincial EPB published its annual list of 20 major polluters that required monitoring in 2010, three of them were identified to be among Kingboard Chemicals’ printed circuit board PCB factories.10 Another Hong Kong owned company with multiple violations is United Laboratories International Holdings Ltd.11 UNITED LAB 3933. As early as 2004, the Company’s Pengzhou factory was checked by the local EPB for being listed as an enterprise required to fix environmental problems within a set timeframe.12 In 2007, residents of Pengzhou were angered by the offensive odor emanating from its operations. The local environmental agency responded by issuing seven notices to the company for corrective action.13 In 2009, the local government ordered the company’s Inner Mongolia operation in Bayan Nur to deal with its offensive odor.14 In 2010, the local government ordered the Bayan Nur factory to comply with the discharge standards and to stop discharging wastewater to the municipal wastewater system by 1 July, 201015. Another example of a Hong Kong-owned company with multiple violations is KO YO Ecological Agrotech Group Ltd.16 KO YO GROUP 827. In 2007, its subsidiary in Dazhou, Sichuan was placed on the province’s watch list for polluting a local river and was ordered to resolve this infraction within a specified timeframe.17 The following year, the local EPB found the same factory violating wastewater discharge standards in both the first and the second quarters of 2008.18 In January 2010, acting on complaints from local residents, the local EPB caught the factory discharging large volumes of untreated industrial wastewater into a local tributary of the Yangtze River. According to a local media report, residents reported that the factory was dumping “black” wastewater at night.19 Among H-share companies, IPE identified Tsingtao Brewery Co. Ltd.20 TSINGTAO BREW 168 as having more than 20 environmental violations records in its operations across China from 2004 to 2009. One of Tsingtao Brewery’s factories in Chongqing was found to have committed environmental violations in 2006, 2007 and 2008.21 According to records published by the local EPB, the factory discharged wastewater without proper treatment in 2007; with suspended solids exceeding the government’s standard by 45.6 times and phosphate exceeding the standard by 36.2 times.22 Another of its factories in Baoji had multiple violation records in 2004, 2007, 2008 and 2009.23 In 2007, it was found by the central government’s investigation team to be exceeding the chemical oxygen demand COD discharge standard by 4.92 times.24 Since 2005, the Zijin Mining Group25 ZIJIN MINING 2899, an H-share company, has had a series of environmental violations and pollution incidents in Hebei, Xinjiang and Guizhou, with some of them discharging toxics into local waters.26 In another example, Zhuzhou Smelter Group Co., Ltd., a subsidiary of Hunan Nonferrous Metals Corporation Ltd27 HNC 2626, was found by the Zhuzhou EPB to have frequently exceeded discharge standards for COD28, ammonia nitrogen and total cadmium in the first half of 2008. The discharge of total lead and total arsenic were also found to have exceeded standards.29 Among Red Chip companies, China Resources Enterprise Ltd. CHINA RESOURCES 291 and China Resources Power Holdings Co. Ltd. CHINA RES POWER 836 were cited for having more than 20 environmental violation 4 records combined from 2005 to 2008. In 2007, a subsidiary of China Resources Enterprise Ltd. located in Nantong was found to be discharging 5,000 tons of untreated wastewater daily, into a local river. According to the local EPB, the factory expanded production capacity over four years but failed to make the corresponding adjustments to its wastewater treatment facilities.30 In early 2008, the factory exceeded the COD discharge standards by 3.24 times and was ordered to suspend production.31 From December 2007 until January 2009, another Red Chip company, Guangxi Huanyin Aluminum Co. Ltd., a subsidiary of Minmetals Resources Limited32 MIN RESOPURCES 1208, was responsible for eight slurry spills.33 As a result of one spill in March 2008, the slurry leaked into a local river contaminating the drinking water source of local villagers. Six months later, another spill covered 50 acres of paddy fields with 15 centimeters of slurry, destroying the crops just before harvest. The slurry also damaged local irrigation brooks and flooded local farmers’ houses. Despite all the corrective action required by the authorities, another spill occurred in January 2009 and contaminated three springs of local communities34. HKEx listed companies found to have major gaps in disclosure In most cases, very little disclosure of violation records, including any explanation or corrective actions, can be found in HKEx listed companies’ annual reports or official websites. In recent years, some HKEx listed companies have begun to follow global trends and publish corporate responsibility reports or sustainability reports. However, the reports reviewed by IPE