Climate and ESG litigation

Answers by Atie Babaie to questions from the Club de l'arbitrage

Comments collected for the Club de l'arbitrage by Iskander Harhouz

Mrs Babaie, hello and thank you for accepting our invitation. You are an international lawyer, advising organizations on cross-border commercial projects and helping them navigate disputes before state courts and arbitral tribunals. You have a special expertise in Energy, ESG and Climate Law. You current research work relates to ESG and Climate litigation.

1. What initially sparked your interest in climate and ESG litigation?

My interest in climate and ESG litigation grew from my career as legal counsel in international energy companies. I worked on cases involving environmental aspects, representing the companies in disputes with farmers, fishermen, and the environmental community, which exposed me to the inherent power imbalances in these conflicts. I realized that these cases will increase in the future and that we cannot afford to be reluctant, given their impact on human life. I became increasingly aware that we do not have efficient legal mechanisms to hold corporations accountable for their environmental impact, particularly when considering non-economic damages. The current responses are insufficient. This realization reinforced my belief that we must transition to sustainable development, and I came to understand that litigation could serve as a powerful tool in addressing global climate and ESG challenges.

2. What do you see as the most pressing challenges in resolving ESG and climate-related disputes today? 

When addressing the most pressing challenges in resolving ESG and climate-related disputes today, it's crucial to first clarify the definition of these disputes. Although ESG and climate-related issues are widely discussed in various conferences and legal forums, there is still no universally accepted legal definition. The lack of a clear and standardized definition limits the effectiveness of legal approaches and frameworks, as different interpretations can lead to varying responses.

In my view, the primary challenges lie in several interconnected areas. First, there are inherent power imbalances between corporations and affected communities, which often complicate the pursuit of justice. These disputes frequently arise from systemic inequities, and resolving them requires not only legal expertise but also a nuanced understanding of the underlying social and environmental dynamics.

Second, engaging marginalized communities in legal processes remains a significant challenge. These communities often lack the resources and confidence to navigate complex legal systems, making it challenging to ensure their voices are heard and prioritized.

Another key challenge is the inability to fully anticipate the long-term impacts of environmental damage, particularly the non-economic damages that may not be immediately visible but have profound consequences in the future. The current legal framework struggles to adequately address these future harms, and this gap creates an ongoing difficulty in resolving such disputes in a manner that truly reflects the scale and complexity of the issues at hand.

Finally, the tension between the rigidity of legal systems and the fluid, non-linear nature of community engagement further complicates the development of effective, inclusive strategies. Creating legal responses that can adapt to the dynamic and often unpredictable nature of ESG and climate-related challenges requires a more flexible and forward-thinking approach. This is essential to ensuring that justice is served and that the voices of affected communities are not only heard but are integral to the resolution process.

3. How well do you think arbitration is currently equipped to handle ESG and climate-related disputes? 

Arbitration, while a valuable tool for resolving disputes, is currently not fully equipped to handle the complexities of ESG and climate-related disputes. Its private nature, with a strong emphasis on confidentiality, can limit transparency and make it less accessible to affected communities and stakeholders, such as NGOs, who may not have the resources to participate in the process. While arbitration is referenced in related conventions, such as the UNFCCC and the Paris Agreement, it remains somewhat of a silent voice in these agreements, with its potential not yet fully realized.

However, arbitration does have the potential to evolve to better address these issues. By adopting procedural changes, such as increasing transparency and incorporating tools like amicus curiae briefs, arbitration could strike a more effective balance between the private interests of the parties involved and the broader public interest. These adjustments would make arbitration more accessible and inclusive, allowing it to play a more prominent and impactful role in resolving ESG and climate-related disputes.

4.  In your view, what are the advantages and limitations of using arbitration to resolve such disputes compared to litigation or other mechanisms? 

Arbitration offers several advantages, such as neutrality, flexibility, and the ability to select arbitrators with specialized expertise in ESG and climate issues. These qualities make arbitration an attractive option for resolving complex disputes in this area. However, as mentioned before,  its private nature can also present limitations, particularly in terms of reducing transparency and restricting access for marginalized communities or stakeholders who may lack the resources to engage in the process.

In contrast, national or international court litigation can offer greater public accountability, as court proceedings are typically more open and transparent. However, litigation tends to be slower and more rigid, and it may struggle to accommodate the multiparty nature of many ESG and climate-related disputes.

Other mechanisms, such as mediation, offer a more collaborative approach that can be more favorable to affected communities and stakeholders. Mediation can provide a platform for dialogue and joint problem-solving, but it lacks the binding authority that arbitration possesses, meaning it may not always result in enforceable outcomes. Each of these mechanisms has its strengths and weaknesses, and the challenge lies in selecting the most appropriate one based on the specific circumstances of each dispute.

5. Some critics argue that arbitration is too private and inaccessible, particularly for stakeholders like NGOs or affected communities. How could arbitration evolve to better accommodate these concerns in ESG cases?

Arbitration could evolve by incorporating procedural tools such as amicus curiae briefs and ensuring greater transparency. These changes would allow stakeholders like NGOs and affected communities to have a more meaningful role in the process. Additionally, making arbitration awards publicly available and encouraging dialogue about the process would enhance transparency and help ensure that ESG issues are addressed in a more inclusive and effective manner

6. Do you think procedural tools such as amicus curiae and transparency rules should be generalized in ESG arbitration?

Yes, I believe that procedural tools like amicus curiae briefs and enhanced transparency rules should be more widely used in Climate Change and ESG arbitration. These tools would allow third-party stakeholders, such as civil society organizations and affected communities, to offer valuable insights into the environmental and social impacts of disputes. However, it's important to note that these stakeholders cannot be parties to the cases themselves, and their involvement would be as friends of the court, not as active participants with decision-making power. Their role would be to assist the court by providing relevant expertise and perspectives, helping ensure that all dimensions of the dispute are considered.

