INTRODUCTION
The growing global embrace of Environmental, Social and Governance (ESG) principles has significantly redefined how businesses perceive corporate responsibility and in general, conduct their commercial affairs [1]. As businesses across Africa increasingly integrate the ESG mantra into their operations, whether voluntarily or through regulatory compulsion, disputes arising from these ESG commitments have become inevitable. However, one is left to wonder; can these disputes, ranging from claims of environmental degradation to breach of social responsibility obligations (now embedded in contracts), often affecting the lives of thousands and even infringing fundamental rights, be resolved behind the closed doors of arbitration?
This article examines the arbitrability of ESG disputes within the Nigerian and broader African context, highlighting the tension between private arbitration and public interest and proposing practical principles to ensure that the resolution of ESG related disputes advances the cause of justice, sustainability and development on the continent.
UNDERSTANDING ESG AND ESG DISPUTES
ESG are factors that are used to evaluate how companies and countries in different jurisdictions view and make advancements on sustainability [2]. It comprises a range of factors that are used in determining whether or not an economic activity is sustainable for the purposes of investment and ultimately, development.
To be clear, ESG related disputes are far from abstract. They are real life issues with real life consequences. They are about the Niger Delta community in Nigeria, whose once thriving environment has become uninhabitable due to incessant gas flaring [3]. They are about the Ghanaian fisherman whose daily catch vanished due to offshore drilling [4]. They are about the Kenyan farmer whose crops failed because industrial waste seeped into the soil [5]. They are about the South African mine worker who toils under unsafe conditions while the company reports boast of stellar governance ratings [6]. They are about the young woman in Kalusale, Zambia who loses access to clean water because a copper mine contaminated the local stream [7]. In fact, ESG disputes are the daily struggles of people and communities whose lives are affected by the actions and inactions, promises and failures of corporations.
According to a Thomson Reuters report of 2018 [8] the wide range of factors for ESGs are divided into three categories, namely, Environmental, Social, and Governance. Environmental factors relate to issues like climate change, Greenhouse Gas Emissions (GHG), deforestation, biodiversity, carbon emissions, waste management and pollution. Social factors refer to the impact the company has on people, culture and communities and look at the social impact of diversity, inclusivity and human rights. While Governance factors refer to how the organization is directed and look at corporate governance factors like executive compensation, succession planning, board management practices and shareholder rights.
THE ARBITRABILITY OF ESG DISPUTES IN NIGERIA
Nigeria’s stance on arbitrability is relatively straightforward, only disputes of a “commercial nature” are arbitrable [9]. Yet this principle is not absolute, it remains subject to public policy considerations [10].
Practically speaking, let’s take for example an oil and gas operator in Bayelsa State who agrees, under its production-sharing contract, to conduct periodic environmental impact assessments and ensure that gas flaring remains within legally permissible limits. Over time, however, it neglects maintenance, allowing continuous flaring and oil leaks that damage nearby farmlands and contaminate the local water. When the host community intends to seek redress for loss of livelihood and environmental degradation, the question that immediately comes to mind is whether or not this is a mere breach of contractually agreed environmental obligations or is it a public policy issue beyond the reach of arbitration?
In addressing this dilemma, we echo the wordings of a Kenyan commentary that observed, “Arbitration represents a viable mechanism for managing ESG disputes ……..“ [11] however, we do so with measured restraint. On a closer look, arbitration and ESG disputes appear paradoxical. For one, arbitration is private, but ESG impacts are public. Arbitration is confidential while Environmental and Social factors demand transparency. Arbitration, like every contract, binds only the parties but ESG affects and harm communities that never signed arbitration agreements.
In our considered view, the key to resolving this paradox lies in distinguishing between the contractual and regulatory/public interest aspects of ESG disputes. For example, where company A contractually promises to provide certain amenities and breaches that promise, in our humble opinion, the arbitration of any such dispute seems appropriate. However, if the same company A violates a statutory environmental requirement, litigation or administrative action by the regulatory authorities seems more appropriate as it is a public interest matter. With that being said, perhaps the most vexing issue is the position of the affected communities. Imagine in our scenario, company A and the government have an arbitration agreement. The affected community does not. If the government arbitrates compensation issues with the company, the community has no seat at the table and no right of audience. Yet the community suffers the actual harm.
