Arbitral Institutions and ESG
ESG is one of the hottest topics of the day. It's everywhere – touching all aspects of business life – and many aspects of our personal lives.
But how does it impact our world of international arbitration, and what is the role of arbitral institutions in tackling ESG issues?
It is important that we first recognise the "climate of the age" in which we are living.
Geopolitical norms are fracturing daily, and predictions are hard to make. Globalisation is under extreme pressure. Economies and business de-risk, and they scenario plan.
Faith is declining in government, and in regional and global institutions, by states and citizens alike. We are seeing this the world over.
The impact of extreme climate has been relentless again this summer, including in my home city of Hong Kong. In a matter of days earlier this month we witnessed both a once in a generation direct hit by a typhoon and a few days later the worst rain since records began over 150 years ago.
This pattern is being played out all over the world, often affecting the most vulnerable in society.
And a new generation of lawyers – and clients – and shareholders – has very different drivers. Together, they are seeking to hold to account employers, corporates and governments in a way that feels different to even a few years ago.
Populism – and activism – feed on each of these themes.
This is the climate of our age.
And it means that everything is now ESG.
And it's not easy to navigate. The constant news, disagreements and conflicting information adds challenges for any industry.
One only has to look to the UK Prime Minister's announcement this week on climate policies and the resulting reactions to understand the confusion that can rapidly affect each of the E, S and G areas.
However, with focus, I believe we can influence progress.
And that we – the arbitral community – as participants in an important multilateral system – have a role to play to tackle the here and now let alone the issues ahead.
The acronym "E-S-G" first appeared in a UN report in 2005. Nearly 20 years later, it appears on every business website and government agenda.
Perhaps the most well-known and tangible pillar is the "E" for environment.
It now covers the environmental impact of every business and government activity, including the impact of products and processes long after they leave the factory floor or minesite.
And technology, which we all might think is immune from environmental criticism is not.
The "S" is for Social. It covers a wide range of issues. From diversity to human rights and modern slavery to health and safety and supply chain issues such as responsible and ethical sourcing. This touches all of us.
And the "G" -- for Governance -- can cover any aspect of the way that an organisation is run.
From corporate policy, such as executive pay, finance, and cyber security, to more criminal matters, such as bribery, tax avoidance, corruption and discrimination.
These three strands are not mutually exclusive and -- in the climate of our age -- are helplessly intertwined.
The current US autoworkers strike links corporate actions around executive pay and share buybacks to the workers' inability to counter the cost-of-living crisis.
Is that S or G?
Last week, California sued oil companies for deceiving the public about the impact of fossil fuels, a case that targets board and management behaviour from the fifties right up to present-day allegations of greenwashing.
Again, E or G?
Everything is now ESG.
Arbitral institutions have a role in leading us to better tackle the issues. I want to make 3 suggestions.
The first is for institutions to accurately track ESG's penetration into business-as-usual commercial arbitrations.
"What gets measured, gets managed."
If we recognise, track and publicise where ESG issues are being raised and determined, it will allow us to better share learning and expertise.
This is especially important given that many of the risks for business are still relatively new – and how disputes surrounding those issues are resolved and dealt with are newer still.
ESG issues – although they have clearly already penetrated business-as-usual commercial arbitrations – can be hard to track where they do not obviously relate to green technology or large-scale, long-term infrastructure, mining or energy projects.
We will see more claims brought from climate events, human-rights workforce issues, or greenwashing issues including in misrepresentation claims, where businesses look to end commercial relationships because their counterparties are not living up to their ESG credentials.
Some institutions are already reporting on these trends, particularly under the "E" banner, including the ICC, ICSID and the SCC. The latest Queen Mary survey on energy arbitration also looked in detail at the impact of the energy transition.
But given the increasing importance of the spectrum of ESG issues, tracking beyond perhaps the more easily identifiable environmental issues is a challenge worth addressing.
A key benefit of arbitration is the ability for parties to identify arbitrators with real expertise and familiarity with the issues in question, which, in the ESG space, are becoming increasingly specialised.
Increasing our understanding of ESG's current presence in disputes will help us to develop our expertise and offering to parties. In doing so, it also responds to an area that practitioners need to be across – it will allow us to learn and improve. Clients expect their lawyers – and probably their arbitrators – to be across these business critical issues. And it can give arbitration an edge.
