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Role of Regional Economic Communities (RECs) in Promoting Africa Intra Trade

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By Hon. Prof. Kariuki Muigua, OGW, PhD, C.Arb, FCIArb is a Professor of Environmental Law and Dispute Resolution at the University of Nairobi, Member of Permanent Court of Arbitration, Leading Environmental Law Scholar, Respected Sustainable Development Policy Advisor, Top Natural Resources Lawyer, Highly-Regarded Dispute Resolution Expert and Awardee of the Order of Grand Warrior (OGW) of Kenya by H.E. the President of Republic of Kenya. He is The African ADR Practitioner of the Year 2022, The African Arbitrator of the Year 2022, ADR Practitioner of the Year in Kenya 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021 and Author of the Kenya’s First ESG Book: Embracing Environmental Social and Governance (ESG) tenets for Sustainable Development” (Glenwood, Nairobi, July 2023) and Kenya’s First Two Climate Change Law Book: Combating Climate Change for Sustainability (Glenwood, Nairobi, October 2023), Achieving Climate Justice for Development (Glenwood, Nairobi, October 2023) and Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024)*

In addition to the AfCFTA, Regional Economic Communities (RECs) s in Africa have played a pivotal role in strengthening intra-African trade. Africa boasts several RECs and intergovernmental organizations including the Arab Maghreb Union (UMA); the Common Market for Eastern and Southern Africa (COMESA); the Community of Sahel-Saharan States (CEN-SAD); the East African Community (EAC); the Economic Community of Central African States (ECCAS); the Economic Community of West African States (ECOWAS); the Intergovernmental Authority on Development (IGAD) and the Southern African Development Community (SADC).

According to the African Union, the purpose of the RECs is to facilitate regional economic integration between members of the individual regions and the wider African continent. RECs have played a major role in strengthening intra-African trade. For example, COMESA established a Free Trade Area in 2000, setting the stage for the reduction of tariffs amongst member states. As a result, intra COMESA trade has grown at an average of seven per cent with higher increases reflected between intra-Free Trade Area States. It has also been pointed out that SADC has made tremendous achievements in a number of areas of regional cooperation and integration notably, in the areas of governance, democracy, peace and security; infrastructure and services; trade, industry, finance and investment; food, agriculture and natural resources; and social and human development.

The EAC has also seen a growth of regional trade with EAC trade value being recorded at $10.17 billion representing a 20% share of Intra- trade to global trade. According to the EAC, imports of locally available goods into the region; such as meat, furniture and textiles, have been attracting a tariff of 35 percent a move which aims at promoting local production, value addition and industrialization. It is therefore evident that there has been some progress towards strengthening intra-African trade. However, despite this progress, it has been pointed out that presently, intra-Africa trade stands low at just approximately 14.4% of total African exports.

Reports further indicate that intra-continental trade constitutes less than 14% of Africa’s total trade, in comparison to 66.9% in Europe, 63.8% in Asia & Oceania, and 44.4% in the Americas. It has been argued that the dependence on external markets leaves the continent highly exposed to crises and shocks in other parts of the world, as showcased by the impact of COVID-19 and the ongoing Russia-Ukraine war. In addition, it has been asserted that while there is huge potential to increase intra-Africa trade, the composition of Africa’s world imports and exports does not match sufficiently to trigger a process of import substitution away from the rest of the world.

Further, it has been asserted that efforts to promote regional integration have reduced tariff protections, but despite significant progress, intraregional traders still face high tariffs. It has further been argued that nontariff measures are potentially more trade restrictive than tariffs therefore hindering the growth of intra-African trade. In addition, it is contended that low performance in trade facilitation indicators is also hampering the development of trade and the economy in the region. For example, it has been pointed out that many African countries score low in ecommerce, linear shipping connectivity and doing business indicators. This has been attributed to several causes including small, fractured and partly isolated markets in the Continent.

UNCTAD posits that many African countries resorted to development strategies after gaining independence that included the establishment of RECs. However, several RECs have overlapping memberships and seem to complicate instead of facilitating trade relationships among the African countries. The African Union Action Plan for Boosting Intra-African Trade further notes that the growth of intra-African trade is constrained by a number of factors including differences in trade regimes; restrictive customs procedures, administrative and technical barriers; limitations of productive capacity; inadequacies of trade‐related infrastructure, trade finance, and trade information; lack of factor market integration; and inadequate focus on internal market issues. It is important to address these challenges in order to strengthen intra-African trade.

