A Matching Policy to Address ESG and Non-ESG Risks Impacted by a Relocation Policy in China’s Chemical Industry

Abstract

China’s chemical industry has faced severe environmental, social, and governance (ESG) issues, such as high safety and environmental accidents and risks. To address these issues and promote industrial upgrading, China’s central government has issued a national relocation and improvement policy targeting its chemical industry. However, its countrywide policy implementation may also lead to other ESG risks during the relocation of chemical enterprises, namely industrial transfer. The typical ESG risks that appear to occur in developed eastern region provinces include a one-size-fits-all solution and unemployment, while less developed central and western region provinces may encounter pollution transfer, carbon leakage, environmental injustice, and health disparities. These ESG risks might overlap with other economic and financial (non-ESG) risks, like stranded assets, industry hollowing-out, and debt sustainability issue. These ESG and non-ESG risks could result from potential mismatches between chemical enterprises and chemical parks, categorized as mismatching errors explained by social-ecological systems, behavioral economics, and information economics. To better manage these risks, we propose an ESG matching policy comprising a national standardized ESG scoring and ranking system, a deferred acceptance mechanism, and a score announcement instrument. Such a policy innovation aims at achieving fair and efficient chemical enterprise–chemical park pairs, which would help manage both ESG and non-ESG risks and provide a just transition toolkit for China and other developing countries.