How to best manage ESG-related risks and disputes in the MENA region

Despite the global pandemic, there is a clear spot light on climate change, which Covid-19 has actually helped bring further into focus. Given the number of national lockdowns in place and the corresponding fall in CO2 omissions, the evidence of humanities’ impact on the world has never been clearer.

Those photos of Venice’s crystal clear canals, for the first time in decades, were a prime example of how the world might look if we were to reverse the severe effects of climate change.

In parallel, global economic growth has stalled. Economies around the world contracted in 2020 and will continue to do so for the majority of 2021, with sustainable growth only predicted to return in 2022. This has also focused the public and private sectors attention on what this recovery should look like and how and why a green sustainable recovery is the best approach.

This is all fine and well you may ask, but how does it impact me and my business. The answer lies in the increased attention on ESG, (environmental social governance) and the rise of climate change related disputes. A few years ago, you would have to google what ESG stood for and now it’s an increasingly referenced issue in both boardrooms and governments.

Parties are lodging claims against companies and governments for losses suffered as a result of climate change. Just this week, France was found guilty by a Paris administrative Court for not complying with its international obligations to fight climate change.

This is not a new event or indeed a product of the current pandemic. It has been building for some time. The last five years alone have seen a dramatic increase in the number of extreme weather events, from the bush fires in Australia and the US to hurricanes and typhoons in the Pacific, causing billions of dollars of damage. The damage caused and the loss suffered has not gone unnoticed. Nor indeed has what many believe to be the cause: climate change.

From a legal perspective, when a harm is suffered by a company or individual, they may have the right to take action (in the form of a civil claim) against the person or persons that caused the harm. Causation is a very large part of any such action. For example, A’s house was burned down in a fire. A wishes to claim damages from B, so A must evidence that B caused the fire and then establish the loss it has suffered as a result.

Now apply this principle to losses suffered as a result of climate change. The causation requirement becomes substantially more difficult, but that is not stopping claims being lodged against what is perceived as the “major global polluters” and states, who have not taken action to tackle climate change.

When it comes to states, there is a yardstick, by which many are measured, to confirm if they have taken the necessary action to combat climate change. This comes in the form of the widely known 2015 Paris Agreement. What is significant about the Paris agreement is that it sets the basis for international cooperation to address climate change, it aligned the action with the science (for the first time) and it also requires all countries to take steps to mitigate climate change.

The key goals are to hold the increase in the average temperature at below 2 degrees above pre-industrial levels, pursue efforts to limit global warming to 1.5 degrees and for most if not all states who signed the Agreement (over 187), to reach net zero carbon emissions by 2050. This is a huge undertaking and will require trillions of dollars of investment. It will also require states to impose measures on companies and public sector entities operating within their borders. If all the players within a State fail to comply with the goals of the Paris Agreement, it places the State at risk of breaching its commitments. As such, governments are becoming increasingly more forcible in their insistence that companies (both public and private) comply with emission standards and targets right through the commercial supply chain. Fines are being imposed for failure to comply with these new standards. Investment opportunities are being missed and funding denied because companies cannot evidence they are doing their part in assisting with this global issue. Lawsuits are being lodged and won against companies that fail to consider environmental issues when investing and operating their day to day business.

The Middle East and North Africa (MENA) is by no means immune to this. Companies across the MENA region are asking and being forced to ask how they can reimagine a more sustainable business and mitigate the risks of disputes caused by ESG related risks. So what can companies in MENA do?

First and foremost, you must conduct an internal green audit. Assess what your share of CO2 emissions are; how you conduct your business, and can it be down in a more environmentally friendly manner. Then you need to broaden it out to your supply chain. Examine who you are working with and ask what they are doing to combat these issues. Consider the reputation harm caused by investing or doing business with entities that fail to address these issues.

We have already seen lawsuits filed against major Silicon Valley companies for their failure to consider such matters. The damage to their brand in this day and age of 24 hour news and instantaneous sharing on social media is, as yet, not calculated.

Nevertheless, as this issue gathers pace, it is certain to be considerable. You should ensure that you are not mislabeling your products from an ESG perspective, thereby increasing your risk of legal action. You should review your company accounts, marketing materials and websites to ensure that any statements given on ESG are not open to challenge. “Green washing” your reports has become a very serious and indeed a risky practice, which should be avoided at all costs.

Companies can no longer sit back and do nothing. Many major government owned players in the MENA region have appointed ESG officers to their boards and are enquiring with their supply chain on what actions they are taking to combat climate change. Given the large amount of MENA government awarded infrastructure work alone tabled for the next 10 years (trillions in the GCC alone), governments will expect their private and public partners to mirror their own actions. Those that fail to do so, will, at best, lose out on substantial opportunities and at worst, risk substantial penalties and potential legal action.

Andrew Mackenzie is a partner and the head of International Arbitration (UAE) Construction and Offshore Litigation (DIFC/ADGM) at Baker McKenzie Habib Al Mulla