*This is an extract from the Book: Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024) by Hon. Prof.  Kariuki Muigua, OGW, PhD, Professor of Environmental Law and Dispute Resolution, Senior Advocate of Kenya, Chartered Arbitrator, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Lifetime Achievement Award 2021 (CIArb Kenya), African Arbitrator of the Year 2022, Africa ADR Practitioner of the Year 2022, Member of National Environment Tribunal (NET) Emeritus (2017 to 2022) and Member of Permanent Court of Arbitration nominated by Republic of Kenya. Prof. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Prof. Kariuki Muigua teaches Environmental Law and Dispute resolution at the University of Nairobi School of Law, The Center for Advanced Studies in Environmental Law and Policy (CASELAP) and Wangari Maathai Institute for Peace and Environmental Studies. He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Prof. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Managing Partner of Kariuki Muigua & Co. Advocates and Africa Trustee Emeritus of the Chartered Institute of Arbitrators 2019-2022. Prof. Muigua is a 2023 recipient of President of the Republic of Kenya Order of Grand Warrior (OGW) Award for his service to the Nation as a Distinguished Expert, Academic and Scholar in Dispute Resolution and recognized among the top 5 leading lawyers and dispute resolution experts in Band 1 in Kenya by the Chambers Global Guide 2022 and was listed in the Inaugural THE LAWYER AFRICA Litigation Hall of Fame 2023 as one of the Top 50 Most Distinguished Litigation Lawyers in Kenya and the Top Arbitrator in Kenya in 2023.

References

United Nations Economic Commission for Africa., ‘Intra-African Trade: A Pillar of Development.’ Available at https://repository.uneca.org/handle/10855/6028 (Accessed on 14/12/2023).

African Development Bank Group., ‘Intra-African Trade is Key to Sustainable Development – African Economic Outlook.’ Available at https://www.afdb.org/fr/newsand-events/intra-african-trade-is-key-to-sustainable-development-african-economic-outlook17022 (Accessed on 14/12/2023),

United Nations Conference on Trade and Development., ‘Intra-African Trade: Unlocking Private Sector Dynamism.’ Available at https://unctad.org/system/files/officialdocument/tdb60d4_en.pdf (Accessed on 14/12/2023).

African Union., ‘Expanding Opportunities for Intra African Trade.’ Available at https://au.int/sites/default/files/newsevents/workingdocuments/31884-wdaep_brochure_theme_2_trade.pdf (Accessed on 14/12/2023).

Brixiova. Z., Meng. Q., & Ncube. M., ‘Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?’ Available at https://docs.iza.org/dp9205.pdf (Accessed on 14/12/2023).

African Economic Outlook 2023., ‘Mobilizing Private Sector Financing for Climate and Green Growth in Africa.’ Available at https://www.afdb.org/sites/default/files/documents/publications/afdb23- 01_aeo_main_english_0602.pdf (Accessed on 14/12/2023).

Africa Union., ‘Action Plan for Boosting Intra-African Trade.’ Available at https://au.int/web/sites/default/files/newsevents/pressreleases/26498-praction_plan_for_boosting_intra-african_trade_f-english.pdf (Accessed on 14/12/2023).

African Union., ‘Agreement Establishing the African Continental Free Trade Area.’ Available at https://au.int/sites/default/files/treaties/36437-treatyconsolidated_text_on_cfta_-_en.pdf (Accessed on 14/12/2023).

United Nations., ‘Africa’s Free Trade on Track, More Efforts Needed.’ Available at https://www.un.org/africarenewal/magazine/january-2023/africa%E2%80%99sfree-trade-track-more-efforts-needed#:~:text=lies%20ahead%2C%20though.-,Presently%2C%20intra%20Africa%20trade%20 stands%20low%20at%20just%2014.4 %25%20of,day)%2C%20according%20to%20UNCTAD (Accessed on 14/12/2023).

The World Bank., ‘The African Continental Free Trade Area.’ Available at https://www.worldbank.org/en/topic/trade/publication/the-african-continentalfree-trade-area (Accessed on 14/12/2023).

Africa Union., ‘Regional Economic Communities.’ Available at https://au.int/en/recs#:~:text=The%20purpose%20of%20the%20RECs,the%20Abuja%20Tr eaty%20(1991). (Accessed on 14/12/2023) 48 Ibid 49 Common Market for Eastern and Southern Africa., Available at https://www.comesa.int/our-success stories/#:~:text=COMESA%20established%20a%20Free%20Trade,intra%2DFree%20Trad e%20Area%20States.&text=By%202018%2C%2098%25%20of%20NTBs,since%202008% 20had%20been%20resolved. (Accessed on 14/12/2023).

