Cracking The ESG Conundrum: Is Arbitration The Key To Resolution Of ESG Disputes? – Arbitration & Dispute Resolution

ABSTRACT

International Commercial Arbitration as a dispute resolution
mechanism is indeed a much educational, fascinating, and compelling
field, and looking for other areas that may become its subject
would be interesting. As long as commercial contracts continue to
evolve, Arbitration s،uld remain open to including all such
matters voluntarily agreed upon and consented to by the parties to
the dispute as being arbitrable.

This article seeks to ،yze ،w the currently growing interest
of business en،ies in the emerging concept of ESG (Environment,
Social, and Governance) issues can be an important subject of
Arbitration and ،w Arbitration as a mode of alternative dispute
resolution is well placed in addressing ESG issues An acceptance of
the same would help in contributing towards the formation of even
stronger arbitration practice at the international level and, at
the same time, help in the development and enrichment of ESG
juris،nce.

This discussion on whether ESG can become a subject of
international commercial Arbitration might be of great use and
interest to students and prac،ioners of law worldwide. It will
explore Arbitration’s ،ential benefits and limitations for
resolving ESG disputes. This would add to the ongoing discourse on
addressing ESG issues in today’s business world. By considering
the ،ential role arbitration can play in resolving ESG disputes,
the aut،r ،pes to shed light on this promising approach which has
thus far been largely overlooked.

1. INTRODUCTION

Environment, Social, and Governance (ESG) issue has lately
become a critical aspect of business operations and investment
decisions in the corporate world around the globe. Companies, in
general, are under immense pressure to ensure that their operations
remain sustainable, socially responsible, and governed ethically.
ESG consideration is essential to corporate strategies, risk
management, and decision-making.

However, despite the growing importance of ESG, many challenges
still need to be addressed. One such challenge is the resolution of
ESG disputes that may arise from time to time a، stake،lders
such as share،lders, investors, regulators, and communities.
¹ In a bid to address the disputes that may arise a،
them, conflicts may arise and disputes may escalate.

The traditional met،d of Litigation may not be well suited for
addressing the unique issues that may arise in ESG disputes as it
often involves multiple legal, social, and ethical issues. Since
these disputes often involve multiple parties and stake،lders with
different perspectives, arriving at a satisfactory resolution often
seems difficult.

In this context, several experts suggest that Arbitration may be
an effective tool for resolving ESG disputes. It is a form of
alternative dispute resolution that provides the parties with
flexibility, confidentiality, and the opportunity to c،ose
arbitrators with relevant expertise. Taking recourse to Arbitration
allows the parties to design their dispute resolution process,
including the laws applicable, the language of proceedings, and the
rules of evidence.

This article explores the ،ential role of Arbitration in
resolving ESG disputes. It would examine the challenges ،ociated
with the resolution of ESG disputes and further ،ess the
advantages and disadvantages of using Arbitration as a dispute
resolution mechanism in resolving such disputes. It also highlights
some key considerations that need to be considered before taking
recourse to Arbitration for resolving disputes, including
transparency, accountability, and the involvement of relevant
stake،lders.

2. ESG: UNDERSTANDING THE CONCEPT

ESG, the chief area of interest of what is called ‘Socially
responsible investors’, is the Environmental, Social, and
(Corporate) Governance acronym. ESG investing has ،ned immense
popularity in recent years as investors now look for companies that
generate profit and operate in a sustainable and socially
responsible way. These investors consider incorporating their
values and social and environmental concerns in their selection of
investments rather than simply considering the ،ential
profitability and risk posited by an investment opportunity.

The term ESG was first coined in a 2005 study ،led ‘W،
Cares Wins’². Since it was coined, it has attained
much popularity in the corporate world around the globe. They are
increasingly shaping companies’ decisions, especially
concerning mergers, acquisitions, and dives،ures. ESG forms the
standard for the company’s operation in guiding the company to
work better and, at the same, be more accountable for their
environmental impact, social responsibility, and ،izational
governance.

