Paths to Social Risk Reforms for the Hong Kong Financial Markets

Paths to Social Risk Reforms for the Hong Kong Financial Markets

Paths to Social Risk Reforms for the Hong Kong Financial Markets

The Asia-Pacific business environment is rife with social risk, manifested as human trafficking, forced labour, modern day slavery, child labour, safety and work environment issues, and other labour rights violations.1 In the modern business environment, a company’s failure to manage social risks can result in serious legal, financial, and reputational consequences.

For investors seeking access to the Hong Kong financial markets, the situation is no different. Investors as well as the key gatekeepers to the financial markets, namely regulators, banks, shareholders, professional investors, and professional services providers (lawyers, accountants, etc.) have an increasing number of incentives to combat forced labour and other related social issues which often arise in the Asia-Pacific region. While social risk has historically tended to be grouped as part of the broader suite of Environment, Social and Governance (“ESG”) issues, it is important to consider social risk also as a standalone issue and appreciate how damaging social risks can be for companies that do not adequate address or protect against social risks. Particularly in the Asia-Pacific region, social risk takes on increased importance in the business environment due to the high levels of forced labour and human rights issues in the region (some examples of which are discussed further in Part II of this paper).

Thus, instead of treating social risk as an ethical or moral issue that goes under the “corporate social responsibility” agenda, companies will increasingly face high-stakes vulnerabilities and, as a result, be increasingly held accountable on social risk. Adjusting to this new reality will be an important part of maintaining or increasing financial value for firms. Regulatory accountability is a boardroom issue and the shift of social risk to a regulatory accountability issue will ensure it forms an integral part of business practices going forward. A responsible board must address any actual or potential involvement in adverse social risk impacts as part of their risk management. If not, they will be inadequately prepared for future events, answerable to stakeholders for a failure to do so and may even expose themselves to liability. 2 This move from ethical to accountable is increasingly pushed by jurisdictions around the world, a phenomenon which began with laws passed in California and later in the United Kingdom, with more and more regions considering enhanced disclosure regimes each year.

This paper will examine some of the reasons behind the increased profile of social risk issues in the business world, including:

■ the increased investor demand for socially responsible companies;

■ a continued crack down on forced labour by legal and regulatory enforcement regimes; and

■ lobbying by global frameworks, NGOs, and non-profits for social risk reform.

In addition to exploring these causes for the increased global focus on social risk issues, this paper will examine and evaluate some of the steps taken to combat social risk issues in Hong Kong and the Asia-Pacific region more generally, and finally propose reforms to better address these social risk issues. Given the current and ever-evolving business, legal and regulatory landscape and DLA Piper’s insight into how global businesses operate, this paper focuses on two necessary reforms:

1. first, there is a clear need for increased financial regulation of the Hong Kong markets in relation to social risk issues; and

2. second, the identification and elimination of social risk issues must be integrated into all relevant business functions.

To read the full report click here.

Liberty Asia is a not-for-profit organization that aims to prevent human trafficking through legal advocacy, technological interventions, and strategic collaborations with NGOs, corporations, and financial institutions in Southeast Asia.