South African Development Community., ‘SADC Major Achievements and Challenges.’ Available at https://www.sadc.int/sites/default/files/2021- 12/Achievements_booklet.pdf (Accessed on 14/12/2023).

East African Community., ‘Intra-EAC Trade Hits the US$10 billion Mark as EAC Readies to Send out Verification Mission Team to Assess Somalia’s Readiness to Join the Bloc.’ Available at https://www.eac.int/press-releases/2706-intra-eac-trade-hits-the-$10- billion-mark-as-eac-readies-to-send-out-verification-mission-team-to-assess-somalia-sreadiness-to-join-the-bloc (Accessed on 14/12/2023).

United Nations., ‘Africa’s Free Trade on Track, More Efforts Needed.’ Op Cit 55 Mo Ibrahim Foundation., ‘African Continental Free Trade Area (AfCFTA): IntraContinental Trade still the Lowest Globally.’ Available at https://mo.ibrahim.foundation/news/2023/african-continental-free-trade-area-afcfta-intracontinental-trade-still-lowest-globally (Accessed on 14/12/2023).

Njuki. J., ‘Intra-Africa Trade: Status and Growth Prospects.’ Available at https://agriculture.ec.europa.eu/system/files/2021-06/fourth-au-eu-conference-intra-africatrade_en_0.pdf (Accessed on 14/12/2023).

United Nations Conference on Trade and Development., ‘Key Statistics and Trends in Regional Trade in Africa.’ Available at https://unctad.org/publication/key-statisticsand-trends-regional-trade-africa (Accessed on 14/12/2023).

African Union., ‘CFTA – Continental Free Trade Area.’ Available at https://au.int/en/ti/cfta/about (Accessed on 15/12/2023).

Africa Union., ‘Theme of The Year 2023: “Acceleration Of AfCFTA Implementation’ Available at https://au.int/en/theme/2023/acceleration-of-afcfta-implementation (Accessed on 15/12/2023).

United Nations., ‘Africa’s Free Trade on Track, More Efforts Needed.’ Op Cit 71 Global Development., ‘Trade in Africa: Formal Barriers, Informal Networks, and Global Prospects.’ Available at https://globaldev.blog/trade-africa-formal-barriers-informalnetworksandglobalprospects/#:~:text=These%20can%20take%20the%20form,goods%20to%20travel %20more%20freely. (Accessed on 15/12/2023).

Njinkeu. D., & Fosso. B., ‘Intra-African Trade and Regional Integration.’ Available at https://www.afdb.org/fileadmin/uploads/afdb/Documents/Knowledge/09484259-EN- INTRA-AFRICAN-TRADE-AND-REGIONLA-INTEGRATION.PDF (Accessed on 15/12/2023) 74 Wellisz. C., ‘Freeing Foreign Exchange in Africa.’ Available at https://www.imf.org/- /media/Files/Publications/Fandd/Article/2022/September/digital-journey-africa.ashx (Accessed on 15/12/2023).

World Economic Forum., ‘Africa Embraces Local Currencies for Cross-Border Payments.’ Available at https://www.weforum.org/agenda/2023/12/africa-local-curenciescross-border-payments/ (Accessed on 15/12/2023).

African Natural Resources Centre., ‘An ANRC Step-by-Step Guide for Local Content Policy Formulation and Implementation.’ Available at https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/anrc/ANRC_A_stepbystep_guide_for_local_content_policy_formulation_and_implementation.pdf (Accessed on 15/12/2023).

Africa Oil Week., ‘The Role of Local Content in Building Africa’s Oil, Gas and Renewables Energy Mix.’ Available at https://africa-oilweek.com/Articles/the-roleof-local-content-in-building-africas (Accessed on 15/12/2023).

African Development Bank., ‘Illicit Trade in Natural Resources in Africa.’ Available at https://www.afdb.org/fileadmin/uploads/afdb/Documents/Events/IFF/Documents_IFF/ANR C_ILLICIT_TRADE_IN_NATURAL_RESOURCES.pdf (Accessed on 15/12/2023).

United Nations Conference on Trade and Development., ‘Defining, Estimating and Disseminating statistics on Illicit Financial Flows in Africa.’ Available at https://unctad.org/project/defining-estimating-and-disseminating-statistics-illicit-financialflows-africa (Accessed on 15/12/2023).

