ESG in Global Arbitration

The term Environmental, Social and Governance (ESG) refers to a set of metrics outlining various aspects of a company’s responsibility in its potential engagements. The Environmental metric gauges a company’s attitude towards its carbon footprint and other pollutants. The Social metric defines a company’s relationships with its employees, unions, its supply chain, customers, and the public impacted by its actions. Governance relates to a company’s corporate governance structure that is in place for its audit, directors’ responsibility, and shareholders’ rights. Greater scrutiny in a number of industries suggests that ESG is gaining increasing traction worldwide. Its presence in the legal sector is prevalent through the codes of conduct of a number of jurisdictions, outlining counsel’s professional responsibility in advising their clients to a reasonable standard.

ESG in arbitration is not a recent combination. Efficiency in arbitration comes hand in hand with at least two of the ESG metrics, specifically the environmental and governance aspects. The COVID-19 pandemic has increased the use of electronic toolkits in the conduct of arbitrations. These are now streamlined across a variety of arbitrations, and help reduce the travel time/distance, and cost to the parties. Whilst this is a welcome approach in conducting efficient arbitrations, it may not be sufficient to meet the ESG metrics. Luckily, an arbitration process is akin to coding, granting the parties the liberty to create a set of principles or instructions they can follow in compliance with their ESG parameters, including the quick and fair resolution of disputes. By selecting a combination of principles, the parties can avoid unnecessarily complex and protracted procedures. The question is whether an agreed procedure is fit for purpose and, of course, fit for ESG. As the world opens up again, virtual hearings and the use of electronic bundles may need to remain the default position, though, while there is no one size fits all, in-person hearings may still be preferred for certain applications or substantive claims. Undoubtedly, international arbitration will become more sustainable over time as its users continue to look for environmental measures to reduce its carbon footprint.

The resolution of disputes may also affect a company’s relationship with its internal and external stakeholders and partners across its supply chain. In the spirit of maintaining the value of its shares, unaffected or at least minimally impacted by an arbitral procedure, a party to arbitration must be able to consider a resolution of the dispute in a manner that does not impact its shareholders and business relationships in its respective trade. Counsel are required to provide reasonable advice to their clients that protects the interests of the company. That includes its social interests which rest on its continued relationships with its employees, shareholders and supply chain. Such advice quite often includes making hard decisions on settlement of arbitration claims, which can pay off economically and financially in the longer term.

Although arbitration is likely to score high with its ability to promote, and most importantly incorporate, environmental sustainability, friction between transparency (an essential pillar of ESG) and the confidentiality of an arbitration procedure is imminently foreseeable. The rules of arbitration of the ICC, LCIA, SIAC, DIAC and the SCCA all set confidentiality as a default principle of procedure, with the caveat that the ICC Secretariat may publish ICC awards made as of 1 January 2019, two years after the parties have been notified of the final award. This occurs unless a party objects to the publication thereof or requires that the award is anonymised or pseudonymised. Having said that, parties to arbitration and arbitral tribunals may establish transparency regimes governing the proceedings, subject to the applicable law and explicit provisions of the law of the seat. Such regime can include anything that does not impose undue hardship or carry with it an incorrect impression on the conduct of the proceedings, the position of the parties or the solution reached by the tribunal. In this regard, an arbitration clause may refer to a set of principles governing the transparency of arbitration or certain aspects thereof, in compliance with a company’s internal procedures or regulatory measures. Of course, any such agreement remains subject to the applicable arbitral regime.

There is plenty of room for agreement (or disagreement) on ESG compliance in arbitration. Experience shows that arbitration has survived numerous challenges in the past decades. A number of arbitration aspects demonstrate that compliance with ESG is possible and likely. The wisdom of the legal community will again be key in setting the framework for promoting ESG compliant arbitrations.