In March 2023, the Institute for Transnational Arbitration (“ITA”) held its third session in a series of conferences focusing on ESG in practice.  These virtual conferences are part of the first online program series of the Americas Initiative Dialogues.  The third session’s panel was composed of Vanessa Silveyra de la Garza (Director of Sustainability and Customer Service at ALEATICA) and Isabel Barba Menchen (Quality and Environmental Manager at SACYR), with Christian Conejero (Partner at Cuatrecasas, Santiago) acting as moderator.  The panelists discussed Environmental, Social and Governance (ESG) factors and risks in the context of the infrastructure and construction sector.  The Panel focused on how ALEATICA and SACYR have adapted their respective business strategy to sustainability practices.  The Panel shared their insights and the challenges and opportunities they face in their industries, which could enlighten practitioners when ESG disputes arise on how to mitigate risks and de-escalate them.

Almost two decades have passed since the seminal “Who Cares Wins” Conference1The term ESG was first coined in the Who Cares Wins 2005 Conference Report entitled Investing for Long-Term Value Integrating Environmental, Social and Governance Value Drivers in Asset management and Financial Research. Who Cares Wins Conference, Investing for Long-Term Value: Integrating Environmental, Social and Governance Value Drivers in Asset Management and Financial Research (Oct. 26, 2005).X1 and sustainability, as well as ESG factors, have indeed become a strategic imperative for companies.2EY Sustainability and ESG Leaders Share Insights on how Organizations can Embed Sustainable Business Practices into their Operations, EY, https://www.ey.com/en_us/sustainability/esg-evolution.X2  As a matter of fact, in today’s world, it is not enough for a product or service to just be “good.”3Ari D. Mackinnon & Martin Vainstein, The Rise of ESG Disputes and the Role of Arbitration in Resolving them, FINANCIER WORLDWIDE, Dec. 2022, at 91, 92, available at https://docs.financierworldwide.com/magazine/FWDEC22_yjb748jso763_digital/#page=94.X3  Regulators and other stakeholders now demand that the product or service meet certain ESG standards.4Id.X4

Investors, as one of these stakeholders, are increasingly paying more attention to ESG standards when investing.5Jane Courtnell, ESG Reporting Preparation Guide: What is ESG Reporting?, GREEN BUS. BUREAU, June 2, 2022, https://greenbusinessbureau.com/business-function/finance-accounting/esg-reporting-what-is-esg-reporting/.X5  The so-called “socially responsible investing” (“SRI”) or “sustainable investing” is indeed growing and is estimated at over $20 trillion in AUM or around a quarter of all professionally managed assets around the world.6Georg Kell, The Remarkable Rise of ESG, FORBES, July 11, 2018, https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/.X6  As such, ESG standards have become vital for business success, compelling corporations to encompass non-financial interests in their operations,7Barnali Choudhury, Serving Two Masters: Incorporating Social Responsibility into the Corporate Paradigm, 11 U. PA. J. BUS. L. 631, 652 (2009).X7 which nonetheless have financial relevance.8Kell, supra note 6.X8  Given that ESG standards are vital for business success, they require effective governance to mitigate external business risk.9Courtnell, supra note 5.X9 

As both panelists acknowledge, the mitigation of these external risks through compliance with ESG policies is deeply important for the infrastructure industry.  The infrastructure industry is the backbone of economic development as it sits at the very center of development pathways and is closely linked to economic growth, environmental outcomes and well-being.10OECD, OECD Reference Note on Environmental and Social Considerations in Quality Infrastructure (June 2019), available at https://www.oecd.org/g20/summits/osaka/OECD-Reference-Note-on-Environmental-and-Social-Considerations.pdf.X10  But it is no secret that it can also have a considerable impact on the environment and local communities.11A study titled Infrastructure for Climate Action, published by UNOPS, UNEP and the University of Oxford, highlights that the infrastructure industry is responsible for 79% of all greenhouse gas emissions and 88% of all climate adaptation costs. UNOPS et al., Infrastructure for Climate Action (2021), available at https://content.unops.org/publications/Infrastructure-for-climate-action_EN.pdf?mtime=20211008124956&focal=none. X11  Work in the infrastructure or construction sector often involves the use of natural resources, such as land and water,12Sustainable Infrastructure Tool Navigator, Resource Efficiency: How to Reduce the Footprint of Infrastructure, https://sustainable-infrastructure-tools.org/resource-efficiency/.X12 and can result in the displacement of communities and entire ecosystems.13Korinna Horta, Paying the Price for Development, D+C, Aug. 20, 2020, https://www.dandc.eu/en/article/when-people-are-displaced-make-room-large-scale-development-projects-trauma-and.X13  Therefore, and as both panelists agree, it is crucial to incorporate ESG standards in the industry since ESG policies are seen as a necessary investment to mitigate external risks.