Africa Union., ‘Action Plan for Boosting Intra-African Trade.’ Op Cit 94 Ibid 95 The World Bank., ‘Regional Integration Removes Barriers to Development in Africa.’ Available at https://www.worldbank.org/en/results/2023/12/08/regional-integrationremoves-barriers-to-development-in-africa (Accessed on 15/12/2023).

News & Analysis

The Nexus between Environmental Social and Governance (ESG) and Arbitration

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By Hon. Prof. Kariuki Muigua, OGW, PhD, C.Arb, FCIArb is a Professor of Environmental Law and Dispute Resolution at the University of Nairobi, Member of Permanent Court of Arbitration, Leading Environmental Law Scholar, Respected Sustainable Development Policy Advisor, Top Natural Resources Lawyer, Highly-Regarded Dispute Resolution Expert and Awardee of the Order of Grand Warrior (OGW) of Kenya by H.E. the President of Republic of Kenya. He is the Academic Champion of ADR 2024, the African ADR Practitioner of the Year 2022, the African Arbitrator of the Year 2022, ADR Practitioner of the Year in Kenya 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021 and Author of the Kenya’s First ESG Book: Embracing Environmental Social and Governance (ESG) tenets for Sustainable Development” (Glenwood, Nairobi, July 2023) and Kenya’s First Two Climate Change Law Book: Combating Climate Change for Sustainability (Glenwood, Nairobi, October 2023), Achieving Climate Justice for Development (Glenwood, Nairobi, October 2023) and Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024)*

Arbitration is form of Alternative Dispute Resolution (ADR) mechanisms. ADR refers to a set of mechanisms that are applied in management of disputes without resort to adversarial litigation. It has been described as a private and consensual process where parties to a dispute agree to present their grievances to a third party for resolution. It is argued that ESG principles have become a model for sustainable business development through which a corporations’ goal for solving environmental, social and governance problems is achieved. Consequently, ESG considerations have an increasing impact in international business as evidenced by the incorporation of sustainability clauses in investment contracts. In such contracts, investors are required to adhere to the concept of sustainable development as envisaged under the contracts and failure to do so may result in ESG related disputes.

In the wake of the climate change debate, there have been calls for responsible business practice towards climate change mitigation through measures such as reduction of carbon emissions. The Paris Agreement on Climate Change has raised the awareness of the need for global efforts to combat climate change and the role of responsible and ethical corporate behavior towards achieving this goal. Further, corporations are increasingly required to safeguard human rights as envisaged by ‘S’ pillar of ESG.

However, some corporations have been accused of violating these ESG concerns as a result of their business practices. Some corporations have been accused of failing to promote climate change mitigation through reduction of carbon emissions and transitioning to cleaner energy production. Further, some corporations have been accused of violating fundamental human rights such as the right to a clean and healthy environment especially in the investment sphere in Africa. These instances have resulted in an increasing number of ESG-related disputes. The growth of ESG concerns has seen corporations being increasingly required to embrace ESG principles in their business practices. Consequently, ESG clauses are being adopted in commercial and investment contracts.

In case of violation of such clauses, ESG related disputes are bound to occur. It has been asserted that adoption of ESG related practices into pre-existing social and governance models adopted by corporations would be disruptive. The inclusion of ESG clauses in commercial contracts not only points to the importance of ESG concerns to companies but it also serves as potential source of disputes where such considerations are not complied with. ESG issues are not only reshaping corporate behavior across the globe but can also be a potential battleground in international disputes25. This creates the need for an effective mechanism of management of such disputes in order to enhance ESG principles in the quest for Sustainable Development.

Arbitration has for a long time been the most viable mechanism for management of international commercial and investment disputes. It offers a neutral forum for the management of disputes and addresses some of the concerns that parties may have in relation to the other parties’ legal system. In international commercial and investment arbitration, parties are reluctant to submit to the jurisdiction of the other party due to the likelihood of favoritism by the host judicial system. Further, arbitration has the potential of facilitating expeditious management of disputes.

In international commercial and investment arbitration, there is need to manage disputes expeditiously in order to preserve the commercial interests of parties. The viability of arbitration in management of international commercial disputes is further enhanced by the availability of a legal framework for the recognition and enforcement of foreign arbitral awards. The New York Convention provides the legal framework for the recognition and enforcement of foreign arbitral awards across different jurisdictions. Consequently, the adoption of ESG elements in international commercial and investment agreements has resulted in the use of arbitration to manage disputes arising from such agreements.

