This article has been authored by Vibhor Kathuria, a 5thyear B.A. LLB (Hons.) student at Dr RML National Law University, Lucknow and Navya Chadha, a 4th-year B.A. LLB (Hons.) student at Himachal Pradesh National Law University, Shimla
India, in its quest to become a developed country by 2047, has been making significant strides in recent years in terms of economic growth and putting the country on the map. Economic growth, nevertheless, comes with its own set of challenges, including ESG concerns. We are experiencing an era where Environmental, Social, and Governance (ESG) aspects are transforming the way the world operates, with profits being placed behind sustainability. At such a critical crossroad, two problems are being experienced simultaneously. Firstly, there is a need and hunger on one hand, resulting in rapid industrialisation to provide for global investments and development. Secondly, there is a strong commitment among the government to fulfil its mission with the aim of meeting the 17 global Sustainable Development Goals (SDGs) by 2030. It is against this backdrop that there resides a complicated exercise of international environmental pledges, strengthening regulatory frameworks and increased investor and social scrutiny. The nation today is in a critical state, with a need for a system that is strong enough to face these new-age problems. The emerging controversy surrounding ESG disciplines, such as green project contracts, ESG disclosure norms, and carbon trading, among others, is hindering the fulfilment of developmental requirements. A demand is thus being experienced across the world for an effective system in dispute settlement to move forward these issues and rapidly implement economic development without cutting corners when it comes to sustainability.
Arbitration is being used to establish effective methods of addressing the increasing cases of ESG disputes by global jurisdictions. The difficult character of these conflicts, related to ESG audit, climate models evidence and the international jurisprudence makes arbitration attractive. India however is at an embryonic level in this respect. Indian arbitration mechanism, though provided with a framework, is not uniform regarding its applicability to ESG disputes. In Vidya Drolia v. Durga Trading Corp. (2020), the Supreme Court expanded the scope of arbitrability; however, there remains no clarity on climate disputes concerning tortious liability or regulatory enforcement. Moreover, over the last few years the drive towards ESG compliance has been enhanced by the regulatory structures.
Arbitration Framework in India and ESG
The ESG disputes currently lie within a wide range of non-financial interpretations of environmental claims i.e. climate disputes, principles of pollution, garbage management; Social claims i.e. labour codes, workplace human rights issues among others and Governance claims i.e. transparency, executive compensation among others. New trends are seeing an increment of ESG related litigation as the world pursues sustainability rather than profits and domestic laws promote sustainable development. Specifically, to address these concerns, the regulatory bodies in India have also developed their structure with an extended approach to tackle this. Indicatively, SEBI’s Business Responsibility and Sustainability Reporting (BRSR) requires leading listed companies to report on their ESGs and the BRSR Core has nine attributes of sustainable governance. In the same vein, the RBI’s draft on climate finance disclosures also focuses on risks in financial disclosures, and the Central Consumer Protection Authority’s Greenwashing Guidelines is also used to address false ESG claims by requiring this disclosure to be supported by verifiable data and by third-party audits. An increase in the number of ESG terms in new-age contracts highlights the importance of a sound dispute resolution mechanism to reduce the increase in the number of ESG disputes.
ESG claims fall into two main categories which are ideal for arbitration. The former are claims pursued based on commercial contracts or private agreements, e.g., Power Purchase Agreements or any other provisions dealing with environmental incidents and the disputes that might arise as a result of them. Secondly, we have the Treaty-based claims that are of the establishment of treaties on investment and which establish claims relating to investment-state disputes. These disputes are generally governed by international law and are resolved by entities such as ICSID. Jurisdictions around the world have begun to experiment with incorporating ESG-related disputes within the umbrella of arbitrability, especially in investor-state cases. It has encountered several claims, which have been brought in recent years. One well-known precedent case is that of Ubraser S.A. & Ors. v. Argentina, where the latter successfully denied a petition because its actions were violating human rights and the weightiness of the case establishing the primary responsibility of corporations to the environment was, on the one hand, based on investment arbitration.
According to Indian law, the arbitrability depends on the fact whether a dispute can be settled outside and without violating the public policy. India is a signatory to the New York Convention, which enables the enforcement of cross-border disputes, making arbitration an appealing option for resolving international ESG disputes. However, arbitrability issues arise when the terms of the contract are such that it relates to an area of public policy, e.g., the definition of ambiguity in non-compliance with ESG or draw upon other soft laws, e.g., the UN Guiding Principles on Business and Human Rights.