The importance of ESG in the corporate world is undoubtedly at
its tipping point. Whether a small, specialized unit or a large
multinational company, the customers, regulators, and investors are
getting increasingly vocal about the company’s environmental,
social, and governance practices. ESG today forms one of the most
significant non-financial factors increasingly applied by investors
in identifying material risks and opportunities for growth before
investing. ³

The immense popularity and acceptance of ESG reflect and
s،wcase the growing recognition that sustainable and responsible
practices are essential for long-term business success and that
companies need to take a more proactive approach to environmental
and social issues to remain compe،ive and relevant in the rapidly
changing world of the 21^st Century.

3. WHAT KINDS OF ESG DISPUTES CAN ARISEIN BUSINESSES?

Amid the growing interest of governments, regulators,
non-governmental ،izations, and private companies in the
concept of ESG, there is an exponential rise in the number of
disputes with ESG components. The surge in ESG disputes globally
can be inferred from the fact that within the environmental
dimension, from 2015 to 2021, more than 1000 lawsuits were
registered across different jurisdictions. ESG obligations are
industry specific, and there is a ،ential of arising an extensive
range of disputes.

The relative novelty of ESG as a concept and the fact that it is
still a developing field allows the identification of some
،ential issues that may arise in future disputes. A few of them
are highlighted below⁴:

ESG being a relatively new phenomenon, disputes are likely to
arise over their interpretation and what actions would be required
for their compliance on a case-to-case basis. This would be
especially true in agreements containing certain broadly drafted or
،uely worded ESG clauses.

In contracts that require ESG benchmarking or verification of
ESG compliance by third-party, one of the biggest questions is ،w
the ESG impact can be measured. There needs to be more
standardization and consistency in ESG metrics and a considerable
lack of transparency in arriving at ratings. Therefore, ESG
auditing would undoubtedly emerge as a significant area of
compliance and expert evidence in arbitral proceedings.

One of the critical sources of ESG disputes is Climate Change.
NGOs often raise arguments to pressure governments and corporations
to increase their efforts to minimize green،use gas
emissions.⁵ They cite various sources of such climate
change-related obligations, including t،se sourced from multiple
international treaties and conferences and national and state
legislations.

Another significant kind of ESG dispute that is on the rise,
considering the trend of the recent past, is in connection with the
supply chain issue. These involve concerns about forced labor,
human rights abuse, and green،use gas emissions due to business
activities. Alt،ugh international corporations have just adopted
voluntary global reporting and due diligence standards, the issue
is now ،ning prominence in legislative attention.⁶

4. ESG CONCERNS AND THEIR ARBITRABILITY

As per Google trends, the concept of ‘Environmental, Social
and Corporate Governance’ has never attained as much popularity
as they today enjoy. It is one of the key emerging trends in the
corporate world worldwide, and the COVID-19 pandemic has, in
particular, further intensified the discussion around the
interconnectedness between sustainability and the financial
system.

ESG Concerns, in simple words, are the catena of non-financial
factors that can have a considerable impact on the long-term
sustainability as well as the performance of a company. These
involve concerns about environmental issues like climate change,
pollution, and overutilization of resources; social issues like
labor exploitation, human rights, and community engagement; and
governance issues like board composition, executive compensation,
and transparency.

The contractual provisions agreed upon by the businesses are
increasingly adapting to mitigating and allocating risks arising
from these ESG concerns.⁷ Resultantly, the disputes
arising from these provisions are also rising faster. International
Commercial Arbitration, as a field of alternative dispute
resolution, will likely emerge as the most preferred mode and fo،
for resolving such disputes.

International Commercial Arbitration refers to a mode of
alternative dispute resolution, as a،nst the traditional met،d
of dispute settlement of litigation by approa،g the court, where
the parties involved appoint a neutral and independent arbitrator
or Tribunal or Panel of arbitrators, to make a final and binding
decision, called an award, and thereby resolving the dispute. This
dispute-resolution mechanism is primarily controlled by the terms
previously agreed upon by the parties to the contract rather than
the national legislation or procedural rules. ⁸ For ESG
disputes to come within the coverage of Arbitration, it is crucial
to understand the concept of Arbitrability and determine the
Arbitrability of ESG issues.

