Chapter 11. ESG – Disputes,
Arbitration, Risk & Opportunity
Introductory articles on emerging exposures, risk mitigation
and insurance risk transfer for clients of Omnisure.
A compendium of introductory ESG articles on emerging exposures, risk mitigation and
insurance risk transfer for clients of Omnisure with claims examples.
Martin Birch – March 2022
Chapter 11. ESG – Disputes, Arbitration, Risk & Opportunity
Corrs Chambers Westgarth Lawyers’ (‘CCW’) produced a document called ESG Guide for General Counsel 1 setting out the commercial imperative for regulated companies rising to meet demands for ESG accountability and transparency.
Historically, environmental, social and governance (ESG) matters were considered to be distinct from the core business of companies, but this has changed. ESG issues present risks and opportunities for organisations. With widespread acknowledgement that holding global warming to 1.5 degrees or less is imperative, now more than ever, companies’ financial performance and reputation depends upon their upholding every aspect of their social licence to operate. Those demands are producing new forms of risk in business operations and contractual relationships. These new forms of risk are and will continue to give rise to disputes.
According to CCW, contracts are the ultimate risk allocation device. ‘ESG’ risk allocation can be provided for by contract. Parties are increasingly asked to warrant that their activities will be responsible, that they will take steps to eliminate any modern slavery in their supply chains and will conduct their operations in line with emissions reduction commitments. Financiers are insisting on contractual ‘conditions precedent’ to finance requiring that the financier be satisfied with the borrower’s ESG compliance. Just as the uptake of ESG requirements in commercial transactions increases, so does the risk of dispute involving those requirements. That risk is particularly pronounced because of the tension between certainty and breadth in drafting ESG clauses 2.
The concept of an ‘ESG risk’ is an umbrella term used to describe environmental, social or governance factors which may impact on (or present an opportunity for) the entity. What falls inside or outside of the umbrella is not clearly defined. As a result, any clause using the umbrella term is ripe for dispute.
If the parties fall into dispute on these issues, those disputes can be dealt with through arbitration. According to CCW, arbitration provides a private and confidential way to resolve disputes. Administered properly, it can be quicker and more efficient than other methods of dispute resolution, including by bringing proceedings in court. The parties can moreover appoint arbitrators who are specialists in the issues in dispute. For example, if the dispute is environmental or if it involves new technology solutions, an arbitrator with expertise in the technical issues can be appointed to hear the dispute and bring their specialist knowledge to its resolution. Arbitration can produce a final resolution faster than the time it ordinarily takes to litigate a complex technical dispute in court.
There are some risks involved in taking disputes involving ESG clauses to arbitration. The strategic imperative behind some ESG action is to attract attention or public scrutiny, and plaintiffs see open court as a better way to achieve that end. This has in turn driven some large entities to introduce arbitration clauses in their consumer contracts to preserve confidentiality. Please note our Foundation Document 3 provides further information for readers interested on this particular subject.
CCW explain that contractors involved in cross-border projects should be mindful of how the increase in focus on ESG is changing their risk exposure when operating overseas, and how a failure to comply with ESG requirements may come to affect their rights, in particular rights afforded under international investment agreements.
By way of context, many Australian companies with assets overseas benefit from legal protections available under investment agreements between Australia and countries across Africa, South America, Europe and South-East Asia. These treaties protect individuals and companies from certain kinds of government-mandated measures, typically in the form of changes in laws or regulatory action, that may affect their assets – including contractual rights. Often these treaties allow companies to commence arbitration proceedings directly against the government of the state in which the asset is located (i.e. the ‘Host State’) to seek damages for unlawful government action.
Australian companies operating overseas that rely on investment treaty protections to de-risk their cross-border operations and investments should follow these developments closely. CCW expect that international treaties will increasingly mandate that business is done responsibly before individuals and corporations can benefit from the protections they afford. Please refer to our Foundation Document for further commentary relevant to cross-border projects in the context of arbitration proceedings and contractual obligations.
3 Our Foundation Document is the original full text version of “ESG Discussions – Introductory articles on emerging exposures, risk mitigation & insurance risk transfer” for clients of Omnisure, compiled by Martin Birch. Register on our website for a full copy.
Please contact Martin Birch for a copy of the full-text Foundation Document at firstname.lastname@example.org