RECOMMENDATIONS: THE WAY FORWARD
Moving forward, Africa needs a distinctly African approach towards determining the arbitrability of ESG disputes, one that recognizes the continent’s unique realities. We propose the following principles as a guide for determining the arbitrability or otherwise of ESG related disputes.
1. Case – by – case Assessments
In our opinion, African jurisdictions should refrain from generalizations like “environmental disputes are not arbitrable” and rather embrace a case by case and context specific assessment. We should rather ask ourselves questions like:
I. Is there a genuine contractual dispute? As earlier opined, if parties voluntarily assumed ESG obligations and inculcated same in their contract, arbitration makes sense.
II. Are the rights of a third party affected?
III. Does arbitration advance or undermine the public interest?
2. Mandatory Transparency for Public-Interest ESG Disputes
African arbitration institutions should develop rules requiring transparency in ESG disputes affecting public interests. This could include the publication of awards. Understandably, some will object that transparency undermines the entire arbitral process. In response, we commend the extant provisions of the ICSID Rules 2022, which enhance transparency, requiring publication of awards and even allowing non-disputing party participation.[12]
3. Specialized Arbitrators and Arbitrator Training
We must emphasize that ESG arbitration requires expertise beyond traditional commercial law. African arbitration institutions must:
- Develop training programs in environmental science, social impact assessment, human rights law and sustainability standards for arbitrators.
- Create specialized rosters of ESG arbitrators with demonstrated expertise.
- Encourage appointment of technical experts as tribunal members, not just as witnesses.
- Facilitate knowledge exchange between African arbitrators and international ESG arbitration specialists.
CONCLUSION
We reiterate that African states must resist two temptations. The first temptation is to completely embrace arbitration, allowing all ESG disputes to be resolved privately. This path risks subordinating public rights to commercial convenience and excluding affected communities from decisions about their futures.
The second temptation is to completely reject the arbitration of ESG disputes, insisting that all such matters belong in courts. This path risks subjecting disputes to lengthy judicial delays and frightening away investment.
The better path lies between these extremes. Which requires African states to thoughtfully distinguish between ESG disputes that can be appropriately arbitrated and those that cannot. It demands building arbitration frameworks that find the delicate balance between confidentiality and transparency, party autonomy and third party rights. It necessitates investing in our local arbitration capacity and expertise.
Most fundamentally, it requires recognizing that sustainable development isn’t just about attracting capital. It is about ensuring that such capital drives development that genuinely improves African lives. ESG dispute resolution mechanisms must serve that ultimate goal.
To our mind, the prevalent question isn’t whether ESG disputes are or should be arbitrable in Africa. Rather, the pressing question is how can we structure ESG arbitration to advance justice, sustainability and development? That’s the question African policymakers, legal practitioners, businesses and communities must answer together. The answers we develop will shape not just our legal landscape but our collective futures. Hopefully, we get it right.
Please note that the foregoing does not in any way constitute legal advice. Kindly contact the authors for any legal advice on the subject matter:
REFERENCES
[2]https://www.mondaq.com/nigeria/arbitration-dispute-resolution/1273354/international-arbitration-esg-a-new-trend-in-dispute-resolution
[3]https://punchng.com/niger-delta-a-region-in-desperate-need-of-transformation/
[5] The soil crisis: Our soil is dying Kenya, African farmers – Naturenews.africa
[6] https://www.tandfonline.com/doi/pdf/10.1080/0376835X.2018.1456909
[10] Section 55 (3)(b) of the Arbitration and Mediation Act, 2023
[11] Kariuki Muigua “The Place of Environmental, Social and Governance (ESG) in Arbitration” Alternative Dispute Resolution Journal, 2022, Vol 10, Issue 4, Pg. 65
[12] Increased Transparency under the New ICSID Rules: A Way Forward for ISDS Legitimacy – Daily Jus
Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries about this should please be directed at the key contacts
