The Role of Arbitration in ESG Disputes

The Paris Agreement on Climate Change, adopted in 2015, gave fresh impetus to the public agenda's growing interest in ensuring the protection of the environment and human rights, and sharpened the debate on the social responsibility of businesses in achieving this goal. Against this global backdrop, there has been a marked increase in disputes involving ESG (Environmental, Social and Governance) components. For example, in connection with the environmental dimension alone, more than 1,000 climate-change-related cases have been recorded across various jurisdictions since 2015. For several decades, arbitration has been the preeminent means of resolving international commercial and investment disputes, and consequently the incorporation of ESG elements into international business has been reflected in the arbitral disputes arising therefrom. There are significant precedents in investment arbitration, where compliance with environmental or human rights laws has been a relevant part of the controversy. Although with different nuances, the ESG dimensions are equally relevant in commercial arbitrations. Public scrutiny of business activity, and the coveted social license to operate as a variable to be considered for business success, have led companies to incorporate ESG commitments into their commercial contracts. These range from granting specific representations and warranties ensuring that the contracting party complies, for example, with applicable environmental and labor regulations, to agreeing to human rights due diligence obligations that make it possible to identify and remedy the impact of their activities. The Role of Arbitration in ESG Disputes Practice shows that a large number of ESG-relevant disputes are resolved through arbitration. The International Chamber of Commerce (ICC) Dispute Resolution 2020 Statistics annual report, published in 2021, found that disputes in the areas of construction, engineering, and energy have historically accounted for the largest number of ICC cases, reaching 38% of all new cases registered in 2021. These areas are, by their nature, crucial to national policies for combating climate change and to guaranteeing the protection of the environment and human rights, which confirms the natural existence of arbitrations with ESG components. The question, then, is whether international arbitration, its rules, and its principles are truly suited to resolving ESG disputes -whose dimensions are as varied and far-reaching as climate change itself- and, if so, why. Arbitration: A Suitable Process for ESG Disputes? Procedural flexibility, the high levels of specialization of arbitrators, and the possibility of enforcing 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 of dispute resolution, including for ESG disputes. These qualities allow the parties to the arbitration to agree on the rules that best meet the needs of their case, from setting the timeframes for submitting the parties' briefs to creating rules for presenting evidence, requesting documents, and participating in hearings. In addition, the parties also play a fundamental role in appointing the arbitrators, who are experts in the matters in dispute and whose academic background and experience enable them to fully understand highly specialized and technically complex arguments and evidence. Other features of the arbitration rules that are particularly relevant to disputes with ESG components are: the possibility of obtaining interim measures before the constitution of the arbitral tribunal or during the arbitration, which are especially pertinent in the case of threats of imminent or irreversible environmental harm, or of serious human rights violations; and the possibility for arbitrators to hear third parties during the proceedings (amicus curiae), which, if the parties so agree, allows for the participation of, for example, civil associations that have played a crucial role in combating climate change, protecting the environment and human rights, and denouncing corporate practices that undermine them. Thus, the multidisciplinary nature of ESG disputes and their particular needs find a place within the flexible and sophisticated arbitral procedure. The international community has continued to promote the evolution of the arbitral procedure toward standards specifically designed to address the particular needs of this type of dispute. For example, in 2014, the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration entered into force with the aim of promoting higher standards of transparency in investment arbitrations.6 Other equally valuable efforts to establish models and best practices in arbitrations with ESG components are: the Report of the ICC Task Force on Arbitration of 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 regarding its suitability. For example, some point to a potential imbalance of resources between the parties that may be involved in ESG disputes in investment arbitrations (e.g., multinationals vs. governments), and the lack of adequate transparency standards in arbitrations -primarily commercial ones- involving the public interest, as deficiencies of the arbitral procedure that, in their view, render it unsuitable for resolving ESG disputes. With respect to transparency standards in commercial arbitrations, recent efforts by arbitral institutions (such as the ICC) to establish presumptions in favor of publishing information on the composition of the arbitral tribunal and on arbitral awards lead one to question whether such criticism is, at present, well-founded or not. Conclusion The growing importance of conducting business in observance of ESG principles, together with the traditional and widespread use of arbitration as a means of resolving international disputes, foreshadow a considerable increase in the number of arbitrations on ESG matters in the coming years. Hence the importance of arbitration as a means of resolving these disputes, and of strengthening this mechanism to balance the needs of the parties and the interests involved, so as to enhance the legitimacy of the processes and decisions. This is the objective that the international community has pursued for several years, achieving significant results, such as those mentioned above. For further information on the subject of this note, please contact our experts: Montserrat Manzano, Partner: +52 (55) 5258-1018 | mmanzano@vwys.com.mx Ana Toimil, Associate: +52 (55) 5258-1018 | atoimil@vwys.com.mx

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