The infrastructure industry, like other industries, is dependent on various stakeholders.1Neil Gunningham, Corporate Environmental Responsibility: Law and the Limits of Voluntarism, in THE NEW CORPORATE ACCOUNTABILITY: CORPORATE SOCIAL RESPONSIBILITY AND THE LAW 476, 480 (Doreen McBarnet et al. eds., 2007).X1  These stakeholders form part of what Neil Gunningham referred to as the different “licenses to operate.”2Id. X2  This concept encapsulates the idea that business is dependent upon and has relationships with different stakeholders that form part of the different licenses to operate.3Id. X3  Therefore, to better understand corporate social responsibility (“CSR”) and ESG policies, a starting point is to stress that ESG can largely be explained by how corporations interpret and react to risks, external pressures and drivers.4Neil Gunningham, Environmental Law, Regulation and Governance: Shifting Architectures, 21 J. ENV’T L. 179, 195 (2009).X4 

These licenses to operate are profoundly intertwined in the sense that they interact with each other.  They sometimes pull in different directions, which is usually the case with the economic license,5Lisa Benjamin, The Responsibilities of Carbon Major Companies: Are they (and is the Law) Doing Enough?, 5 TRANSNAT’L ENV’T L. 353, 359 (2016).X5 but they often gain strength through their interaction.6Gunningham, supra note 14, at 482. X6  A few examples may illustrate this point.

There is an obvious interaction between the social license, composed of social stakeholders, such as communities, consumers and activists, and the corporation’s economic license to operate.  This is discussed by the panelists, as they recognize that it is crucial for their corporations to have the social license in order to properly operate.7Id.X7  But if companies fail to respond adequately to the social license, aside from the economic impact such failure entails, these companies also risk a tightening of their regulatory license, as frustrated community activists usually turn to politicians and regulators for help, calling for stricter legislation and sanctions.8Id. at 485. X8  In turn, the legal license can expand the social license by imposing mandatory ESG reporting as opposed to voluntary, market-based ESG reporting.9Market-based reporting has been criticized for multiple reasons including: the influence of the four market-leading rating companies that compete among themselves to provide ESG metrics; the disparities of the components of ESG performance indicators; the multiplicity of ESG standard-setting initiatives, which cause “option overload” for companies; the quality of the information provided by companies; industry sector bias; and the overall failure to identify risks by the aforementioned methodologies, which can mislead investors and materially affect investment decisions. See Javier El-Hage, Fixing ESG: Are Mandatory ESG Disclosures the Solution to Misleading ESG Ratings?, 26 FORDHAM J. CORP. & FIN. L. 359 (2021). See also Timothy Doyle, The Big Problem with “Environmental, Social and Governance” Investment Ratings? They’re Subjective, INVS. BUS. DAILY, Aug. 9, 2018, https://www.investors.com/politics/commentary/the-big-problem-with-environmental-social-and-governance-investment-ratings-theyre-subjective/; Dennis T. Whalen, It’s Time to Reassess ESG and Sustainability Reporting, NACD BOARDTALK, Oct. 28, 2019, https://blog.nacdonline.org/posts/reassess-sustainability-reporting.X9  This not only compels companies to adopt a more positive approach to ESG, it also allows the disclosed standards to become more consistent and comparable.10See Cynthia A. Williams & Jill E. Fisch, Petition for Rulemaking on Environmental, Social, and Governance (ESG) Disclosure (Oct. 1, 2018), available at https://www.sec.gov/files/rules/petitions/2018/petn4-730.pdf. X10  The disclosed standards provide social actors and other stakeholders, such as investors, banks and credit institutions, with the legal framework and appropriate standards to access information on ESG compliance.11Gunningham, supra note 14, at 482. X11  This information is in turn used by these stakeholders not only in their decision to invest but also to grant preferential rates and better financing conditions.  This is extremely important for infrastructure projects because they require considerable investment efforts and financing, thus affecting the economic license.

The aforementioned are just some examples of the interplay of the different licenses to operate.  These examples help to provide context for the discussion that follows on how these companies operate in practice.

As mentioned, understanding the inherent dynamics and interplay between the external pressures or drivers is key for comprehending how ESG initiatives are adopted.  Considering the different stakeholders and including them in the discussion process is essential for determining which ESG policies to adopt.

