Regulatory compliance in China has become more complicated and confusing in the last 2 years. New requirements and enforcement seem to come out of the blue. This White Paper examines the root causes of rapidly changing environmental policies and recommends a quick and cost-effective approach to risk management in China that is aligned with the Government’s regulatory intent and with minimum impact on the sites’ operations.

1. 1
Three-Dimensional Environmental Risk Screening:
Cost-effective compliance management for operational sites in
China
Executive Summary:
Regulatory compliance in China has become more complicated and confusing in the
last 2 years. New requirements and enforcement seem to come out of the blue.
This White Paper examines the root causes of rapidly changing environmental
policies in China and that recommends a quick and cost-effective "SEP-approach" to
identify and mitigate risks related to environmental compliance of China operations
and suppliers in alignment with the Government’s regulatory intent and ongoing
industrial transformation.
The following sections will illustrate root causes of the above events and provide
solutions and recommendations for enterprises.
Part 1 How to correctly interpret environmental regulation and policy in China?
The root causes of today’s rapidly-changing Chinese environmental policies can
be traced back to the Law of the People's Republic of China on Environmental
Protection. Environmental policies during the "13th Five-Year Plan" and the "14th
Five-Year Plan" all follow the Environmental Protection Law to set forth
environmental policies in the new era of environmental protection.
Most Chinese environmental policies since 2015 have been designed to address
one challenge: “What shall be done if all companies have met discharge standards,
but the environment is still deteriorating?” The nation has put forward a series of
policies, regulations, and management methods aiming at improving the quality of
the environment to address this situation.
The focus of environmental regulations and environmental enforcement shifted
from controlling total emission loads by setting fixed standards to a more dynamic
and holistic approach of doing anything needed to meet environmental quality goals.

2. 2
The main aspects of these policies are as follows:
1. Improvement of "regional environmental quality" has become the only goal
of environmental policies;
2. The fate of enterprises in a region are uncertain as long as the “regional
environmental quality” goals are not achieved;
3. Setting "total pollutant discharge limits" has become subject to meeting
"regional environmental quality" goals;
4. The goal (legal behavior) is "continuous pollution reduction" instead of
"discharge in compliance with standards";
5. Pollutant discharge permitting management now takes into account both
the process of pollution control and the improvement of regional
environment quality;
6. Such requirements will translate to pollutant discharge permits and
especially to environmental “emergency response measures” set forth by
the authorities at times of adverse weather conditions correlating with
heavy pollution and the approach of environmental quality improvement
deadlines.
Below are examples of questions which have arisen at operating facilities as a result
of these changes:
1. Is it really necessary to treat VOCs emissions even if they are far below the
emission standards? According to which laws and regulations?
2. Can the local government legally shut down enterprises just because
regional water quality does not meet standards?
3. Does the government have the right to ask an enterprise that meets all
discharge standards to limit or even stop production?
4. What is the relationship between “uncollected” emissions and fugitive
emissions? Shanghai regulations prohibit “uncollected” emissions. What
does this mean and is this even technically feasible?
5. Is "discharge in compliance with standards" equal to “legal behavior”? Does
it mean “no” non-compliance?
6. Isn't pollutant discharge permitting management and total amount control
of pollutant emissions the same? Is there any essential difference between
both?

3. 3
In this new era of environmental protection, enterprises can benefit by
expanding their focus from legal compliance at the site level to considering three
dimensions, i.e. Site, Environment and Policy (SEP), where:
• Site focuses on legal compliance of the enterprise itself;
• Environment takes into
account the sensitivity of
the enterprise's
surrounding environment
and related environmental
quality goals; and
• Policy emphasizes
conformance to
national/local policy and
planning.
Part 2 Cost-effective measures for environmental compliance risk management in
the new era of environmental protection
Companies that only consider the "self-compliance" dimension, can be at risk
because of the relevance to enforcement of the two additional dimensions of
"sensitivity of the surrounding environment" and "conformance of regional
environmental policy and planning."
For example, on April 28th, 2018, the Guannan County Government (in Jiangsu
province) ordered all enterprises in its Chemical Industrial Park to stop production
for environmental protection rectification, mainly because poor environmental
quality of the region and odor complaints by local residents. Detailed inspections
were performed, and the Jiangsu Provincial Environmental Protection Department
implemented a six-month limited EIA approval period for the entire region covering
six counties.
This event illustrates how the performance or behavior of a site's neighbors
(and the whole industrial park) can directly affect the site itself and environmental
actions focused on protecting the interests of the people.
Environment
Local
sensitivity
Policy
Focus on actual
priority issues
Site
Legal
compliance