Given mounting ESG pressures, I also think it would be unsurprising if, in due course, there is more appetite for, or even pressure on, institutions to publish anonymised awards given public interest in ESG topics, and in order to promote consistency and transparency.
So, let's get tracking.
The second role for institutions is the influence they can bring to bear on how arbitrations are run – through their procedural rules, but also through the way that they administer arbitrations.
I think there are many ways in which institutions can do this. Let me suggest 3 that are worthy of consideration.
First, they can introduce specialist rules for the arbitration of ESG disputes. Although the efficacy of these rules is still questionable – at least to date.
Arguably, the institutional pioneer in this area is the Permanent Court of Arbitration. The PCA launched its optional rules for the arbitration of disputes relating to the environment and/or natural resources 22 years ago.
These rules provide for a specialised list of arbitrators with expertise in environmental disputes and lists of potential expert witnesses. They also allow the tribunal to request a summary of technical or scientific matters from the parties, bespoke confidentiality restrictions and the possibility of obtaining interim relief to prevent harm to the environment.
The PCA rules have been used but only a handful of times, though we do know of 13 multi-lateral environmental agreements that refer to the PCA.
In fact, in 2017, the ICC launched a taskforce on the "Arbitration of Climate Change Related Disputes". Rather than recommending any rule changes, the report gave useful guidance as to how the existing rules could be used to manage climate change related disputes.
It's also worth mentioning the Hague Rules on Business and Human Rights Arbitration published in 2019 and based on the UNCITRAL rules.
Second, institutions can create specialist panels of arbitrators. This is perhaps more practical and easier to achieve.
Arbitral institutions are uniquely placed to match the right arbitrators to the right cases. Not only are they privy to the types of disputes that are going on behind closed doors, but they also know which arbitrators are hearing them, and how those arbitrators are managing those cases.
This is useful in the realm of ESG.
If you have a dispute over whether a company has met its carbon footprint commitments, you need an arbitrator who is sufficiently familiar with the issues.
Similarly, if a company is accused of violating labour laws, of greenwashing, or of causing environmental damage, you need arbitrators who can handle the current context and technicalities of these issues and the technical elements, and not just existing laws.
The PCA is already doing this. This list has the potential to shape and change the law internationally as they increasingly rule on environmental issues as well as broader conceptual and structural issues, such as the relevance of international law and the interplay of international and domestic laws.
And third – and much broader – institutions can tailor their existing procedural rules and practices to accommodate disputes in the ESG space.
We have seen this being done:
- first, explicitly in their procedural rules, and
- second, by adopting new ways of administering their arbitrations or other initiatives which are adjacent to the administration of arbitrations but which are equally important.
We have seen some brilliant innovations in institutional rules of late, particularly on the environmental impact of arbitration; and on diversity – part of the S.
I will start on home turf, in Scotland, because, in the words of Voltaire "We look to Scotland for all our ideas of civilisation"
The Scottish Arbitration Centre's inaugural arbitration rules enshrine the Green Protocols developed by the Campaign for Greener Arbitration.
Article 23 of the SAC Rules, entitled "environmental impact", provides that all parties shall be mindful of the environmental impact of the arbitration and in particular shall, at the commencement of the proceedings, consider the application of the Green Protocols developed by the Campaign for Greener Arbitration.
I believe that the SAC was the first institution to include this sort of obligation in its rules.
In my view, this normalises environmental concerns as a relevant factor in procedural debates. It is a very welcome development. And it is bold.
When parties are fighting about whether to produce paper bundles or whether a witness needs to fly to give evidence in person, parties can cite this rule to justify a desire to minimise environmental impact.
This can also be achieved by including the Green Protocols in procedural orders, just to ensure that parties and arbitrators alike are alive to environmental concerns and hold each other to account where appropriate.
Many other institutions are also adopting new ways of administering their arbitrations or coming up with new initiatives in the sustainability context, for instance by developing their own case management tools.
This obviously has huge environmental benefits because it encourages paper less – or even paper free – arbitrations. One example is the ICC Case Connect tool, but there are plenty of others too.
In terms of diversity, the Scottish centre's rules are also one of the first to deal expressly with diversity of arbitrators, along with Belgium's CEPANI centre and the recently published consultation version of the SIAC rules.
Article 8 of the Scottish Arbitration Centre's rules, which deals with the appointment of arbitrators, does this in two ways.