ESG concerns have become prominent in investor-state arbitration with arbitral tribunals having to determine issues relating to climate change, corruption and human rights. It has been asserted that the growth of ESG will redefine the practice of arbitration as it seeks to adapt to the new concerns created by ESG. However, the flexibility of arbitration and its ability to adapt to emerging concerns means that it is well positioned to manage ESG disputes. However, there is need for reform in order to enhance the role of arbitration in managing ESG disputes.

*This article is an abridged version of the Article The Place of Environmental, Social and Governance (ESG) in Arbitration (Available for download at Kariuki Muigua & Co. Advocates Website, follow the link) by Hon. Prof.  Kariuki Muigua, OGW, PhD, Professor of Environmental Law and Dispute Resolution, Senior Advocate of Kenya, Chartered Arbitrator, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Lifetime Achievement Award 2021 (CIArb Kenya), African Arbitrator of the Year 2022, Africa ADR Practitioner of the Year 2022, Member of National Environment Tribunal (NET) Emeritus (2017 to 2023) and Member of Permanent Court of Arbitration nominated by Republic of Kenya and Academic Champion of ADR 2024. Prof. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Prof. Kariuki Muigua teaches Environmental Law and Dispute resolution at the University of Nairobi School of Law, The Center for Advanced Studies in Environmental Law and Policy (CASELAP) and Wangari Maathai Institute for Peace and Environmental Studies. He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Prof. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Managing Partner of Kariuki Muigua & Co. Advocates and Africa Trustee Emeritus of the Chartered Institute of Arbitrators 2019-2022. Prof. Muigua is a 2023 recipient of President of the Republic of Kenya Order of Grand Warrior (OGW) Award for his service to the Nation as a Distinguished Expert, Academic and Scholar in Dispute Resolution and recognized among the top 5 leading lawyers and dispute resolution experts in Band 1 in Kenya by the Chambers Global Guide 2024 and was listed in the Inaugural THE LAWYER AFRICA Litigation Hall of Fame 2023 as one of the Top 50 Most Distinguished Litigation Lawyers in Kenya and the Top Arbitrator in Kenya in 2023.

Hamilton. J & Coulet-Diaz. M., ‘Arbitration & the ESG Era’ available at https://www.whitecase.com/news/media/arbitration-esg-era (accessed on 28/09/2022).

International Arbitration in 2022., ‘The Rising Significance of ESG and the Role of International Arbitration’ available at https://www.freshfields.com/en-gb/our-thinking/campaigns/internationalarbitration-in-2022/the-rising-significance-of-esg-and-the-role-of-international-arbitration/ (accessed on 28/09/2022)

Mazhorina. M.V., ‘ESG Principles in International Business and Sustainable Contracts’ available at https://aprp.msal.ru/jour/article/view/3223?locale=en_US (accessed on 28/09/2022).

Moses. L.M, ‘The Principles and Practice of International Commercial Arbitration’ 2 nd Edition, 2017, Cambridge University Press 28 Ibid 29Muigua. K., ‘Promoting International Commercial Arbitration in Africa’ available at http://kmco.co.ke/wp-content/uploads/2018/08/PROMOTING-INTERNATIONAL-COMMERCIALARBITRATION-IN-AFRICA.pdf

Muigua. K., ‘International Investment Law and Policy in Africa: Human Rights, Environmental Damage and Sustainable Development’ available at http://kmco.co.ke/wpcontent/uploads/2018/11/International-Investment-Law-and-Policy-in-Africa-AILA-Conference-Paper5-11-2018.pdf (accessed on 28/09/2022)

Muigua. K., ‘Realising Environmental, Social and Governance Tenets for Sustainable Development’ available at http://kmco.co.ke/wp-content/uploads/2022/07/Realising-Environmental-Social-andGovernance-Tenets-of-Sustainable-Development-Kariuki-Muigua-July-2022.pdf (accessed on 28/09/2022)

Muigua. K., ‘Settling Disputes Through Arbitration in Kenya’ Glenwood Publishers Limited, 4th Edition, 2022

Ross. A., ‘We need talk about ESG’ available at https://globalarbitrationreview.com/we-need-talkabout-esg (accessed on 28/09/2022)

The ALP Review., ‘The Importance of ESG and its effect on International Arbitration’ available at https://www.alp.company/sites/default/files/ALP%20Review%20- %20The%20Importance%20of%20ESG %20and%20its%20effect%20on%20International%20Arbitration.pdf (accessed on 28/09/2022).

