The rise of ESG considerations in international arbitration

In recent years, Environmental, Social, and Governance (ESG) considerations have increasingly influenced the realm of international arbitration. This trend is reshaping the landscape of disputes, with a notable rise in cases related to environmental and social issues, as companies, investors and even governments seek to hold each other accountable for their ESG commitments.

In particular, growing awareness of ESG ideals that are incorporated into policies and investment decisions is expected to lead to an increase in potential disputes as follows.

• Environmental Disputes: With growing concerns about climate change and environmental degradation, companies may face claims from investors, communities, or even governments for failing to meet their environmental obligations. Disputes on how to navigate the delicate balance between environmental protection and investors’ economic interests are expected to become increasingly important.
• Social Disputes: Companies may be held accountable for violations of human rights in their supply chains, unfair labour practices, or negative impacts on local communities. These tensions are expected to increase as policies and legal mechanisms are developed to protect minority rights.
• Greenwashing Claims: The increase in promoting ESG-credentials by companies, coupled with a growing risk of “greenwashing” or exaggerating their environmental and social performance is expected to lead to an increase in potential disputes where investors or consumers may accuse companies of misleading them about their ESG practices.
• Commercial Contracts Disputes: ESG clauses are now more common in all types of commercial contracts: supply chain agreements, credit facilities, joint venture agreements and M&A transactions. 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. Disputes may arise over the interpretation and enforceability of these clauses, measurement of compliance with ESG provisions and/or obligations, as well as claims for non-performance or misrepresentation of ESG matters.
• Investment Treaty Disputes: Investors may sometimes be able to bring international claims against a state that they consider to have breached its undertaking to treat their investment fairly and equitably, non- discriminatorily and to refrain from illegal expropriations, among other standards. Conversely, host states are more likely to bring claims or counterclaims against foreign investors for failure to meet their ESG-related obligations or in situations where investor protection clauses frustrate a host state’s ESG objectives. Again international arbitration may help to resolve disputes and may contribute to find a balance between a state’s right to regulate in the public interest, including environmental and safety concerns, and its obligations to foreign investors.

This edition of the International Arbitration Outlook delves into this transformation, exploring significant legal developments and their broader implications.

Corporate Accountability and Environmental Stewardship: ClientEarth v Shell Plc

At the forefront of this shift is the landmark case of ClientEarth v Shell Plc. This case, center of the Insight piece authored by Marta Rios Estrella, Júlia Gallel Moragues and Adrián Vila Montoya, decided by the Business and Property Courts of England and Wales of the High Court of Justice, highlights the growing importance of corporate accountability in addressing climate change. The claimant, ClientEarth, argued that Shell’s directors had failed to fulfill their duties related to the Paris Agreement on Climate Change, specifically in implementing a reasonable strategy to achieve net zero emissions.

The case serves as a critical precedent in the realm of corporate governance and climate risk management. It underscores the increasing legal scrutiny companies face in their environmental practices and the fiduciary responsibilities of their directors. As businesses navigate the complexities of climate-related risks, this case emphasizes the necessity for robust, actionable strategies to meet international environmental commitments.

Global Perspectives on Environmental Litigation

The Global Briefing section of this issue provides a comprehensive overview of how environmental issues are being addressed in various legal arenas worldwide. It begins with an update by Iciar Alvarez Bullain and Daniela Amarante on the case Milieudefensie et al. v Royal Dutch Shell Plc, where Shell was ordered to reduce its net CO2 emissions by 45% by 2030 compared to 2019 levels. Although the judgment was issued in 2021, the forthcoming decision by the Hague Court of Appeal (expected to be issued by the end of this year) is highly anticipated, as it will set a significant precedent for corporate environmental responsibility.

Additionally, Gabriel Bottini and Maria Querol Guillen explore in the Global Briefing the contributions of the International Court of Justice (ICJ) to international environmental law through landmark cases such as Pulp Mills on the River Uruguay, Whaling in the Antarctic, and the Construction of a Road in Costa Rica along the San Juan River. These cases highlight the ICJ’s role in shaping environmental norms and obligations, providing a legal framework that influences both national and international policies.

Further, the section delves into key cases under different international legal sub-systems, including two ICSID cases (Rockhopper v Italy and Eco Oro Minerals Corp. v Colombia), a UNHRC case (Daniel Billy and others v Australia), and a recent ECHR case (Verein Klimaseniorinnen Schweiz and Others v Switzerland) analyzed by Diana Nunes and Tiago Lopes Veiga. Each of these cases addresses the international obligations of sovereign states, illustrating the intersection of human rights law, international investment law, and environmental protection.

The Global Briefing concludes with a reflection by Iván Paez and Alexander Acosta on the Sustainable Development Goals (SDGs) adopted by the United Nations General Assembly in 2015, examining their application through sustainability reports in Colombia. This reflection underscores the global commitment to sustainable development and the role of legal mechanisms in achieving these goals.

Navigating the ESG Regulatory Landscape

The In Focus section of this issue provides critical updates on ESG topics relevant to all arbitral jurisdictions. Olga Puigdemont, Lara de Sousa and José Miguel Egea explore how, as the regulatory landscape becomes increasingly complex, companies are striving to align with ESG principles. This section explores the evolving regulatory environment, highlighting the importance of contractual commitments that incorporate ESG considerations.

One notable trend is the incorporation of sustainability and ESG-related principles in recently adopted bilateral investment treaties (BITs) analyzed by Sebastián Green Martínez and Clara Ruiz Garrido. These treaties reflect a growing recognition of the need to integrate environmental and social governance into the framework of international investment. By embedding ESG principles into BITs, states and investors are better positioned to address the challenges of sustainable development and corporate responsibility.

Conclusion: A Paradigm Shift in International Arbitration

The articles in this edition of the International Arbitration Outlook collectively illustrate a paradigm shift in international arbitration, driven by ESG considerations. As environmental and social issues take center stage, the nature of disputes is evolving, bringing new types of disputes and challenging traditional legal frameworks, with a clear emphasis on corporate accountability and sustainable practices.

This trend is not merely a passing phase; it represents a fundamental transformation in how businesses operate and how legal systems respond to global challenges. The increasing prominence of ESG in arbitration signals a broader recognition of the interconnectedness of economic activities, environmental sustainability, and social well-being.

For practitioners, policymakers, and businesses, understanding this shift is crucial. It requires a proactive approach to integrating ESG considerations into corporate strategies, legal frameworks, and arbitration practices. Companies need to be aware of the potential for ESG-related disputes and develop strategies to manage these risks. As we move forward, the role of ESG in shaping the future of international arbitration will continue to grow, fostering a more sustainable and equitable global economy.

In this issue, we invite our readers to delve into the detailed analyses and insights provided by our contributors. Their expertise sheds light on the complex interplay between ESG considerations and international arbitration, offering valuable perspectives on the path ahead. As we navigate this evolving landscape, it is imperative to remain informed, engaged, and committed to advancing sustainable and responsible practices in all spheres of activity.