How to build a green factory that meets ESG standards?

On 19 October 2023, China’s Ministry of Ecology and Environment and the State Administration for Market Regulation jointly issued the Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading (for Trial Implementation), providing basic requirements for voluntary emission reduction trading and related activities in terms of the examination and registration of voluntary emission reduction projects, the verification and registration of emission reductions, emission reduction trading, and the management of examination and verification institutions, as well as clarifying the rights and obligations of all market participants, and the powers and duties of regulators.

On 8 November, the Ministry of Industry and Information Technology (MIIT) released the 2023 Green Manufacturing List, with a total of 1,491 green factories and 205 green supply chain management enterprises named, covering various fields such as electricity, chemicals, food and home appliances. This shows once again that national authorities attach great importance to the capability of enterprises in green and sustainable development.

In recent years, with the concept of environmental, social and governance (ESG) emerging rapidly in China and investors focusing more on companies’ potential for sustainable development, an increasing number of Chinese companies have embraced energy saving and efficiency improvements in production, and reduction of carbon emissions in the supply chain, aiming to improve their own sustainability and create better growth opportunities. Building a green factory is one of the most important steps.

Evaluation requirements

The Notice on the Construction of Green Manufacturing System issued by the MIIT in 2016, listing green factories, products, parks and supply chains as its main contents, aims to build a green manufacturing system based on an open and transparent third-party evaluation mechanism and a standard system. Attached to the notice is the Green Factory Evaluation Requirements, which elaborates on the green factory evaluation indicator framework, evaluation basis and method.

The indicator framework covers six aspects: general requirements, infrastructure, management system, product, environmental emissions and performance, which are also divided into basic and prospective requirements. Basic requirements are essential for enterprises to be qualified as green factories, and only those that fulfil all basic requirements are eligible for declaration. Prospective requirements are referential targets to establish green factories. The requirements encourage local authorities to consider and build on prospective requirements, with regard to the development level of each region.

In addition, some provinces and municipalities have issued Interim Measures for Green Factory Evaluation and Administration, which provide for the basic conditions, evaluation standards and procedures for enterprises applying for provincial and municipal green factory evaluation. Also, the MIIT has put forward more targeted evaluation requirements for green factories and special regulations to be followed by enterprises in specific industries, such as tyres and cement products. For enterprises in other industries, the green factory evaluation standards should still follow the requirements.

Supply chain and technology

According to CDP statistics, emissions from a company’s supply chain are often 5.5 times greater than those from corporate operations. Against this backdrop, green supply chains have emerged. China has issued Guidelines on Green Procurement for Enterprises (for Trial Implementation), the Green Manufacturing – Green Supply Chain Management in Manufacturing Enterprises and the Implementation Scheme for Environment Protection Top-Runner System, selecting green supply chain model enterprises and creating a system that promotes the development of green supply chains.

Based on the Green Manufacturing – Guidelines on Green Supply Chain Management in Manufacturing Enterprises, issued by China’s Standardisation Administration, a green supply chain refers to “a co-ordinated and unified supply chain system that integrates the concepts of green manufacturing, product life cycle and extended producer responsibility into the business processes of enterprises based on the traditional supply chain, and comprehensively considers the enterprise’s economic benefits with resource-saving, environmental protection, and safety requirements for human health”. In operation management, a green supply chain involves six aspects: green procurement, design, production, logistics, sales and recycling.

In addition, the author believes that following the standards of green factories to carry out technological innovation in production is the core initiative to improve product quality and realise the long-term sustainable development of enterprises. Meanwhile, it is also important to introduce green supply chain management by leveraging new technologies, including blockchain and AI. Traceable and non-tamperable blockchain technology makes it easy to track carbon footprints while improving calculation accuracy, with which governments can build digital low-carbon management platforms, implement flexible and dynamic carbon subsidies and levy dynamic carbon taxes on enterprises.

Conclusion

As ESG continues to blossom in China in both concept and practice, especially with the further expansion of ESG disclosure requirements for listed companies, improvement of their own ESG capabilities has become a must for enterprises. The establishment of green factories, improved balance of cost and efficiency, energy saving and emission reduction, manufacture of green and low-carbon products, and ultimately the attainment of green and sustainable development, are vital steps to fulfilling the national strategy of “dual carbon” goals.

In recent years, China has constantly rolled out incentives to encourage market players to actively embrace ESG concepts and green corporate development. In the future, we expect more companies to emphasise and implement ESG, and to facilitate the sustainable development of businesses.

Li Weiming is a partner at Blossom & Credit Law Firm