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The original version of this article is hosted on Lexis Nexis via the link below:
INTRODUCTION
International Arbitration is increasingly addressing Environmental, Social, and Governance (ESG) considerations in contractual agreements. ESG issues involve a company’s commitment to ethical conduct and sustainability practices, which have implications for International Arbitration.
In 2021, the International Chamber of Commerce (ICC) Annual Report on Statistics of Dispute Resolution[1] revealed that Construction, Engineering, and Energy disputes accounted for the highest percentage of ICC disputes in 2020, comprising 38% of all new cases registered. This highlights a correlation between International Arbitration and ESG frameworks.
This article explores how ESG-related contractual provisions impact profitability and the general areas they are found. It also briefly examines the prevalence of these clauses in different jurisdictions and the relationship between ESG and transparency in international arbitration.
THE SCOPE OF ESG CONSIDERATIONS
With the upsurge in awareness and advocacy about ESG, investors and stakeholders are beginning to pay critical attention to compliance levels of companies when evaluating these companies with a view to taking a position on whether or not to invest. PWC’s 2021 Global Investor Survey[2] interviewed 325 global investors, primarily self-identified long-term asset managers. The survey found that 79% of respondents considered ESG risks and opportunities to be an important factor in investment decision-making. Additionally, 49% indicated they would divest of their investment if the company failed to take sufficient action to address ESG issues.
THE INCIDENCE OF ESG-BASED CONTRACTUAL PROVISIONS ACROSS JURISDICTIONS
With cross-border transactions on the rise, ESG considerations are widely and rapidly becoming “same”, to the extent that the considerations and definitions given to them from one jurisdiction to the next do not differ. Across the world, they are now prominently featured in commercial agreements, mergers and acquisitions, corporate documentation, etc.
In the UK, the insurance company Aviva in 2020[3] announced that it would require companies that were in its investment portfolio to achieve net-zero carbon emissions by 2050 and to ensure disclosure of their ESG policies. In 2021. In the US, Apple signed an agreement[4] with Conservation International in 2020 to support the restoration and protection of forests, as part of its commitment to be carbon neutral in 2030. In 2021,[5] South African power utility, Eskom, signed an MoU with two coal suppliers, Exxaro and Seriti Resources for the development and implementation of renewable energy projects. In Nigeria, the Nigerian Stock Exchange (NSE) launched a Corporate Governance Rating System (CGRS)[6] that assesses listed companies’ adherence to global corporate governance standards. It rates their level of compliance with codes of corporate governance, environmental and social sustainability.
THE IMPACT OF ESG CONISDERATIONS ON PROFITABILITY
Companies may be resistant to the inclusion of ESG clauses due to concerns about increased costs or decreased flexibility, however the long-term benefits of prioritizing ESG issues like reduced regulatory risks, attraction and retention of talents, access to new markets and customers, and enhanced stakeholder relationships outweigh the short-term costs.
A study by Morgan Stanley Capital International (MSCI)[7] reveals that companies with high ESG ratings have a lower cost expenditure and a higher return on equity compared with companies with low ESG ratings. A survey[8] conducted by Accenture equally informs that 63% of consumers globally want companies to take a stand on current and broadly relevant issues such as sustainability. Another survey by the Impact Marketing Club[9] reveals that 67% of the respondents (who were prospective employees) stated that they would only work for companies that were socially inclined and responsible.
According to Global Sustainable Investment Alliance[10], assets under management in sustainable investments grew 15% from 2018 to 2020, reaching $35.3 trillion globally, indicating that investors prioritized sustainability and companies with those practices may be more attractive to them. In the long run, ESG-compliant companies tend to perform better financially.
IMPLICATIONS ON INTERNATIONAL ARBITRATION
With the upsurge in ESG-based contractual obligations, disputes closely related to these are abound to be on the increase. Questions around demonstrating ESG compliance and the balance between confidentiality and transparency (based on public policy considerations) tend to be on the rise. With the clamor, in recent years for more transparency in arbitrations, there is the need to tie together public policy interests (transparency) with commercial profitability and one of the tenets of arbitration (confidentiality).
