Alternative Dispute Resolution: Significance of ESG in Arbitration
Environmental, social, and governance (ESG) issues have been growing concerns in the business world. Consumers, countries, and industries increasingly have been demanding that companies implement ESG practices within their overall mission and operations. To ensure these practices are implemented, ESG standards and benchmarks are now included in many agreements, from project contracts to national treaties. And as with any agreement, there is always the chance for disputes to occur. Alternative dispute resolution, such as arbitration and mediation, is generally the preferred method for handling conflicts in many such agreements, so it would follow that ADR would be an ideal option to resolve ESG issues without having to overload court systems while still maintaining a high standard of environmental, social, and governance issues.
As a key resource for arbitration in Thailand, the Thailand Arbitration Center stays abreast of ESG issues and how ADR can be leveraged to benefit all involved.
What is ESG?
ESG, as mentioned above, has become a buzzword in business and legal circles, but what does it mean? The acronym stands for “environment, social, and governance,” which may seem self-explanatory. Still, it is part of an evolving trend in government and commerce to take responsibility for how their actions impact the world around them.
Starting with the concept of “corporate sustainability” in the 1990s, companies began integrating standards to reduce their pollution outputs, such as by recycling or adopting more efficient processes, which would go beyond those required by governmental roles and regulations. Furthermore, this concept added a new facet with “corporate social responsibility,” whereby companies also looked to philanthropic endeavors, helping out local communities and the underprivileged – hence, the “social” aspect.
Many have adopted ESG as a broader, more inclusive concept that holds organizations more accountable. But, in a way, it is more specific in that it explicitly lists the areas of concern – environmental, social, and governance. So, when an entity embraces ESG, it is committing to making positive impacts on the environment, social issues, and governance or internal policies that impact its own stakeholders.
Part of an organization’s ESG policy often demands those they partner, contract, or work with to meet specific standards or make certain commitments. This has created an atmosphere where companies are feeling greater pressure from ESG clauses in commercial contracts to reach zero carbon emissions or protect human rights among workers and nearby communities. Because of the widespread concern about how a party to a contract fulfills their ESG obligations, clauses describing alternative dispute resolution for such issues are often included.
How ESG is a hot-button topic in investment and commerce
Several recent developments point to ESG issues becoming points of contention for companies doing business locally and internationally. Last year, the Hague District court handed down a ground-breaking decision whereby it ordered Shell to meet an obligation to reduce its CO2 emissions. In this case, Shell had not yet breached any obligations, but the court deemed it was in “imminent breach” and, therefore, must alter its practices. Furthermore, international organizations have been announcing moves that will help companies integrate ESG practices, such as the European Commission’s Supply Chain Directive and the UN Climate Change Conference’s (COP26) Glasgow Financial Alliance for Net Zero.
Companies must now scrutinize every aspect of their business to ensure that they act responsibly based on their own ESG policies and that their business dealings and interactions do not fall afoul of these international standards, policies, and agreements. This can become very complex very quickly. For example, a company must evaluate every step in its supply chain, ensuring that every party involved, including itself, complies with the terms in executed contracts and that such contracts comply with accepted and obligatory ESG practices.
Many of these regulations and standards are recent, which means that they are largely untested. Furthermore, how ESG is involved in a contract may be complex and involve multiple parties across many jurisdictions, so there may be issues regarding interpretation and application. This is why, even as many contracts contain an arbitration clause as the preferred alternative dispute resolution method, arbitration is an ideal way to handle ESG matters.
Why is arbitration ideal for ESG disputes?
Many organizations consider arbitration an ideal way to resolve disputes among parties in conflict, avoiding the time and cost expenditures they would face with a drawn-out process in court. And if a conflict involves parties and events across two or more jurisdictions, conflict of law matters come into play, complicating things even further.
Specifically for ESG issues, arbitration is particularly appropriate for several reasons. First, parties can avail themselves of arbitrators who are specialists in the matter under contention, such as in human rights or renewable energy. For example, in Urbaser SA and Consorcio de Aguas Bilbao Bizkaia vs. The Argentine Republic, the main issue regarding this dispute between a company and the Argentinian government was the human right to water access. Furthermore, arbitration allows for a more flexible forum whereby experts can question other experts rather than going through intermediaries such as lawyers and judges. And ultimately, back to the conflict of laws mentioned earlier, most countries are signatories to the New York Convention, which means that an arbitral tribunal’s decision, no matter where it is made, is enforceable as long as the countries are parties to the convention.
THAC as ESG arbitration resource
The Thailand Arbitration Center (THAC) offers access to a wide range of resources for parties who are contemplating how to handle ESG issues. This includes assisting with drafting arbitration clauses and agreements and identifying the most experienced arbitrators who are experts in the ESG issue in question. In addition, THAC provides comprehensive services for alternative dispute resolution, including arbitration, in Thailand. With a convenient location in central Bangkok near highways and public transport, THAC is suitable for local and cross-border ADR proceedings. THAC has conference and meeting rooms and is fully equipped with the latest technology to facilitate online dispute resolution, allowing in-person and remote hearings. Furthermore, THAC offers complete administrative support for any ADR. If you have questions about ESG or any other type of issues and how to handle them through ADR, please contact THAC at [email protected] or +66 (0)2018 1615.