“Going Out” in Search of Oil and Gas: How Should Chinese Companies Tackle Human Rights Challenges?

Commentary, 24 March 2014

By Motoko Aizawa

China's Crude Oil Imports by Source, 2013. Source: FACTS Global Energy, Global Trade Information Services.

Amid soul searching for causes of the unexpected February slump in Chinese exports – maybe it’s the Chinese New Year, or perhaps the start of a real down turn? – China’s overseas direct investments (ODI) continue to flow vigorously.

According to the Economist Intelligence Unit (EIU), China’s outflows will match inflows by 2017. The EIU predicts that the balance of new outflows will target OECD countries to help China access new markets.

Meanwhile, China’s search for natural resources, such as metals, minerals, oil, and gas, continues in developing countries.

The central government has an ongoing policy to push Chinese companies to “go out,” to trade and invest abroad. These days, more and more Chinese companies that are not state-owned are “going out” alongside state-owned enterprises (SOEs), to make direct investments overseas in search of new resources and markets. China imposes numerous rules on its SOEs through the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC).

A notable example is SASAC 2008 Guidelines to the State-owned Enterprises Directly under the Central Government on Fulfilling Corporate Social Responsibilities – a high level but comprehensive enumeration of SOEs’ corporate social responsibilities that are essential for the sustainable development of the SOEs. Among these responsibilities are legal and honest business operation, sustainable profits, innovation, , resource conservation and environmental protection, duties toward employees’ well-being and development, community engagement, and reporting on implementation.

SASAC’s intention is clear: SOEs must operate on par with any western multinational enterprises. But those pesky private enterprises – those smaller (in comparison to the SOE behemoths, though by no means small in the sense of SMEs in the US, for example) and less experienced firms -- posed a risk to Chinese reputation in the international markets, because they often operated on their own, lacking strong guidance from the state, and unaware of the consequences of their actions. But that is changing.

But private enterprises – those smaller (in comparison to the SOE behemoths, though by no means small in the sense of SMEs in the US, for example) and less experienced firms -- posed a risk to Chinese reputation in the international markets, because they often operated on their own, lacking awareness of the consequences of their actions, and adequate response when thing went wrong. But that is changing.

Under internal and external pressure, China has sought to fill this gap by developing guidelines that apply to all Chinese companies doing business abroad. Two recent examples of standards of business conduct for Chinese enterprises “going out” highlight the issues involved.

Last year, the Chinese Ministry of Commerce (MOFCOM) and the Ministry of Environmental Protection (MEP) co-issued Guidelines on Environmental Protection in Foreign Investment and Cooperation. These guidelines urge Chinese companies doing business abroad to respect host country environmental protection laws, religions, and customs, and ensure rights and interests of workers; in addition, they suggest that companies follow established principles and practices of international organizations and multilateral financial institutions.

In 2012, the China Banking Regulatory Commission (CBRC) issued Green Credit Guidelinesfocusing on the financial sector. According to these Guidelines, banks supporting overseas investments should strengthen environmental and social risk management, and make sure project sponsors observe host country laws on environmental protection, land, health, safety, etc. The Guidelines state that banks shall publicly promise that, “appropriate international practices or international norms will be followed as far as such overseas projects are concerned, so as to ensure alignment with good international practices.” (Article 21).

The common thread running through these guidelines is observance of international norms, principles, standards, or practices, in addition to respect for host country laws and practices, on environmental protection and protection of workers and local communities – a notion that aligns with the corporate responsibility to respect human rights under the UN Guiding Principles on Business and Human Rights (the GPs).

The work of IHRB in Myanmar (through the Myanmar Centre for Responsible Business), East Africa (the Nairobi Process: a pact for responsible investment), and soon in Colombia, aims at engaging companies investing in the oil and gas sector in these countries. The idea is to help create capacities in companies to operate consistently with the GPs and related internationally accepted good practices of responsible business. IHRB is already engaging with a number of Chinese companies, both state and non-state-owned, in its existing programs, and continues to reach out to others in China at HQ and in their operations overseas.

In spite of a commonly held perception that Chinese oil companies are agents of the state, meeting objectives of the state and fulfilling orders from the central government, it reality these companies are “fragmented, decentralized and evolving,” according to the International Energy Agency’s study on Overseas Investment by Chinese National Oil Companies. If this is the case with Chinese SOEs, imagine the fragmentation and isolation of the non-SOEs in unfamiliar foreign territories. And yet the expectations placed on them are very high. They must post financial gains, and do so while having to abide by a combination of international good practice, and host and home country laws, and face public scrutiny for their conduct abroad, which often their domestic operations do not face. But this is exactly what any multinational enterprise must do today, and the recent Chinese guidelines affirm the need for Chinese companies “going out” to demonstrate the same level of conduct.

Ongoing steps by the Chinese Government to clarify its expectations of Chinese companies operating abroad, coupled with growing international expectations of businesses, are likely to lead to the GPs eventually becoming part of standard operating procedure for Chinese companies doing business anywhere in the world. IHRB’s programs will help by providing practical tools for Chinese companies as they learn to meet and even exceed the expectations placed on them, by their national government, and by foreign communities affected by their operations. Many multinational oil and gas companies have learned that this is the only way to survive and thrive in their business. Chinese firms going out will benefit from the same pathway.

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