In addressing this tension, parties may explore the use of a confidentiality ring. This is a mechanism that allows for the sharing of confidential information with the tribunal and selected experts. This ensures that confidential information related to ESG concerns is only disclosed to a select number of people, while still allowing for transparency in the arbitration process. In Churchill Mining Plc and Planet Mining Pty Ltd V. Republic of Indonesia, a dispute arose over a coal mining project in Indonesia. The Parties, with the approval of the arbitration tribunal, established a confidentiality ring to protect certain documents relating to the project’s Environmental Impact Assessment.
Additionally, arbitrators can consider adopting the ‘Sanitized Award’ approach, where the tribunal issues a redacted version of the award which does not contain confidential information In the Littop Enterprises Limited, Bridgemont Ventures Limited and Bordo Management Limited v. Ukraine, SCC Case No. V 2015/092[11], an investor-state dispute regarding the extraction of crude petroleum and natural gas, the final award was redacted to protect confidential information, whilst still satisfying the requirement of transparency for public policy considerations.
To strike a balance between public policy, transparency and confidentiality, it is important that tribunals and arbitrators are familiar with ESG issues so as to be equipped to navigate the nuances of the terrain whilst satisfying the other 2 considerations. This can be achieved by appointing arbitrators who are subject matter experts and have demonstrated experience with ESG issues.
CONCLUSION
While the inclusion of ESG clauses in arbitration agreements can promote responsible business practices and accountability, it could also raise the cost of dispute resolution for smaller businesses that are unable to meet the higher ESG standards required.
Furthermore, it could be argued that the rising emphasis on ESG in arbitration seems to overshadow other issues like social justice and human rights, which raises the question of whether ESG is an adequate framework for promoting responsible business practices, or whether we need a more comprehensive approach to take a broader range of social and environmental concerns into account.
The front burner regarding ESG and arbitration may not be limited to finding a balance between transparency and confidentiality or ensuring that arbitrators are well-versed in ESG trends, but rather, it may require us to take some steps back and critically evaluate the potential impact of ESG on access to justice and other important social justice considerations, while still achieving an equitable and sustainable future for all. A critical question as to the universality of public policy is one that cannot be answered by this paper due to constraint of word count, however, has the time come for the concept to be given a universal definition?
The original version of this article is hosted on Lexis Nexis via the link below:
REFERENCES
[1] https://nyiac.org/wp-content/uploads/2021/09/ICC-Dispute-Resolution-2020-Statistics.pdf
[2] https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/2021-esg-investor-survey.html
[3] Aviva Climate-related Financial disclosure – 2020
[4] https://www.apple.com/newsroom/2020/07/apple-commits-to-be-100-percent-carbon-neutral-for-its-supply-chain-and-products-by-2030/
[5] https://africa-energy-portal.org/news/eskom-collaborate-coal-suppliers-renewable-energy-projects
[6] www.cgrsng.com
[7] https://www.msci.com/www/blog-posts/esg-and-the-cost-of-capital/01726513589
[8] https://www.accenture.com/_acnmedia/Thought-Leadership-Assets/PDF-5/Accenture-The-rise-of-the-purpose-led-brand-Accenture-Strategy.pdf
[9] https://impactmarketingclub.com/list-statistics-demonstrate-importance-csr/
[10] http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf
[11] https://jusmundi.com/en/document/decision/en-littop-enterprises-limited-bridgemont-ventures-limited-and-bordo-management-limited-v-ukraine-none-currently-available-thursday-1st-january-2015
The original version of this article is hosted on Lexis Nexis via the link below:
Diane Okoko, FCIArb, FICIArb, is the Managing Partner at Marcus-Okoko & Co., and she specializes in International Arbitration, Corporate Governance, and Regulatory Compliance
Theophilus Ifeoluwa Aigbogun is a Junior Associate at Marcus-Okoko & Co., and he specializes in Corporate Commercial Law and Regulatory Compliance