also provided little disclosure about the violations, making it a clear gap in such CSR reports. For example, neither of PetroChina Co. Ltd.’s PETROCHINA 857 2007 or 2008 Corporate Social Responsibility Reports35 disclosed the multiple environmental violation records of the company’s subsidiaries in those two years.36 Another example is Datang International Power Generation Co., Ltd. DATANG POWER 991. Its official website 37 provides no explanation of the company’s more than 20 environmental violations that occurred between 2005 and 2010. Half of these violations occurred in one year 2008. For example, one of Datang Power’s subsidiaries in Chaozhou, Guangdong Province was fined RMB 100,000 in 2008 for breaking air emission standards, and for false reporting and refusing to report on various types of emissions, and was ordered to address the infractions.38 Another of the company’s power plants in Taiyuan, Shanxi Province was listed in 2006 and 2007 for severe violations of emission standards.39 The same plant was openly censured by the Taiyuan city EPB in 2008 for legal violations of discharge rules,40 and in 2010, it was again ordered to comply with environmental standards.41 The company’s 2008 Social Responsibility Report42 failed to cite or explain any of these violations in 2008. Improving enforcement in the mainland Historically, violation of environmental regulations and standards in China has been of little financial consequence to companies because of weak enforcement and insignificant fines. As such, penalties have often been regarded as part of the cost of doing business. Despite this, the trend is veering towards tighter enforcement and the imposition of higher punitive fines, a clear indication that environmental violations will become more costly to companies. As an example, Sinopec Guangzhou Company, a subsidiary of Sinopec Corporation SINOPEC CORP 386, has records of violations in 2004, 2005, 2007 and 200843. In 2008 alone, the company paid RMB 20 million in discharge fees and penalty fines. Yet in 2009, it was again placed on the list of major polluters required to 5 correct under intensive monitoring by the Guangdong Provincial EPB. According to an official media report, the company also received a ”red” card44 in an annual review of its environmental perance. The report noted that if the company could not control its pollution, its future ability to obtain credit from local banks would be affected45. Under increasing pressure from local communities and government to fix the problem or even to relocate, the company announced in mid-2009 that it would invest RMB 140 million to build and maintain pollution control facilities.46 As another example, in 2008, the Yulin city EPB imposed a fine of up to RMB 1 million and charged double the discharge fee on one of the coalmines of China Shenhua Energy Co. Ltd. CHINA SHENHUA 1088 that violated wastewater standards. The coalmine was also required to suspend production until the pollution was controlled.47 In 2009, when the same mine failed to meet environmental standards yet again, it was fined RMB 1 million.48 Another well-known example is the Hong Kong company Fountain Set Holdings Limited FOUNTAIN SET 420. In 2006, local environmental officials found that the company’s Fuan Textile factory in Dongguan was discharging daily 22,000 tons of untreated wastewater through a secret pipe into a nearby river. The local EPB imposed a fine of RMB 210,000, and the company was made to pay RMB 11.5 million in fees for its previous illegal wastewater discharge.49 Improved enforcement is most marked in the more developed coastal regions in China, such as the Yangtze River Delta and the Lake Tai watershed. Beyond imposing higher fines, local authorities have also ordered polluters to suspend production, with obvious financial impact on the companies in question. In the above mentioned case in Nantong, the subsidiary of China Resources had to halt production in 2008 and as a consequence lost RMB 20,000-30,000 per day during the closure. The case also impacted other China Resources’ subsidiaries, particularly in their ability to obtain credit from local banks. According to a media report, in April 2009, the Nantong unit was shut down for good and the business liquidated.50 Increased requirements to report and disclose environmental ination Companies operating in China are under increasing pressure from the government to report and disclose environmental ination. The State Council’s Open Government Ination Regulations and the Ministry of Environmental Protection’s Environmental Ination Disclosure Measures EIDM that went into effect on 1 May 2008 represent a major watershed in improving environmental governance. As a result, mainland environmental protection agencies are now legally required to publicly disclose a wide range of environmental ination. As defined under the EIDM, this includes environmental plans, pollution discharge permits and environmental statistics. Particularly relevant to corporations is the requirement to disclose