United Nations Conference on International Commercial Arbitration, ‘Convention on the Recognition and Enforcement of Foreign Arbitral Awards’ United Nations, 1958

Von Wobeser., ‘The Role of Arbitration in ESG Disputes’ available at https://www.vonwobeser.com/index.php/publication?p_id=1650 (accessed on 28/09/2022)

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Enhancing the Role of Arbitration in Management of ESG Disputes

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By Hon. Prof. Kariuki Muigua, OGW, PhD, C.Arb, FCIArb is a Professor of Environmental Law and Dispute Resolution at the University of Nairobi, Member of Permanent Court of Arbitration, Leading Environmental Law Scholar, Respected Sustainable Development Policy Advisor, Top Natural Resources Lawyer, Highly-Regarded Dispute Resolution Expert and Awardee of the Order of Grand Warrior (OGW) of Kenya by H.E. the President of Republic of Kenya. He is the Academic Champion of ADR 2024, the African ADR Practitioner of the Year 2022, the African Arbitrator of the Year 2022, ADR Practitioner of the Year in Kenya 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021 and Author of the Kenya’s First ESG Book: Embracing Environmental Social and Governance (ESG) tenets for Sustainable Development” (Glenwood, Nairobi, July 2023) and Kenya’s First Two Climate Change Law Book: Combating Climate Change for Sustainability (Glenwood, Nairobi, October 2023), Achieving Climate Justice for Development (Glenwood, Nairobi, October 2023) and Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024)*

Arbitration represents a viable mechanism for management of ESG disputes. The following are proposals for interventions towards embracing arbitration in management of ESG disputes for Sustainable Development towards enhancing the use of arbitration in ESG disputes:

Enhancing Knowledge in ESG Concerns

Statistics show that many ESG related disputes are being managed through arbitration. According to the International Chamber of Commerce, engineering, construction and energy disputes represent the highest number of cases handled representing 38% of all cases registered so far. Such disputes entail ESG components such as renewable energy projects, environmental protection and human rights concerns. This demonstrates that ESG and arbitration are inextricably linked. Arbitration practitioners thus need to equip themselves with knowledge in ESG related matters in order to be better placed to manage ESG related disputes.

Promoting Sustainable Development

Sustainable Development has been defined as development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. This concept entails a combination of elements including environmental protection, economic development and social issues. The importance of Sustainable Development has seen the adoption of the Sustainable Development Goals as the global blueprint of development. Most of the Sustainable Development Goals entail aspects of ESG such as clean water and sanitation, affordable and clean energy, industry, innovation and infrastructure and climate action. Arbitration practitioners should therefore promote the principles of sustainable development when managing ESG related disputes. This could entail requiring investors to comply with the host country environmental laws and ESG standards in mining, energy and construction disputes which have an ESG bearing.

Upholding Human Rights

The ‘S’ pillar in ESG seeks to promote responsible and ethical corporate behavior through aspects such as respect for human rights. However, corporate behavior especially in the investment sphere in Africa has resulted in gross violation of human rights. Some corporations which have invested in oil exploration have been accused of human right abuses, environmental degradation and unsustainable peace due to their business culture. In Kenya, a multinational corporation that has invested in the agricultural sector has been accused of human right abuses such as killings, rape, and other forms of sexual and gender-based violence allegedly committed by its guards, bad labour practices and land injustices against the neighbouring communities. Some of these disputes have ended up in arbitration where tribunals are called upon to adjudicate on human rights issues. Arbitrators should thus seek to uphold human rights in such disputes by rendering awards that are in line with human rights standards. By promoting human rights, arbitrators will be embracing the ‘S’ pillar that is fundamental in the ESG debate.

Promoting Good Governance

The Governance pillar in ESG seeks to achieve good financial and accounting standards as well as legal and regulatory compliance, such as transparency, corporate structures and ethics in corporate conduct. It also seeks to align Governance with the Sustainable Development Goals where governance issues include industry, innovation and infrastructure (Goal 9); peace, justice and strong institutions (Goal 16); and partnerships with public and private institutions (Goal 17). Good governance can be promoted through arbitration by rendering awards that adhere to good governance practices such as transparency, accountability, reporting and disclosure.

Seeking Expert Assistance in Complex ESG Matters

Arbitration has a significant role in promoting ESG tenets in areas such as climate change. Arbitrators play a significant role in shaping and adapting international law to respond to the climate crisis. However, in some instances, arbitration has been slow to act to act in response to the climate crisis. Some climate change concerns such as determining adherence to climate change commitments through low carbon transition requires arbitrators to be fully informed and engaged in such concepts. This may require expert analysis and guidance from persons with requisite knowledge in environmental matters. Arbitrators should therefore seek expert assistance in such issues in order to be fully informed and render awards that promote ESG principles.