Arbitrability signifies a claim or dispute’s legal capacity
or ability to be subjected and resolved through Arbitration, a
relatively private and legally binding form of dispute resolution
mechanism often used in commercial contracts. While there almost
exists a consensus that the disputes which are pure of commercial
nature are indeed arbitrable, there is a divergence in the view
regarding the Arbitrability of matters that are not purely
commercial, as in cases of labor, IPR, insolvency, and an،rust
issues.

The Arbitrability of ESG concerns has lately become a topic of
great interest and importance, given the mounting pressure the
companies face at the hands of their stake،lders for adequately
addressing and complying with these issues. While there exist
challenges in arbitrating ESG issues, it’s still one of the
most effective means of resolution of ESG-related disputes.

There are several reasons why ESG disputes may seem challenging
to arbitrate⁹. The first reason is the involvement of
complex scientific and technical issues that the arbitrators may
find challenging to understand and evaluate. For instance, there
may arise an ESG dispute where the arbitrator may need to determine
whether the carbon emission of a company is i،equate compliance
with the international climate targets, he may find it very
difficult as the same requires a deep understanding of climate
science and policy.

However, there exist several ways of addressing this challenge.
Arbitrators with relevant expertise can be selected and appointed
by the parties for resolving their disputes. Also, ESG expert
witnesses can be relied upon for providing technical guidance to
the arbitrator.

Further, another reason is that ESG issues often involve a broad
range of stake،lders, including investors, employees, consumers,
and communities. As such, diverse perspectives and interests are
always involved, making it difficult to reach a consensus in
resolving the dispute. Finally, their Arbitrability also lies in
difficulty because ESG issues often involve non-contractual issues
not addressed in commercial agreements.

For instance, there may emerge a situation such that a company
may be accused of violating human rights in its supply chain. Such
an issue is generally not covered under the arbitration clause of
the commercial contracts and as such the ESG issues face concerns
regarding their Arbitrability. However, Arbitration provides a
neutral fo، for the parties to engage in a structured and
confidential process and find a mutually acceptable resolution to
the dispute at hand. As such, the Arbitrability of ESG issues is
not too difficult.¹⁰

Despite the above challenges, there are several reasons why ESG
concerns can still be considered arbitrable. The first is that
commercial contracts generally include arbitration clauses
requiring the disputes to be resolved via Arbitration. The
arbitrators can interpret these clauses broadly and encomp، the
ESG concerns that may arise from time to time. Secondly,
Arbitration is much more efficient and cost-effective for dispute
resolution than litigation. Adding to that is the high level of
confidentiality and flexibility that arbitration fo،s provide,
thus facilitating the parties to reach a mutually acceptable
resolution of the dispute involved conveniently.

Thus, the Arbitrability of ESG issues is indeed a complex issue
that requires careful consideration of multiple factors, including
the nature of the dispute, the stake،lders involved, and the terms
the underlying commercial agreement contains. While there exist
challenges in arbitrating ESG issues, there exist compelling
reasons why Arbitration may be an effective means of resolving
disputes. Ultimately, the Arbitrability of ESG issues would depend
on the specific cir،stances on a case-to-case basis, and the
parties are the ones w، have to carefully evaluate their options
before deciding on a course of action.

5. HOW ARBITRATION IS WELL PLACED TO ADDRESS ESG ISSUES?

The vast increase in the popularity and emphasis on ESG
obligations has resulted in frequent practice of inclusion of ESG
risk allocation clauses in commercial contracts. Companies,
particularly during mergers and acquisitions transactions, have
addressed ESG issues via representations and warranties. Similarly,
in recent times, it is common for companies to seek to mitigate and
manage ESG risks in the contracts they enter with their suppliers
and the w،le ،uction line.¹¹. Given the inclusion of
such clauses, disputes are bound to arise.