The issue of arbitrability in India law is interpreted through S.2(3) of the Arbitration & Conciliation Act in conjunction with the precedents made by the Supreme Court in cases such as Booz Allen and Hamilton v. SEBI Home Finance (2011), which makes it clear that only those disputes pertaining to right in personam, and not the rights in rem are arbitrable. In the case of ESG, this implies that breaches of contract are arbitrable, whereas regulatory fines might not be. Environmental torts which include pollution that impacts the communities, are not arbitrable under the public policy exception when it comes to climate related situations.
Although arbitration has potential, arbitrating ESG disputes is not an easy task, particularly when the existing framework does not support the effective application of ESG and climate disputes in India, which cuts across legislative, institutional, procedural, and substantive areas. The amount of arbitration has increased by 21% after 2021, but there is a lack of data relating to ESG matters, which demonstrates the underuse of arbitration systems in this setting. Institutional arbitration in India has received attractiveness as new centres such as the MCIA and the DICA have come into the picture, but none of them have ESG specialised protocols yet, falling behind the global trends.
Lacunae in the Existing Framework
The current arbitration framework constrains the arbitrability of most of the ESG disputes. ESG disputes are not necessarily premised upon contractual duties; sometimes, the soft law and social expectations are the foundations of these obligations. Some of the problems like the environmental implication of corporate activities, human rights abuses in the chain of supply, degree of pollution, deforestation, and unregulated construction mostly lie beyond the scope of the stringent application of the law and thus are subjected to heightened moral and social responsibility, and thus are hard to be resolved through arbitration and which illustrates the weaknesses of the process in dealing with these disputes.
Leaving the problem of arbitrability aside, the ESG disputes remain hard to arbitrate and their resolution necessitates a significant change in the current structure to render arbitration ESG friendly. To begin with, there is the absence of specialized training of arbitrators. ESG and climate disputes often involve unconventional scientific, environmental, and technical considerations, in addition to traditional legal expertise. The Indian panels often consist of commercial lawyers and retired judges, which makes them unsuitable to be a perfect candidate when an IPCC data or carbon footprint analysis is involved. The environmental regulations of the PCA fill these gaps as domestic institutions are behind those. Without it, an arbitral tribunal might not be able to capture the details of such conflicts well and this will reduce the effectiveness of arbitration in this field. Arbitrators in international institutions such as the ICC and LCIA also maintain lists of niche-expert arbitrators. The PCA has, in any case, incorporated the Optional Rules for Arbitration of Disputes Relating to the Environment (2001) to make use of technical experts; however, this practice is not yet systematized in India.
Moreover, the multi-party nature and presence of parties, such as communities or NGOs, raises another issue and complicates the bilaterality of arbitration, potentially locking out important voices. Because the character of conflict, in this case, is non-financial in character, such as loss of ecosystem, the absence of a standardized approach makes it challenging to measure the damage and hence making it inconsistent. In addition, the privatization aspect of arbitration may become inconsistent with accountability and the common good regarding ESG matters. This is a challenge and complicates the advancement and becomes cumbersome to enjoy all the benefits of arbitration in ESG related controversies. This is why the necessity of adaptive arbitration frameworks can be questioned.
Future Prospect and Recommendations
India has a bright future in administering arbitration for ESG disputes due to its potential in human resources and a vision to come up with ambitious development projects. With the enhancement in the systems of ESG integration, arbitration could pose as the most effective approach towards effective dispute resolution, due to its rapid and expedient system of resolving disputes. India thus needs to move to implement ESG related structures and should rather work on building its capacity as it wants to compete with all other countries and desires to be the seat of arbitration in the global arena.
Legislative and institutional reforms are the most typical way to maximize this golden opportunity. These reforms involve some changes to the existing arbitration framework, such as incorporating ESG-specific clauses into the 1996 Arbitration Act and identifying the grey zone of arbitrability in ESG disputes. Secondly, regarding institutional arbitration, such institutions like MCIA and DIAC would employ capacity building programmes and development of specialised ESG rules that entail a panel of experts as panellists. Additionally, advertising ESG arbitration terms in government contracts, ensuring consistency with current international frameworks, and utilizing AI along with technological integration to unify data and research-based analysis may enhance general dispute resolution systems. The nuances of ESG and similar controversies are also suitable to new models of arb-med-arb, which is more inclined to merge mediation and arbitration and might be effective in the context of a successful resolution process.
Proper execution of these reforms can assist India not only to achieve some form of balance between high economic growth and sustainable development, but will also make India a potential hub of international commercial arbitration. The institutions and legislators concerned should sit at one table with stakeholders and develop a roadmap that will help bring this vast potential to fruition.