Conclusion

The relationship between Environmental, Social and Governance (ESG) and arbitration continues to grow. Adoption of ESG by corporations as a means of promoting responsible and ethical business practices and the wide use of arbitration in management of international commercial and investment disputes points to increased use of arbitration in management of ESG related disputes. In managing such disputes, arbitrators should promote ESG considerations whilst balancing the needs and interests of parties involved in issues such as climate change. Arbitration represents a viable mechanism for managing ESG disputes while simultaneously promoting Sustainable Development. There is need to enhance the viability of arbitration in management of ESG related disputes.

*This article is an abridged version of the Article The Place of Environmental, Social and Governance (ESG) in Arbitration by Hon. Prof.  Kariuki Muigua, OGW, PhD, Professor of Environmental Law and Dispute Resolution, Senior Advocate of Kenya, Chartered Arbitrator, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Lifetime Achievement Award 2021 (CIArb Kenya), African Arbitrator of the Year 2022, Africa ADR Practitioner of the Year 2022, Member of National Environment Tribunal (NET) Emeritus (2017 to 2023) and Member of Permanent Court of Arbitration nominated by Republic of Kenya and Academic Champion of ADR 2024. Prof. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Prof. Kariuki Muigua teaches Environmental Law and Dispute resolution at the University of Nairobi School of Law, The Center for Advanced Studies in Environmental Law and Policy (CASELAP) and Wangari Maathai Institute for Peace and Environmental Studies. He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Prof. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Managing Partner of Kariuki Muigua & Co. Advocates and Africa Trustee Emeritus of the Chartered Institute of Arbitrators 2019-2022. Prof. Muigua is a 2023 recipient of President of the Republic of Kenya Order of Grand Warrior (OGW) Award for his service to the Nation as a Distinguished Expert, Academic and Scholar in Dispute Resolution and recognized among the top 5 leading lawyers and dispute resolution experts in Band 1 in Kenya by the Chambers Global Guide 2024 and was listed in the Inaugural THE LAWYER AFRICA Litigation Hall of Fame 2023 as one of the Top 50 Most Distinguished Litigation Lawyers in Kenya and the Top Arbitrator in Kenya in 2023.

References

Amao. O., ‘Corporate Social Responsibility, Human Rights and the Law: Multinational corporations in Developing Countries.’ Routledge, 2011.

Cummins. T et al., ‘ESG Litigation – How Companies Can Get Ready, Respond and Resolve Claims’ available at https://www.emerald.com/insight/content/doi/10.1108/JOIC-07-2021-0032/full/html (accessed on 29/09/2022)

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Way Forward in Managing Risk and Liability of ESG Litigation

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By Hon. Prof. Kariuki Muigua, OGW, PhD, C.Arb, FCIArb is a Professor of Environmental Law and Dispute Resolution at the University of Nairobi, Member of Permanent Court of Arbitration, Leading Environmental Law Scholar, Respected Sustainable Development Policy Advisor, Top Natural Resources Lawyer, Highly-Regarded Dispute Resolution Expert and Awardee of the Order of Grand Warrior (OGW) of Kenya by H.E. the President of Republic of Kenya. He is the Academic Champion of ADR 2024, the African ADR Practitioner of the Year 2022, the African Arbitrator of the Year 2022, ADR Practitioner of the Year in Kenya 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021 and Author of the Kenya’s First ESG Book: Embracing Environmental Social and Governance (ESG) tenets for Sustainable Development” (Glenwood, Nairobi, July 2023) and Kenya’s First Two Climate Change Law Book: Combating Climate Change for Sustainability (Glenwood, Nairobi, October 2023), Achieving Climate Justice for Development (Glenwood, Nairobi, October 2023) and Promoting Rule of Law for Sustainable Development (Glenwood, Nairobi, January 2024)*

In order for companies to manage the risk and liability associated with ESG litigation, it is imperative for them to strengthen their ESG reporting and disclosure requirements. It has been observed that recent ESG trends have driven the requirement by businesses to report on ESG aspects such as human rights and environmental standards as evidenced by emerging legal frameworks requiring companies to report on human rights and environmental issues, emerging mandatory human rights due diligence legislation, and increased legal enforcement and litigation risks.

As a result, it is important for companies to treat public disclosures in relation to ESG matters seriously and consider taking independent auditing and verification steps, particularly for annual ESG-related reports and/or other material ESG disclosures. Such an approach can help companies effectively manage and reduce the risk of ESG related litigation.