4. 4
Even being in an industrial chemical park doesn’t offer guarantees. Many
provinces across the country have started shutting down chemical industrial
parks. For example, in March 2018, the Vice Governor of Shandong Province
stated that the province would strive to reduce the number of chemical
industrial parks to less than 100 and shut down 20% of existing chemical
companies.
According to current statistics, this means that 50% of chemical parks will
be abolished, and more than 1,500 enterprises will be shut down.
This shows that, in the new era of environmental protection, enterprises need
to focus on all three SEP dimensions, with key focuses for each dimension as follows:
1. Site：compliance with legal procedures (licenses) and compliance of operational
behavior (meet standards)
2. Environment：regional sensitivity, environmental capacity and objectives, e.g.
residential areas and protection zones
3. Policy：industrial policies and planning, environmental policy, environmental
protection infrastructure, industrial park planning
The level of corporate environmental compliance risk across China can be
quantified and scored based on the "three-dimensional risk screening" above being
applied across multiple sites. By using this approach, enterprises can more
effectively manage and mitigate the risks of their operations and/or supply chain.
Because each of the SEP three dimensions has its own level of risk, risk levels
can be classified according to the actual situation of the enterprise. GREENMENT has
developed specified sets of criteria for each dimension and adapted these for related
industries in related regions.
The depth of screening is chosen based on the purpose of the screening.
Classifying in 3 levels leads to S1S2S3…，E1E2E3…，P1P2P3…resulting in a
total of 3×3×3=27 levels of classification. Classifying in 4 levels leads to
S1S2S3S4…，E1E2E3E4…，P1P2P3P4… resulting in a total of 64 (4×4×4=64)
data points useful for measuring and visualizing the environmental risk profile of a
specific site.

5. 5
The following table illustrates potential risk classification outcomes using a SEP
risk matrix when the Site's risk is assumed to be medium (S2):
Risk matrix (adjusted as applicable)
Enterprise's own risk (S2)
Surrounding
Sensitivity
Regional environmental policy and planning compliance
Low Policy Risk Medium Policy Risk High Policy Risk
Low Env.
Sensitivity
S2E1P1（2） S2E1P2（4） S2E1P3（6）
Medium Env.
Sensitivity
S2E2P1（4） S2E2P2（8） S2E2P3（12）
High Env.
Sensitivity
S2E3P1（6） S2E3P2（12） S2E3P3（18）
According to the above risk matrix, we can identify the level of environmental
compliance risk of an enterprise, but also the characteristics of the risk: whether the
risk mainly originates from regional environmental policy, the surrounding
environment, or the compliance level of the enterprise itself?
The method is particularly suitable for auditing of portfolios of operational sites
or supply chain sites, facilitating the risk classification for each site or each supplier.
For environmental compliance audits, companies may consider following the steps in
the table below:

6. 6
In China, data on environmental infractions is public available, allowing for a
high-level compliance screening without even visiting the sites. It suffices to have the
site’s address and its type of industry to classify the site’s Risk Level. This allows a
company to quickly screen the vulnerability of its factories or its suppliers even
without informing or involving the individual sites.
Part 3 New site selection
The practical methodology described in this White Paper demonstrates how
three-dimensional SEP risk screening can be a useful measure for assessing
environmental compliance risks of existing facilities in this new era of environmental
enforcement which is aligned with the policy intentions of the Chinese Government.
In addition, the methodology can be a powerful source of insight during the
"site selection" process for new projects, anticipating potential future environmental
requirements at a given location:
First, conduct a regional environmental sensitivity survey (E):
• investigate regional environmental quality and capacity,
• regional total amount of pollution indicators,
• environmental conditions of regional basins, the surrounding
factories, residential area, as well as public infrastructure within the
region, especially wastewater collection system and hazardous
waste disposal facilities;
Second, evaluate local environmental policy and planning (P), including:
• class/level of the industrial park,
• the park's development planning,
• industrial policy guidance,
• regional environmental access permitting,
• environmental quality improvement deadlines,
• heavy pollution weather emergency plans, and
• joint air pollution control requirements

