China: China To "Rate" Environmental Protection Efforts

Last Updated: 21 February 2014
Article by Ostiane M. Goh-Livorness

As a "green" start to the new year, the Ministry of Environmental Protection of the People's Republic of China ("MEP") announced on January 2 the introduction of a credit rating scheme ("Scheme") that will measure a company's environmental protection efforts according to a designated standard. The Scheme is due to launch on March 1.

The rules that govern the Scheme will apply to companies that are responsible for high levels of pollution and pose great risk to the environment. Industries caught by the Scheme will include energy, transportation, thermal power, steel, cement, electrolytic aluminum, coal, metallurgy, chemical, petrochemical, building materials, paper, brewing, pharmaceutical, fermentation, textile, leather, and mining. Companies that exceed prescribed emissions standards, use or produce toxic and hazardous materials, have caused significant environmental damage, have been fined more than 50,000 RMB or possess a recordable offense, or have been identified by environmental protection departments at provincial levels will also be included. Those who do not fall within the scope of the Scheme may choose to participate by their own volition.

Each company will be assigned a rating according to a four-colored scale—green (trustworthy), blue (good), yellow (warning), and red (adverse)—which will be determined based on the company's carbon emissions and efforts to curb pollution. The ratings will then be used by banks and financial institutions in China to evaluate whether a new loan offering or subsidy should be granted to the company in question. The MEP has recommended that companies with the worst ratings should be prevented from receiving new funding until their environmental credit rating improves.

It is anticipated that the assessment period for the Scheme will run from January 1 to December 31, and that the rating will be published by April of the following year; however, timelines may differ by province. The provincial environmental protection departments will be responsible for monitoring the credit rating scheme and can delegate tasks to other institutions.

As the world's biggest emitter of greenhouse gases, China is increasing efforts to address its environmental concerns while attempting to appease mounting civil unrest. The government has set itself an ambitious target to reduce carbon intensity by 40–45 percent below 2005 levels by 2020, and officials believe the new Scheme will help the country achieve this goal. Although the Scheme can only recommend that financial providers and government departments penalize the worst offenders, most importantly it offers a formal incentive for businesses to take action to curb their emissions and adhere to environmental regulations. The success of the Scheme will rest on how severely the financial community will apply its rules and the extent to which authorities will incorporate environmental issues into their economic decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ostiane M. Goh-Livorness
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