The Paris Agreement on Climate Change adopted in 2015 gave new impetus to the growing interest of the public agenda to ensure environmental and human rights protection, and intensified the discussion on corporate social responsibility in achieving this goal.
There has been a notable increase in disputes with ESG (Environmental, Social and Governance) components in this global context. For example, just in relation to the environmental dimension of ESG, from 2015 to date, more than 1,000 lawsuits that relate to climate change in different jurisdictions have been recorded.
For decades, arbitration has been the principal means of resolving international commercial and investment disputes, and therefore, the incorporation of ESG elements in international business agreements has been reflected in arbitration disputes deriving therefrom. There are important precedents in investment arbitration where the compliance with environmental laws or human rights has been a material part of the dispute.
Although with different nuances, the ESG dimensions are equally relevant in commercial arbitrations. The public scrutiny of business activity, and the desired social license to operate as a variable to consider for business success, have led companies to incorporate ESG commitments in their commercial contracts. These range from giving specific representations and warranties that ensure the contracting party complies with, for example, the applicable environmental and labor regulations, to agreeing to due diligence obligations concerning human rights that allow the identification and remediation of the impact of their activities.
The role of arbitration in ESG disputes
Practice shows that many disputes relevant to ESG are dealt with through arbitration. The 2020 Annual Report of Statistics on Dispute Resolution of the International Chamber of Commerce (ICC) (ICC Dispute Resolution 2020 Statistics), published in 2021, identified that construction, engineering and energy disputes represent, historically, the highest number of ICC cases, reaching 38% of all the new cases registered in 2021. These areas are, by their nature, crucial to national policies to combat climate change and to guarantee environmental protection and human rights, thus confirming the natural existence of arbitrations with ESG components.
The question is whether international arbitration, its rules and principles are indeed appropriate to resolve ESG disputes – whose dimensions are as varied and wideranging as climate change itself – and, if so, why.
Arbitration: the right process for ESG disputes?
The procedural flexibility, the high levels of specialization of the arbitrators and the possibility of executing the awards in practically any country in the world under the New York Convention are some of the attributes of arbitration that make it an attractive and effective method for resolving conflicts, including ESG disputes.
These qualities allow the parties in the arbitration to set the rules that best meet their case needs, ranging from establishing the times for presenting the parties’ memorials to creating rules for presenting evidence, requesting documents and participating in hearings. In addition, the parties also play a vital role in the designation of arbitrators, who are experts in the matters at dispute and whose education and experience allow them to fully understand highly specialized and technically complex arguments and evidence.
Other characteristics of the rules of arbitration particularly relevant for conflicts with ESG components are: the possibility of obtaining interim measures before the constitution of the arbitral tribunal or during the arbitration, which are especially relevant in the case of imminent or irreversible environmental damage, or of serious violations of human rights, and the possibility for the arbitrators to hear third parties during the proceeding (amicus curiae), which, if agreed by the parties, enables the participation, for example, of civil associations that have played a crucial role in tackling climate change, in promoting environmental and human rights protection, and in denouncing corporate practices that threaten them. Thus, the multidisciplinary nature of the ESG disputes and their particular needs can be accommodated in the flexible and sophisticated arbitral proceeding.
The international community has continued to drive the evolution of the arbitral proceeding toward standards specifically contemplated for addressing the particular needs of these types of disputes. For example, in 2014, the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitrations entered into force to encourage higher standards of transparency in investment arbitrations.6 Other efforts equally valuable for establishing models and best practices in arbitrations with ESG components are the Report of the ICC Task Force on Arbitration in Climate Change Related Disputes; the PCA Optional Rules for Arbitration of Disputes Relating to the Environment and/or Natural Resources; and The Hague Rules on Business and Human Rights Arbitration.
Despite the advantages of arbitration as a means of resolving ESG disputes, there are also criticisms of its suitability. For example, some authors point to a potential imbalance of resources between the parties that may be implied in ESG disputes in investment arbitrations (e.g., multinationals vs. governments), and to a lack of adequate standards of transparency in arbitration proceedings – primarily commercial – that involve the public interest as shortcomings of the arbitral proceeding, which in their view render it inadequate for resolving ESG disputes.
Regarding transparency standards in commercial arbitrations, recent efforts of arbitral institutions (such as the ICC) to establish presumptions in favor of the publication of information on the composition of the arbitral tribunal and arbitral awards lead one to question whether such criticism is still valid.
The growing importance of doing business in accordance with ESG principles and the traditional and widespread use of arbitration as a means of international dispute resolution augur a considerable increase in the number of arbitrations on ESG matters in the coming years.
Hence the importance of arbitration as a means for resolving these disputes, and of strengthening this mechanism to balance the needs of the parties and interests involved, so as to increase the legitimacy of the processes and decisions. This is the goal that, for several years, the international community has been pursuing, achieving important results, such as those mentioned above.
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