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ESG and Sustainable Investment in Africa: Promises and Pitfalls

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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)*

ESG tenets are vital in enhancing sustainable investment in Africa. The African Union points out that the concept of ESG is increasingly become an important factor in determining the competitiveness of businesses as they serve the society in which they operate with a critical focus on the sustainability of their activities. It further points out that Africa is not an exception to this evolving trend. The African Union further states that ESG requirements are vital in accessing finance and markets in Africa.

It has been argued that a strong approach towards ESG in Africa is necessary in order to create value by laying the foundation for sustainable investing, continued government and community support, and access to investment capital and world-class partners, which will better position the continent for long-term profitability and impact.

It has also been argued that African organisations simply cannot afford to downplay the importance of ESG tenets. Africa continues to face environmental, economic and social development problems including climate change, poverty, food insecurity, water scarcity, health challenges, energy crisis, environmental degradation, high debt distress risks among others which are major threat to the Sustainable Development agenda.

African organizations and Multinational Corporations (MNCs) play a major role in addressing these challenges and fostering Sustainable Development in Africa through investments in key sectors such as agriculture, health, energy, education, infrastructure among others. As a result, it has been observed that African business leaders have the opportunity to drive effective ESG strategies towards sustainability.

African organisations can help to build trust in their societies and deliver sustained business outcomes by implementing effective ESG strategies. It has correctly been asserted that businesses in Africa cannot succeed if their societies fail. Sustainable investments are of vital importance in Africa in light of global challenges including the climate crisis and the aftermath of the COVID-19 pandemic.

It has been pointed out that recent global shocks have amplified investment barriers in Africa by lowering investor confidence and worsening information shortages while increasing the cost of capital in Africa more than in other regions of the world. For example, it has been pointed out that as result of unfavourable country credit ratings and heightened risk aversion among international investors, the costs of public and private capital are far above global averages in many African countries, especially in the renewable energy sector.

Sustainable investments are essential to steer Africa’s productive transformation towards inclusion and resilience. It has been noted that there is a growing awareness that sustainable investing can tackle the environmental, social and economic challenges in Africa and that the resulting economic growth will be sustainable, benefitting investors and African citizens in the long run.

To this end, it has been argued that integrating ESG factors into investment is particularly important for developing countries, which have limited resources to adapt to urbanization and supply side shocks in the market. Adopting ESG tenets can therefore unlock sustainable investment in Africa. ESG can help Africa realize sustainable investments. It has been pointed out that ESG considerations are taking centre-stage in all discussions of sustainability and becoming an important benchmark for funding assessments across the world.

Firms in Africa can embrace ESG and incorporate its demands into their operations in order to attract critical sustainable investments. It has been argued that ESG considerations will have an increasingly important impact on the investment landscape in Africa. As a result, it has been contended that firms in Africa big and small will experience increased demands and expectations regarding how they conduct business hence the need to adopt ESG for sustainable investments in Africa.

It has been argued that Africa has immense potential to adopt ESG for sustainable investments. Africa Union’s Agenda 2063 enshrines the ideal of a prosperous Africa, based on inclusive growth and Sustainable Development. Agenda 2063 seeks to achieve Sustainable Development in Africa through various strategies including fostering intra-African investments. Agenda 2063 presents a case for sustainable investments in Africa by advocating for corporate social and environmental investments.

It has further been argued that Africa can leverage on the African Continental Free Trade Area (AfCFTA) to promote sustainable investing and green transition in the continent. AfCFTA seeks to achieve certain objectives including creating a single market for goods, services, facilitated by movement of persons in order to deepen the economic integration of the African continent. It has been argued that the AfCFTA will be a game changer, creating the world’s largest free trade area and a single market for goods and services worth $3.4 trillion for more than 1.3 billion Africans.

The United Nations opines that AfCFTA is appropriately designed to deepen integration, foster trade and investment, enhance the mobility of capital and labour, support industrialization, and the development of a dynamic services sector. At its full realization, the AfCFTA with the mandate of eliminating trade barriers, will be the largest free trade area in the world bringing together the 55 countries. It has been argued that the AfCFTA Protocol on Investment presents a unique opportunity for African countries to attract and promote investments in green sectors that support green transition.

The Protocol provides several mechanisms for African countries to achieve green transition and sustainable investment. These mechanisms include promoting investment in green sectors, facilitating technology transfer, developing green investment standards and encouraging regional cooperation. The AfCFTA can therefore be a catalyst of sustainable investments in Africa which embrace ESG tenets.

In addition, Africa is also endowed with an abundance of natural resources which presents numerous opportunities for sustainable investment. It has been observed that with its massive deposit of oil, gas and mineral resources, Africa is the world’s fastest-growing region for Foreign Direct Investment.

The United Nations further opines that Africa is rich in natural resources ranging from crude oil, natural gas, minerals, forests and wildlife which holds the key for social and economic development in the continent. It asserts that measures such as sustainable investments can serve to reverse the losses from natural capital to help the continent free resources that can finance implementation of development agendas.

African countries can adopt ESG for sustainable investment in their natural resources. For example, it has been pointed out that Africa is seeing increased investment in renewable energy and infrastructure projects, which align with ESG goals. Solar and wind energy projects, for instance, not only address environmental concerns but also contribute to expanding access to clean energy in the region. Africa therefore has the potential to adopt ESG for sustainable investing. However, adopting ESG for sustainable investing in Africa faces certain hurdles.

It has been contended that the African investment reality is marked by the dominance of extractive industries, high exposure to climate change and pressing developmental needs. The dominance of extractive industries poses a clear obstacle to the rise of ‘green’ investment strategies on the continent. For example, investment strategies by some Multinational corporations in the extractives sector in Africa have been accused of flouting ESG requirements by resulting in environmental concerns including the extinction of biodiversity, contamination and destruction of soil and air pollution as a result of oil spillages and social challenges including gross human rights violations and land injustices. Such practices have had an impact on economic activities, social-cultural life and human health of the affected people thus hindering the attainment of Sustainable Development within the ESG framework in Africa.

In addition, it has been argued that there are significant barriers in the form of: poor infrastructure, weak regional infrastructure links, limited access to market information, failure of regulation, and small domestic markets hindering the adoption of ESG for sustainable investments in Africa. As a result, it has been argued that Africa’s sustainable financing and investment gap remains small in global comparison. Addressing these challenges calls for the adoption of ESG principles for sustainable investment in Africa.

*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.

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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.

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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)

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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).

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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.

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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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