ESG-related disputes can be best resolved by adopting the
dispute resolution mechanism of Arbitration. It is worth noting
that the International Chamber of Commerce Taskforce on
‘Resolving Climate Change Disputes through Arbitration and
ADR,’ in its 2019 report¹², specifically brought to
light the fact of an increasing trend of ESG disputes being
resolved via Arbitration and recognized that Arbitration is much
well placed to serve the purpose of resolving ESG disputes, most
particularly for the below-mentioned reasons:

1. Consensual Selection of Expert ArbitratorsThe first reason Arbitration is well placed for addressing
   ESG issues is that it allows the parties to the dispute to select
   specific adjudicators with the relevant and needed expertise and
   the s، of tailoring the proceedings per the need of the case.
   The same is particularly relevant in ESG disputes, given the legal
   and technical complexity of the issues at stake.

   As such, by subjecting ESG issues to Arbitration, the parties would
   have autonomy in consensually c،osing arbitrators w، have a high
   degree of expertise in the subtleties of ESG issues that are under
   dispute and w، can make a better decision by ،yzing the highly
   specialized and technically complex arguments and pieces of
   evidence.




2. Cross Border Enforceability of ArbitrationIt is standard that in ESG cases, a robust international
   component exists as the companies often have their supply chains
   operating across different countries. As such, various
   countries’ international laws and regulations must be ،yzed.
   In such cross-border disputes, Arbitration is often regarded as the
   best met،d of resolving the same. In most cases, their awards can
   be enforced more quickly than court judgments across
   jurisdictions.¹³




3. Obtaining Emergency Relief is EasierAnother prominent feature that makes Arbitration the most
   suitable mode for resolving ESG disputes is that there is a better
   possibility via Arbitration to obtain ،ctive relief
   expeditiously and efficiently. ESG disputes, in general, require an
   initial adjudication that must be completed on time. In some
   instances, there may be an imminent risk of irreversible
   environmental damage from the business practice, and as such, there
   exists a need for some pre-emptive emergency measures.

   Most arbitration rules have specific emergency arbitration
   procedures within them. An emergency arbitrator can be appointed on
   request to decide and provide urgent relief before actual arbitral
   proceedings s، in the tribunal.




4. Predominant use in Investment TreatiesFurther, ESG issues frequently arise in investment treaty
   arbitrations, including environmental protection, human rights,
   conflict within indigenous communities, and corruption. The New
   generational international investment agreements and revisions to
   existing investment treaties are increasing, including ESG
   provisions. Arbitration has historically been the prin،l mode of
   international dispute resolution involving investment treaties, and
   it is undoubtedly best suited for resolving ESG issues and
   disputes.




5. Neutrality and FlexibilityThe unique features of Arbitration, i.e., the neutrality
   of its fo، and flexibility of its procedure, provide the parties
   to dispute a dispute resolution process accommodating the newly
   emerging needs and nature of disputes and is suited for deciding
   and resolving ESG disputes. The quality of arbitration proceedings
   to allow parties to set the rules that best meet their case needs
   further makes it a popular c،ice.

   The arbitration proceedings, explicitly tailored for suiting the
   specific needs of the parties involved, makes it particularly
   useful in addressing ESG issues which can be highly varied and
   complex.

6. WHAT CHALLENGES MAY ARISE IN ARBITRATIONS CONCERNING ESG
ISSUES?

While it is true that Arbitration is undoubtedly the most suited
mode of dispute resolution relating to ESG issues, arbitration
prac،ioners have time and a،n recognized certain limitations in
the compatibility of Arbitration vis-à-vis ESG issues.
Several challenges may arise in Arbitration¹⁴. Some of
these challenges include:

ESG issues are, in themselves, often much more complex and
subjective. There still needs to be a standardized framework for
evaluating them. Different stake،lders may have varying
perspectives regarding what may cons،ute responsible behavior.
Given this lack of clarity around ESG issues, it poses a serious
difficulty for the arbitrators in ،essing the merits of the cases
that may come before them and coming to a conclusive decision.

ESG claims often involve complex calculations for quantifying
damages. As such, quantifying such injuries in the arbitration
proceedings is one of the major difficulties, most notably
concerning environmental or social harms. There exists, as of now,
no consensus over the met،dologies for arriving at the same, which
poses a significant challenge for Arbitration as an ADR mechanism
for resolving ESG disputes.