In addition, it has been argued that there is need for companies to embrace best practices in order to mitigate the risks of ESG litigation and also address such litigation when it arises. For example, it has been suggested that companies should conduct risk assessments in order to determine the likelihood of ESG related suits and deal with such concerns immediately; undertake public engagement to order to ensure openness and transparency in ESG matters; build knowledge on ESG issues in order to be well equipped to handle ESG claims when they arise; and strengthen their management systems and internal practices in order to enhance compliance with ESG standards.

It has been observed that ESG litigation is associated with several risks to companies including regulatory and enforcement risk, reputational risk, damage to brand, potential disruption by activists and financial risks such as loss of access to capital and financial losses as a result of damages, fines and other forms of monetary compensation. It is also imperative to strengthen access to justice in ESG matters. It has been pointed out that in order for litigants to be given the right of access to courts in ESG matters, whether individually, collectively, or as a third party or amicus curiae, the criteria pertaining to standing, which differ from jurisdiction to jurisdiction, must be followed.

It is also necessary to widen and strengthen the jurisdiction of courts on ESG issues such as climate change. Further, it has been pointed out that there is need to embrace techniques such as litigation funding in order to provide the financial stability and support needed to pursue legal action without compromising on the quality of representation or legal strategy in ESG matters. It has been argued that litigation funding can be an effective strategy for needy claimants to pursue claims against a company that they may ordinarily not be able to afford, enabling them to ultimately to hold companies to account for ESG failures.

Finally, it is imperative for companies to think creatively and strategically in order to effectively resolve ESG claims. It has been pointed out that ESG claims may significantly differ from other types of litigation companies have previously faced, hence the need for creative solutions towards these claims. For example, in ESG claims, there is need to bear in mind both the litigation aspects of a dispute, and broader ESG concerns including those around reputation and access to capital. As a result, it has been suggested that there is need for companies to be alive to the potential for resolving ESG claims outside the court room, and what mitigation strategies could be deployed to avoid litigation.

Alternative Dispute Resolution (ADR) mechanisms are ideal in managing ESG disputes by fostering privacy, cost effective and expeditious management of disputes while also allowing parties to select experts to hear and determine contentious ESG matters. In addition, it has correctly been observed that businesses would normally prefer to have their disputes managed in a private manner in order to prevent ruining their image in public and also in an expeditious and cost-effective manner in order to protect business interests.

It has also been pointed out that the use of ADR mechanisms such as mediation in managing ESG related disputes is a practical demonstration of a sustainability-oriented business culture since mediation can offer a quick, flexible, consensual and win-win solution based on the mutually accepted interests of the parties. ADR mechanisms can therefore be an effective tool to enable companies manage the risks associated with ESG litigation.

*This is an extract from the Article: Fostering Environmental, Social and Governance (ESG) Litigation for Sustainability, Available at: https://kmco.co.ke/wp-content/uploads/2024/02/Fostering-Environmental-Social-and-Governance-ESG-Litigation-for-Sustainability.pdf (Accessed 2nd March 2024) by Hon. Prof.  Kariuki Muigua, OGW, PhD, Professor of Environmental Law and Dispute Resolution, Senior Advocate of Kenya, Chartered Arbitrator, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Lifetime Achievement Award 2021 (CIArb Kenya), African Arbitrator of the Year 2022, Africa ADR Practitioner of the Year 2022, Member of National Environment Tribunal (NET) Emeritus (2017 to 2023) and Member of Permanent Court of Arbitration nominated by Republic of Kenya and Academic Champion of ADR 2024. Prof. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Prof. Kariuki Muigua teaches Environmental Law and Dispute resolution at the University of Nairobi School of Law, The Center for Advanced Studies in Environmental Law and Policy (CASELAP) and Wangari Maathai Institute for Peace and Environmental Studies. He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Prof. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Managing Partner of Kariuki Muigua & Co. Advocates and Africa Trustee Emeritus of the Chartered Institute of Arbitrators 2019-2022. Prof. Muigua is a 2023 recipient of President of the Republic of Kenya Order of Grand Warrior (OGW) Award for his service to the Nation as a Distinguished Expert, Academic and Scholar in Dispute Resolution and recognized among the top 5 leading lawyers and dispute resolution experts in Band 1 in Kenya by the Chambers Global Guide 2024 and was listed in the Inaugural THE LAWYER AFRICA Litigation Hall of Fame 2023 as one of the Top 50 Most Distinguished Litigation Lawyers in Kenya and the Top Arbitrator in Kenya in 2023.

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