In recent years, driven by multiple factors such as domestic overcapacity, rising costs, and the rise of emerging markets overseas, Chinese companies are accelerating their globalization strategy, viewing it as the second path to promote sustained growth. Cross border operations and deep expansion into overseas markets have become the core direction of corporate strategic planning. However, driven by the global wave of sustainable development, companies are facing new challenges in their journey to go global - ESG (Environmental, Social, and Corporate Governance) compliance. In addition to dealing with traditional legal risks and cross-cultural challenges, enterprises must also actively respond to the requirements of sustainable development, which has become a key element in their internationalization journey.
European Union
In recent years, global government regulatory agencies and international organizations have become increasingly strict in their requirements for ESG standards, with a wider and deeper regulatory scope. The crackdown on "greenwashing" behavior is also constantly increasing. In November 2022, the European Council officially adopted the Corporate Sustainability Reporting Directive (CSRD), which will come into effect on January 5, 2023 and gradually apply to large listed and non listed companies operating in the EU. According to the directive requirements, relevant enterprises are required to regularly release sustainability reports, comprehensively revealing the potential risks and opportunities brought by social and environmental issues to enterprise operations, as well as the actual impact of enterprise activities on human and natural environment.
In addition, the European Union passed the Carbon Border Adjustment Mechanism (CBAM) on May 17, 2023, imposing carbon tariffs on six high carbon industry products imported from outside the EU. Subsequently, on January 17, 2024, the European Parliament passed the "Empowering Consumers to Achieve Green Transition Directive", which explicitly prohibits greenhouse gas emission offsetting statements without substantial emission reduction basis and strictly limits environmental statements without supporting documents. At the same time, the EU's "New Battery Law" officially came into effect on February 18, 2024, requiring power batteries and industrial batteries to declare their product carbon footprint from July 2024 and meet the carbon footprint limit requirements before July 2027. Starting from 2027, power batteries exported to Europe will also need to hold a "battery passport" that includes information on the battery manufacturer, material composition, recyclables, carbon footprint, and more.
Faced with a series of strict ESG regulations from the European Union, Chinese battery manufacturers and new energy vehicle export enterprises are facing unprecedented challenges. In addition, on April 23, 2024, the European Parliament also passed a draft of the "Regulation on the Prohibition of the Use of Forced Labor Products in the European Union Market", which investigates products suspected of using forced labor. Once confirmed, the sale of related products in the European Union market will be prohibited. On May 24th of the same year, the European Council approved the Due Diligence Directive on Corporate Sustainability (CSDDD), which will gradually apply to EU companies and non EU companies that meet specific revenue thresholds within the EU. CSDDD requires companies and their supply chain partners to actively prevent, terminate, or mitigate negative impacts on human rights and the environment, and to incorporate due diligence procedures into their management systems and publicly disclose investigation results.
For Chinese companies with a certain scale and layout in the EU market, they have been directly included in the non EU enterprise list of CSDDD and are required to strictly comply with the due diligence requirements of the directive. These enterprises include EU companies and their parent companies with over 500 employees or global revenue exceeding 150 million euros. Meanwhile, companies that have business dealings with EU companies, such as textiles, clothing, agriculture, food, and minerals, also face the risk of being investigated. If due diligence fails, these companies may be excluded from the supply chain by EU clients, resulting in significant business losses.
America
On December 23, 2021, the Uyghur Forced Labor Prevention Act (UFLPA) was officially enacted in the United States
The bill adopts the principle of "rebuttable presumption," assuming that all products from Xinjiang are produced through "forced labor" unless importers can provide clear and convincing evidence to the contrary.
Germany
On January 1, 2023, the German Due Diligence Act for Supply Chain Enterprises came into effect. According to the bill, German companies are required to regularly fulfill their due diligence obligations on direct and indirect suppliers in areas such as human rights and environmental protection.
Canada
On May 3, 2023, the Canadian Parliament officially enacted the "Prohibition of Forced Labor and Child Labor in Supply Chains Act", which aims to enhance the transparency of global supply chains and crack down on forced labor and child labor issues in supply chains. Against the backdrop of increasingly stringent global ESG (Environmental, Social, and Corporate Governance) regulations, overseas enterprises urgently need to establish a comprehensive global ESG compliance and risk management system to strengthen their own and supply chain ESG management capabilities.
Firstly, when conducting overseas investments and market expansion, enterprises should have a deep understanding and respect for the culture, laws, and regulations of the target market. By actively grasping local laws and regulations on labor, environmental protection, etc., enterprises can avoid violating the laws and regulations of the host country due to neglect or lack of understanding, thereby effectively avoiding government penalties, protests from non-governmental organizations, and public complaints.
Secondly, companies should deeply integrate ESG concepts into their strategies and development plans, and establish a sound ESG governance system. This system needs to cover three major areas: environmental protection, social responsibility, and corporate governance, including policy formulation, institutional establishment, supervision of implementation, and continuous improvement, to ensure ESG compliance for enterprises and upstream and downstream supply chains. By practicing ESG principles, overseas enterprises can not only gain recognition from local governments and consumers, but also significantly reduce legal risks, enhance brand image and market competitiveness.
Finally, enterprises should implement strict due diligence procedures in supply chain management, conducting comprehensive audits and evaluations of all aspects of the supply chain. By providing clear guidelines for supplier behavior, companies can ensure that their suppliers and partners comply with their ESG standards. In addition, companies should regularly release ESG reports, detailing their performance in environmental protection, social responsibility, and corporate governance. Only by establishing cooperative relationships with suppliers that meet ESG standards can companies ensure product quality and sustainable development.