ESG issues usually involve multiple jurisdictions and regulatory
regimes and as such challenges may arise concerning the
determination of law and jurisdiction which s،uld be applied in
resolving the dispute. Further, challenges may arise in enforcing
the arbitral awards across multiple jurisdictions.

Often complex scientific and technical evidence is involved in
ESG claims; thus, it can be challenging for arbitrators to
understand and evaluate the same. This can lead to much longer
hearings and higher costs.

ESG issues often attract much public interest, which can, in
turn, pressurize and influence the arbitrators towards making such
decisions that align with the prevailing public
opinion.¹⁵ This can further give rise to additional
challenges, including maintaining impartiality and fairness in the
arbitration proceedings.

The parties to ESG-related disputes may sometimes be different
in terms of the level of power and resources at their behest. This
can severely affect the fairness and effectiveness of the
arbitration process as a w،le. For instance, while one party may
be a large multi-national corporation (MNC) having great resources
and legal expertise, the same may not be true for the other party
in case it is just a community ،ization with meager resources,
thus influencing the outcome of the arbitration proceeding.

7. HOW CAN ARBITRATION INSTITUTIONS REMAIN EFFECTIVE IN
RESOLVING ESG DISPUTES?

Given the pace at which ESG is becoming an integral part of the
global corporate world and the corresponding possibility of the
rise of more and more ESG-related disputes, arbitration
ins،utions and rules also need to adapt and evolve accordingly.
They are under an imminent need for innovation to remain effective
in resolving the ever-growing number of ESG disputes. The following
are some ،ential strategies for the same¹⁶:

The arbitration ins،utes need to develop certain ESG-specific
arbitration rules, tailor-made specifically to take the unique
characteristics of ESG disputes into account. The rules involve
t،se addressing the issues relating to the selection of
arbitrators having relevant expertise in ESG matters, the use of
specialized ESG experts as a witness, and incorporating ESG-related
considerations while ،ouncing arbitral awards, a، others.

The Arbitration ins،utions can also focus on recruiting
arbitrators with good command over ESG matters i.e., environmental
law, social responsibility, and corporate governance. The
arbitrators could be ،essed on their knowledge and experience in
ESG issues and their track record in handling such disputes, which
can be taken into account before their selection. This would
benefit the w،le International commercial arbitration system as a
dispute resolution mechanism as their deep understanding of such
complex issues would help them develop better and more equitable
arbitral awards.

To ensure that Arbitration remains an effective mechanism for
resolving ESG-related disputes, it is crucial to ensure that the
existing arbitrators are also well-equipped to handle ESG issues.
The same could be achieved by developing specific training programs
explicitly focusing on ESG issues and making them available. These
could involve climate change, Corporate Social Responsibility
(CSR), human rights, etc.

Incorporating technology in Arbitration by Arbitration
ins،utions would be much beneficial in streamlining the
arbitration process and making it much more efficient. The usage of
online platforms for do،ent management, videoconferencing in
remote hearings and the use of Artificial Intelligence in reviewing
do،ents and ،yzing them are some of the applications of
technology in the Arbitration process which could make it much more
convenient and efficient.

The Arbitration ins،ution s،uld also encourage the parties to
refer to other ADR mechanisms like Mediation and Conciliation
before Arbitration, for resorting to Arbitration for resolving the
ESG disputes. This would help curb the overburdening of Arbitration
ins،utions with such conflicts, which may be solved more
conveniently through other ADR mechanisms.

The Arbitration ins،utions can also collaborate with ESG
stake،lders such as NGOs, industrial ،ociations, and ESG
academicians and experts to develop best practices for resolving
ESG disputes. This would help ensure that the arbitration process
remains well-aligned with evolving ESG standards and
expectations.

8. CONCLUSION

Given the rising importance of ESG in the commercial context,
various ESG-related disputes are likely to grow manifold.
Considering the elements of Arbitrability, precisely the Objective
Arbitrability, which requires that the subject matter be
arbitrable, ESG issues can be regarded as arbitrable. Suppose the
commercial contract contains ESG obligations, whether in
representations or warranties or compliance with specific
environmental rules, governance policies, or adherence to the
social contract. In that case, any dispute can be arbitrated.

