China’s ESG Risks For Outbound Enterprises.
Supply chain oversight and environmental impact assessments are some of the key areas that Chinese businesses need to be mindful of in outbound operations
As Chinese companies deepen their global footprint through outbound investment, international trade, and EPC (engineering, procurement and construction) contracting, the growing relevance of ESG factors has become a defining feature of global business compliance. ESG is no longer a soft concept or optional add-on — it is a legal and operational imperative.
Chinese enterprises now face mounting scrutiny from host-country regulators, international financiers, transnational civil society organisations, and global value chain partners. From allegations of forced labour to environmental damage and community displacement, ESG risks are materialising into litigation, sanctions, reputational harm, and project disruptions.
This article outlines the key ESG risks and compliance measures that Chinese companies must consider when operating overseas, with emphasis on EPC projects and host-country operations.
1. Environmental risks: more than permits and pollution
Chinese firms engaging in overseas EPC projects often encounter complex environmental regulatory regimes that extend well beyond local permitting. In regions such as Southeast Asia, Latin America, and Africa, compliance with local environmental impact assessment (EIA) laws is mandatory. However, for projects financed by multilateral development banks (e.g. World Bank, AIIB, ADB), companies must additionally comply with international environmental safeguard standards—often more stringent than domestic rules.
Failing to conduct legally compliant environmental impact assessments (EIAs), or commencing works without final approvals, may result in project suspension, regulatory fines, or debarment from future tenders. In environmentally sensitive zones, companies may be subject to transnational litigation in home or third jurisdictions, especially when biodiversity or indigenous rights are implicated.
The most important environmental approval is an EIA. Before commencing any construction or investment project, companies must conduct a thorough EIA in accordance with local laws. This includes assessments of air, water, noise, and ecological impact, followed by public disclosure and government approval. Other key environmental issues also include waste and emissions control, noise and light pollution, natural resource protection, green construction and energy efficiency.
For the above-mentioned environmental issues, legal response strategies that Chinese enterprises can take include but are not limited to:
- Engage qualified local counsel and environmental consultants early in project planning;
- Ensure EIAs and permits are obtained before mobilisation;
- Incorporate environmental covenants into subcontracting agreements;
- Monitor emissions, waste disposal, and land use in real time and maintain audit trails.
2. Social impact: the rising cost of neglect
On the social front, Chinese companies face increasing pressure to demonstrate compliance with the following key social issues:
- Labour compliance and human rights:
Hiring must comply with local labour laws and international standards. Forced labor, child labor, and unsafe working conditions must be strictly prohibited. All workers should receive contracts, fair wages, and adequate protections.
- Community engagement:
Projects that affect nearby residents — such as infrastructure construction or land conversion — must maintain transparent communication with local communities, including public consultations and grievance mechanisms.
- Land acquisition and resettlement:
Compensation must be fair and based on local laws, and voluntary relocation must be conducted respectfully. Projects funded by international development institutions should align with IFC Performance Standard 5 on Land Acquisition and Involuntary Resettlement.
- Occupational health and safety (OHS):
A robust OHS system must be implemented, including regular safety training, protective equipment, and incident response protocols.
- Diversity and gender inclusion:
Equal opportunity policies should be in place to prevent discrimination. Gender equality measures can improve staff morale and project reputation.
For example, in Africa and South Asia, improper land resettlement without fair compensation or consultation has led to widespread community unrest and reputational backlash. Meanwhile, Western regulatory regimes — such as the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) and the US Uyghur Forced Labor Prevention Act — create extraterritorial legal exposure, especially for supply chain violations.
The legal response strategies that Chinese enterprises can take include:
- Conduct human rights due diligence in line with the UNGPs or OECD guidelines;
- Ensure contracts with local labour providers explicitly prohibit child or forced labour;
- Establish grievance mechanisms for workers and affected communities;
3. Governance and ethical conduct:
Governance risks often stem from inadequate compliance infrastructure and lack of awareness of international anti-corruption laws. In many jurisdictions, even minor facilitation payments or undocumented consultancy fees can trigger enforcement under the US Foreign Corrupt Practices Act , UK Bribery Act, or local equivalents.
Additionally, with the rise of global sanctions regimes and heightened scrutiny of Chinese enterprises, companies must implement robust know-your-counterparty (KYC) procedures to avoid doing business with sanctioned entities or individuals.
Supply chain governance is equally critical. International contractors are now expected to cascade ESG obligations to their subcontractors and suppliers. Failing to monitor third-party compliance may expose the primary contractor to joint liability, reputational harm, or contract termination.
Key governance issues:
- Anti-Corruption and bribery:
Strict internal policies and training should be enforced to prevent bribery, especially in procurement, permitting, or customs clearance. Any use of third-party agents must be subject to due diligence and compliance monitoring.
- Sanctions and export controls:
Companies must screen counterparties against international sanctions lists (e.g., OFAC, EU, UN) to avoid legal and reputational risks. This includes subcontractors, suppliers, and financial institutions.
- Supply chain ESG oversight:
ESG requirements should be embedded in procurement contracts with subcontractors and vendors. Periodic audits and ESG self-assessment questionnaires can enhance control over supplier behaviour.
- ESG disclosure and transparency:
ESG reporting is increasingly expected by lenders, investors, and eve local regulators. Companies should prepare ESG reports aligned with international frameworks such as the GRI (Global Reporting Initiative) or SASB (Sustainability Accounting Standards Board).
- ESG governance structures:
An internal ESG committee or designated senior officer should coordinate ESG policies and reporting. Cross-functional teams can ensure ESG issues are integrated into daily project operations.
The legal response strategies that Chinese enterprises can take include:
- Implement anti-bribery and corruption policies and provide training across overseas units;
- Establish KYC and sanctions screening systems aligned with OFAC, EU, and UN lists;
- Integrate ESG clauses into procurement and subcontracts, including audit rights;
- Appoint ESG compliance officers and conduct regular interna assessments.
4. Toward a proactive ESG compliance framework
Chinese companies are increasingly recognising ESG not just as a compliance burden, but as a strategic tool to enhance global competitiveness. To that end, legal counsel must play a central role in designing and overseeing ESG governance frameworks that are both operationally effective and legally sound.
At a minimum, outbound enterprises should:
- Establish a board-level ESG oversight mechanism or dedicated ESG working group;
- Align ESG policies with global disclosure frameworks such as GRI, SASB or IFRS S2;
- Conduct ESG due diligence before bidding or acquiring overseas assets;
- Prepare ESG reports that balance compliance with market expectations.
As international ESG standards continue to harden into enforceable law — via trade regimes, public procurement rules, and investor mandates — Chinese enterprises must move from reactive to preventative compliance models.
The ESG landscape facing Chinese companies abroad is rapidly evolving from voluntary to mandatory, from reputational to legal. For lawyers advising Chinese outbound clients, the key is to help clients internalise ESG as a governance function — not merely a box-ticking exercise.
By embedding ESG due diligence, contractual safeguards, and enforcement protocols into overseas operations, Chinese enterprises can mitigate risk, unlock capital, and build durable global credibility. In a world of intensifying ESG scrutiny, proactive legal compliance is not just a shield — it is a passport to sustainable international growth.
For further information, please contact:
YI, Fang, Partner, JunHe
yif@junhe.com