First, it states that the parties and the institution itself shall have regard to the Equal Representation in Arbitration Pledge and The Racial Equality for Arbitration Lawyers (or REAL).
These are initiatives that are close to my heart, particularly given my current role as the co-chair of the Global Steering Committee of the Pledge.
This is a hugely welcome – and bold – step, particularly given that the process for coming up with arbitrator shortlists is pretty opaque – both for arbitral institutions and party nominations. I'm hopeful that this will encourage everyone to actively consider whether their shortlists are truly as diverse as they can be.
Article 8.2 of the SAC rules also states "Without prejudice to the parties' right to submit their dispute in accordance with the tenets of any particular religion, any prior purported agreement between the parties as to the gender, race, or ethnicity of any arbitrator shall be of no effect".
This should help to ward off blatant instances of discrimination which often go unreported.
In its report published only a couple of weeks ago, the English Law Commission also expressly encouraged arbitral institutions to prohibit discrimination explicitly in their codes of conduct to the extent that they do not already do so.
So SAC is hopefully the trend-setter as this becomes more of a norm.
Institutions have taken steps to improve the diversity of arbitrators, not only by appointing more diverse candidates themselves but also by publishing statistics. What gets measured, gets managed.
They have also started not just to focus on gender, but have also taken more fledgling steps to look at the nationality and age of arbitrators, which is an important step in ensuring diverse representation more generally.
It is clear that institutions are leading the way on this compared with party and co-arbitrator appointments. For example, in 2022 the LCIA appointed women 45% of the time, compared with 19% and 23% for parties and co-arbitrators respectively. The LCIA also appointed non-British arbitrators 63% of the time, despite 85% of LCIA arbitrations being governed by English law.
In 2022, Delos, an institution based in Paris, also launched an open-source database of arbitrator candidates in an effort to expand the pool of arbitrator candidates and allow users access to information on available arbitrators.
The ICC Court has also been recognised for its inclusivity efforts. In particular its recently launched LGBT+ network, as well as its disability inclusion taskforce for arbitration. This taskforce aims to study and analyse the ways in which the ICC Court can meet the needs of arbitration users who may need accommodations or changes for the way they work.
My final topic is to look at the way that institutions are changing their own internal governance in the ESG space.
This ranges from reporting on their own energy consumption, emissions and environmental footprint, to making their own sustainability commitments, including signing, for example, the Green Pledge, and looking to embed the Green Protocols into their procedural rules and practices. These steps are likely to become standard.
In the recent QMUL energy arbitration survey, respondents were asked what their priorities were vis-à-vis green arbitration. 81% of respondents said they would encourage the use of videoconferencing for meetings and hearings, 69% would avoid unnecessary travel, particularly flights, and 66% voted for greater use of electronic bundles at hearings.
So this is clearly the direction of travel (if you'll excuse the pun!).
Institutions' action on diversity now also extends to the boards of the institutions themselves, which are becoming increasingly diverse. It will be interesting to see what influence institutions can bring to bear on party and co-arbitrator appointments, which are falling behind.
And finally on the Governance side, I can think of three areas where arbitral institutions will need to be proactive.
First, institutions are under increasing pressure to protect data and minimise cyber risk. Indeed, institutions are becoming data controllers as they develop platforms for holding documents, so this needs to be managed very carefully. Most institutions will have done the thinking on this already, but I think this is an area where one mistake could lead parties to reconsider a particular institution. And the reputational and PR risks are significant. This key area of risk should be high on any board agenda.
Secondly, sanctions also fall within governance, and have caused issues in the transfer of funds to and from sanctioned parties, for example for advance payments for costs and security for costs. The LCIA, for example, procured a general licence from the UK's Office of Financial Sanctions Implementation (OFSI) for cases administered by the LCIA, though navigating this issue was extremely complex.
And third, we now live in a world where transparency and disclosure are key. Institutions are already doing this in their case reports, but there may soon be binding reporting standards that apply to arbitral institutions – and as I mentioned earlier increasing pressure to publicise anonymised awards that deal with ESG issues.
So there is much to do, but much of which we should already be proud. This is an exciting area of practice – and change – but we must remember the climate of our age. The context means that these issues are not going anywhere.
When users of arbitration are increasingly being judged and scrutinised on their own ESG credentials, institutions – in their rules, administration and organisational governance – cannot afford to be found wanting.
I look forward to seeing you all in Hong Kong in May 2024 for the next ICCA Congress.