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Last Thursday, at FII6, Riyadh—the so-called “Davos in the Desert”—I chaired the panel discussion, “Managing Social Risks and Liabilities In International Business.” Participants included Dr. Fahad Al-Sherehy, Vice President, Energy Efficiency & Carbon Management at SABIC; Adam Janikowski, ESG Lead and Asian Investment Banking at CIBC Capital Markets; Oliver Stern, Managing Director in Forensic Investigations and Intelligence at Kroll; and Julianne Hughes-Jennett, Partner at Quinn Emanuel.  

Dr. Al Sherehy began by mapping out the very real risk that the “S” in ESG presents for business and their processes. In his role at SABIC, he is tasked with identifying and mitigating such risks. Dr Al Sherehy underscored that people development goes hand-in-hand with managing social risk: internal capacity building and training on social risk puts a business in the best place to identify that risk at the outset before it becomes more problematic. Adam Janikowski continued by discussing the challenge of quantifying social risk in the financial world. He noted that such risk has a price and increasingly could become a “deal-breaker,” meaning that a transaction does not proceed, or in the event that the transaction goes ahead it could lead to a “messy divorce” if risk emerges that had not been priced at the outset of the transaction. Adam also alluded to the distinction between CSR and ESG, recognizing that, while it is easy to conflate acronyms, the two were not synonymous. CSR—or Corporate Social Responsibility—is about the deeds a company carries out with respect to its stakeholders, including local communities, such as volunteering, contributing to local health and educational projects in the vicinity of your operations, and so on. ESG are the areas of risk that impact a business’s operational and financial performance. I concurred, noting that while CSR and effective ESG risk management often go hand-in-hand, it is not enough to point to CSR projects, such as educational efforts, as defense to litigation concerning ESG risk in your operations and supply chain.

Oliver Stern subsequently explained Kroll’s approach to assisting its clients in identifying and mitigating human rights risk preemptively and after a human rights issue had emerged. Oliver referred specifically to the benefit of effective supply chain management from a human rights perspective and underscored the commercial advantages of proactively managing human rights risk and liabilities.  

 Julianne then clarified how human rights or ESG risk can manifest as real legal risk. She identified three silos of claims. The first includes claims that fall typically under tort law in common law jurisdictions, with respect to human rights impacts in businesses’ direct operations or supply chain. This phenomenon has come before the English Courts in the last decade or so, such as high-profile claims against Unilever, BAT, and Shell. Second, she pointed to the potential for securities claims with respect to ESG misrepresentations or omissions in public-facing documents, such as IPO prospectuses. Third, she talked about claims against directors for breach of their fiduciary duties, citing the recent claims against the directors of Shell with respect to climate change. The rest of the panel also touched upon the expectation of greater regulation in this area, citing in particular the EU Corporate Sustainability Due Diligence Directive.  

It is clear that human rights risk is a very real risk: corporations that engage proactively to identify and mitigate that risk are not only best placed to comply with impending regulation and to defend any litigation, but also are more likely to be profitable—human rights risk that is not effectively managed can gravely impact the bottom line or reputation of a business.

Written by:

John B. Quinn