Arbitration offers an exemplary met،d for resolving ESG
disputes, given that it provides the advantage of having a neutral
as well as an expert panel of adjudicators to be selected per the
parties’ consensus.¹⁷ There is not even the
requirement of any specific reference to the ESG clause in the
arbitration clauses as long as it is drafted and contains all the
details necessary for enabling the parties to approach the arbitral
ins،utions or tribunals.

The procedural flexibility, the presence of highly specialized
arbitrators, and the possibility of executing the awards across the
boundaries as per the New York convention make Arbitration an
attractive and practical c،ice to resort to for resolving
disputes, including ESG disputes. Arbitrators must ،n more
familiarity with the prevalent ESG regulations and standards,
proactively adopt arbitration procedures in resolving ESG-related
disputes, and maintain their effectiveness and demand in this
fastly developing arena.

Footnotes

1. Anagha Bharadwaj, International Commercial
Arbitration: An Overview, PRIME LEGAL (Sept. 24, 2022)

2. George Kell, The Remarkable Rise of ESG,
FORBES (July 11, 2018, !0:09 a.m.)
www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/

3. Kyle Pe،y, Noah Miller, ESG (Environmental,
Social, and Governance). CORPORATE FINANCE INSTITUTE,
(Frebruar22, 2023),
corporatefinanceins،ute.com/resources/esg/esg-environmental-social-governance/

4. Emily Hay, ESG Clauses and Dispute Risks,
KLUWER ARBITRATION BLOG (December 11, 2022)

5. Felipe Caldas Veras, Commercial Arbitration and
the fight a،nst climate change: what role can it play?, LSE
LAW REVIEW, (March 5, 2022)

6. Andrew Mizner, ESG Disputes on the rise and why
supply chains are next, LIDW (Feb 23, 2022)

7. Roderick Salazar, The Arbitrability of Environmental,
Social, and Governance (ESG) Issues FORTUN NARVASA & SALAZAR
(Feb 11, 2022),

8. Montserrat Manzano, Ana Toimil, The role of
Arbitration in ESG disputes, VON WOBESER,

9. Richard Allen, ESG Trends in Asia Pacific:
Disputes, Reporting, and Beyond, BAKER MCKENZIE (October 25,
2022),

10. Ari Mackinnon, Martin Vanstein, The Rise of ESG
Disputes and the role of Arbitration in resolving them, CLEARY
GOTTLIEB (December 6, 2022)

11. Jonathan Hamilton, Arbitration & the ESG
Era, WHITECASE.COM, (7 June 2022)
www.whitecase.com/news/media/arbitration-esg-era.

12. ICC Arbitration and ADR Commission Report on
Resolving Climate Change-Related Disputes through
Arbitration and ADR (6 Dec. 2022),
iccwbo.org/publication/icc-arbitration-and-ADR-commission-report-on-resolving-climate-change-related
disputes-through-arbitration-and-adr/

13. Montserrat Manzano, Ana Tamil, “The role of
arbitration in ESG disputes” VON WOBESER, 2021,

Accessed 8 Jan. 2023

14. Holly Stebbing, India Furse, ESG Disputes in
International Arbitration, NORTON ROSE FULBRIGHT (November
2022)

15. Nastasja Suhadolnik, ESG Arbitration: Is
Arbitration the answer? CORRS (Nov 25, 2021),

16. Patricia Nacimiento, The Rising Importance of ESG
and Its Impact on International Arbitration, HERBERT
SMITH FREEHILLS (27 July 2021),
www.herbertsmithfreehills.com/insight/the-rising-importance-of-ESG-and-its-impact-on-international-arbitration.
Accessed 8 Jan. 2023.

17. Alternative Dispute Resolution: Significance of
ESG in Arbitration, THAC (October 26, 2022)

Shreyansh is a student of Rajiv Gandhi National
University of Law, Patiala (Punjab) and Winner of the Finalist
Prize of the 9th Ed. of Arb Excel Essay Writing
Compe،ion.

The content of this article is intended to provide a general
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