7. 7
Part 4 Case Study
The SEP approach was used by a large multinational automotive company
confronted with serious financial damage after they unexpectedly lost one of their
key suppliers in China due to an unexpected environmental enforcement action.
With over 200 operator and supplier sites in over 80 cities, the company
wanted to quickly understand its other vulnerabilities in China. Findings were
organized based on the cities where the sites were located, initially without
revealing specific site details (EP-scoring).
The suppliers' activities were categorized according to applicable environmental
regulations. Suppliers with industrial activities categorized as "heavy polluting" in 15
cities were identified as “at risk” as these cities are transforming to new high-tech
and clean-tech industries, phasing out the related activities and related suppliers.
Suppliers in 6 provinces were categorized as “safe” as their activities were
categorized conform with the industrial planning for these regions and provided the
suppliers comply with the related strict new regulations governing these heavy
polluting activities.
Next, auditing and specific environmental performance programs were
developed for selected suppliers to ensure compliance with the latest policies and to
ensure business continuity.
Evaluation and regional visualization of operational sites and suppliers

8. 8
Key Outcome
• The company quickly got an overall picture of its suppliers and
operational sites without visiting them. Sites with a high-risk outlook
within 2 years were identified and categorized, as illustrated in above
Figure.
Tactical Mitigation of Supply Chain Risks
• The company immediately sought alternatives for 4 high risk single-
sourced suppliers to minimize the major risks of business interruption,
and also started looking and pre-negotiating back-up sources for 12 high
risk suppliers to further reduce the risk of cost impacts from business
interruption.
Strategic Considerations for the Business
• The company is currently considering moving part of its business
activities from one factory to another factory in a “safe” zone closer to a
long term secure supply chain in order to save costs.
• The company is also considering moving one of its operations to a
specialized zone instead of upgrading existing facilities, in order to
leverage financial benefits supporting the transformation of China’s
industrial landscape in line with government planning.
Part 5 Conclusion
Priority policy goals for China today are derived from the “three tough battles”
Xi Jinping has focused his administration on: prevent and defuse financial risks,
target poverty alleviation and control environmental pollution. The ultimate goal is
to build a moderately prosperous society by 2020 in line with the 13th Five-Year
Plan.
The importance of environmental protection was reflected by the Amendments
to the Constitution of the People's Republic of China (2018) passed on March 11th,
2018, which added "ecological civilization" and "Beautiful China" in the goal of the
country for the first time. Two days after this, on March 13th, 2018, the Ministry of
Ecology and Environment (MEE) was established to replace the Ministry of
Environmental Protection. The MEE has brought together all environment-related
responsibilities which before were dispersed over various departments for land
development and reform, land resources, agriculture, marine and water resources.

9. 9
Environmental inspections covering 30 provincial regions, have ushered in an
era in which the environment is at the forefront of government enforcement action.
In a centrally-led enforcement campaign as far-reaching as anything that the
government has undertaken, over 5700 officials have been arrested and over 30,000
companies have been penalized.
These campaigns for years to come will be a continuous coordinated effort
between central inspection teams and a wide range of local government authorities
until the national goals have been achieved. The government has committed to roll
out the inspections on an ongoing biennial basis in order to address the ever-present
risk of environmental “relapse.”
Companies should have a 3-year strategy in place to anticipate fall-out from the
environmental enforcements, both on their own operations and their supply chains.
Three-dimensional risk screening is a vital and effective risk control and
strategic forward-looking tool to protect enterprises both during ongoing operation
and as part of site selection for a new facility and can help achieve the sustainable
development goals of China. A high level three-dimensional risk screening can be
performed without impacting the sites and at high speed and low cost.
Authors: Ma Liqiang and Johnny Browaeys
The SEP methodology and derived Dynamic Risk Management Tool will be illustrated
during the Seminar GREENMENT is organizing on June 19th
in San Francisco.
Information and registration online at: https://tinyurl.com/GREENMENT
For discount tickets or for more information on SEP or the Dynamic Risk
Management Tool, contact GREENMENT at johnny.browaeys@greenment.net or via
WeChat: 13761894720