Increased transparency would also be crucial, as it would help build public trust in the arbitration process, making it more open and accountable. By ensuring that arbitration is more inclusive and transparent, these tools would contribute to making ESG and climate-related arbitration a legitimate and trusted mechanism for resolving disputes, while also empowering marginalized voices without granting them the full power of party status.

7. Do you see international arbitral institutions having a role in shaping the future of ESG dispute resolution? If so, what role would that be? 

   
   

International arbitral institutions have a crucial role to play in shaping the future of climate change and ESG dispute resolution, particularly if they modify procedural rules to genuinely consider cases with public interest aspects. These changes would allow arbitration to better reflect the broader societal and environmental impacts of such disputes. By incorporating ESG principles into standardized procedural rules, these institutions could ensure that arbitration addresses not just the private interests of the parties involved but also the collective interests of communities and the environment.

Additionally, arbitral institutions could foster real diversity in the process by encouraging the inclusion of a wider range of stakeholders, including affected communities, civil society organizations, and experts from diverse fields. This approach would allow arbitration to move beyond mere rhetoric of inclusivity and truly reflect the public interest. Modifying procedural rules to make arbitration more inclusive, transparent, and participatory would ensure that these disputes, which affect entire communities and the planet, are resolved in a way that serves the common good, not just private or corporate interests. Such reforms would help arbitration become a more effective and equitable mechanism for addressing the urgent global challenges posed by climate change and ESG concerns.

8. How can States navigate the tension between their obligation under BITs and their international commitments under climate change agreements like the Paris Agreement? 

States can navigate this tension by negotiating treaties that explicitly allow for exceptions or carve-outs for environmental protection and climate change commitments, and this is the place where we need a proper definition of what climate change commitments are. This approach would enable states to balance their obligations under BITs with their international commitments to climate change without fearing that regulatory actions will result in investment claims. More precise language in treaties that recognize the right to regulate for environmental protection is essential to overcoming this tension.

9.  How do you interpret the shift in recent BITs or model treaties that increasingly integrate ESG references or carve-outs for environmental protection? Are these developments sufficient to prevent regulatory chill? On the other hand, are they susceptible of creating some sort of disincentive for investors? 

The shift towards incorporating ESG references and environmental carve-outs in recent BITs is a positive development. These provisions help reduce the risk of regulatory chill, giving states more room to regulate for public health and environmental protection. However, these clauses might create some disincentive for investors who fear that such regulations could negatively impact their profits. Striking a balance between protecting investor rights and enabling states to pursue sustainable development goals is crucial to ensuring both economic growth and environmental protection.

10. How can arbitral tribunals balance environmental considerations with investor protection under the current legal framework? 

Arbitral tribunals can balance environmental considerations with investor protection by interpreting investment treaties in a way that allows states to regulate for environmental protection without infringing on investors’ rights. Tribunals should ensure that states have sufficient regulatory space to meet their climate commitments and protect public welfare, while also considering the legitimate interests of investors. This balance can be achieved through proportionality, ensuring that environmental regulations are not overly burdensome to investors.

However, achieving this balance requires a multidimensional approach. Arbitrators must be equipped with not only legal expertise but also an understanding of science and environmental policy. With the complex and evolving nature of climate change and environmental issues, it is essential that arbitrators have the ability to interpret treaties based on the unique facts of each case, incorporating scientific data and environmental considerations into their legal analysis.

To foster this, we could encourage the creation of specialized forums or panels with a balanced view, where arbitrators with diverse backgrounds—including legal, scientific, and environmental expertise—can investigate and adjudicate cases that specifically focus on climate change and environmental aspects. This interdisciplinary approach would allow for a more nuanced and well-rounded interpretation of treaties, ensuring that both environmental protection and investor rights are considered fairly and equitably in resolving disputes.

11. ESG and climate change are timely topics with urgent, real-world consequences, and yet they remain surrounded by significant legal uncertainty. What advice would you give to young lawyers who want to build a meaningful career in ESG-related legal practice? 

In today’s rapidly evolving landscape, ESG and climate change are pressing issues with far-reaching real-world consequences. As the legal field faces significant uncertainty in these areas, it’s clear that lawyers can no longer afford to think purely in legal terms. To effectively address these challenges, we need an interdisciplinary approach that goes beyond traditional legal training.

My advice to young lawyers aiming to build a meaningful career in ESG-related legal practice is to adopt a multidimensional mindset. Stay informed not only about developments in environmental law but also in fields like economics, social sciences, sustainability, and international relations. Understanding the intersection of law with policy, science, and the lived experiences of affected communities will provide a broader vision and a more nuanced understanding of the complex issues at play.

Seek opportunities to engage with cross-border projects that involve collaboration across various sectors, and gain hands-on experience in areas such as sustainable finance, climate risk management, and corporate accountability. Additionally, building a diverse network of experts from different fields will help you stay ahead of the curve. This interdisciplinary knowledge and broad perspective are essential to navigate the complexities of ESG and climate-related legal practice and to contribute to solutions that foster sustainability and social justice.