Both panelists approach this issue through a materiality analysis.  Materiality assessment is understood as “the process of identifying, refining, and assessing numerous potential environmental, social and governance issues that could affect a business, and/or its stakeholders, and condensing them into a short list of topics that inform the company strategy, targets, and reporting.”1KPMG, SUSTAINABLE INSIGHT: THE ESSENTIALS OF MATERIALITY ASSESSMENT (2014), available at https://assets.kpmg.com/content/dam/kpmg/pdf/2014/10/materiality-assessment.pdf.X1  This type of analysis enables the elaboration of effective ESG policies that incorporate and mitigate ESG risks while focusing their resources accordingly.   

For Isabel Barba, the key issues identified after conducting SACYR’s materiality analysis were climate change; energy efficiency; corporate ethics; and good relations between analysts and stakeholders.  Based on these three main issues, SACYR elaborated its sustainability plan to include environmental, social and governance measures.  This plan includes measures such as diminishing CO2 emissions and neutralizing carbon footprint, circular economy,2Circular economy is a model of production and consumption that involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products for as long as possible. This allows the life cycle of products to be extended. Circular Economy: Definition, Importance and Benefits, NEWS EUR. PARLIAMENT, May 24, 2023, https://www.europarl.europa.eu/news/en/headlines/economy/20151201STO05603/circular-economy-definition-importance-and-benefits#:~:text=The%20circular%20economy%20is%20a,reducing%20waste%20to%20a%20minimum.X2 increasing the number of women in leadership roles social action and investing in the development of its workers, who in turn usually prefer to work in ESG-committed companies.  The plan likewise encourages all operations to abide by good corporate ethics, elaborating codes of conduct to that effect.

Vanessa Silveyra, who describes her company as “agents of welfare,” states that ALEATICA also conducts a materiality analysis to flag key ESG issues and allocate resources and efforts accordingly.  The process involves the participation of communities and other stakeholders to identify the issues that are truly relevant to those participants.  As with SACYR, climate change, corporate governance and human rights surfaced as the most important matters.  Ms. Silveyra stressed the importance of designing a global sustainability strategy tailored not only to the needs of the company as a whole, but also to the needs of its different business units in order to gain precision and better allocate resources to key issues.  She also emphasized the importance of constructing resilient structures, adapted to climate change and severe weather phenomena which only serves to demonstrate how environmental issues such as climate change must be incorporated in the different aspects of an infrastructure company’s activities.

This inevitably leads to the conclusion that organizations can get the most benefit from their materiality analysis by using it as an opportunity to apply a sustainability lens to business risk, opportunity, trend-spotting and enterprise risk management processes.3Id. X3  The better view, as both panelists agree, appears to be that ESG planning should be an integral part of the business, rather than a separate, isolated process.

Given that the expertise of both panelists falls outside the scope of dispute resolution, arbitration and other forms of dispute resolution was barely touched upon by the panel.  Nonetheless, the panelists agreed that it is in their respective company’s best interest to avoid ESG-related disputes altogether.  This is not only because of the legal consequences such disputes entail, but also because nowadays, more than ever, the risk of reputational harm is tremendous.  As ESG is increasingly important for different stakeholders, the importance of preventing these disputes by actively engaging in ESG practices is fundamental.  Similarly, it is important for companies to responsibly report their ESG frameworks and standards in order to avoid the reputational harm that a mismatch or false information of ESG performance could cause.

Despite the fact that the panelists do not focus much on dispute resolution mechanisms, they nevertheless conclude that as the importance of ESG in corporate policies and investment decisions increases, so too will the number of disputes arising out of ESG-related issues.1Holly Stebbing & India Furse, ESG Disputes in International Arbitration, LEXOLOGY, Dec. 1, 2022, https://www.lexology.com/commentary/arbitration-adr/international/norton-rose-fulbright/esg-disputes-in-international-arbitration.X1 

Prior to briefly discussing this issue, a distinction should first be drawn between commercial arbitration and investment arbitration. 

A. Commercial Contract Claims

One can foresee that the inclusion of ESG standards and commitments in concession bids and infrastructure contracts, especially after the pandemic, will certainly influence the number of ESG-related disputes.  In this context, the panelists confirm this tendency, as they see an increasing trend in concession bids that incorporate ESG policies.  For example, and as mentioned by Isabel Barba, bids today increasingly require the companies to calculate and inform the irruption of their carbon footprint, which entails not only the carbon footprint of their activities but also of the materials used in the project and the whole supply chain, including transportation.  This elevates the responsibility of construction companies who now must scrutinize and take into account all parts of the construction cycle.

On the other hand, companies such as SACYR and ALEATICA incorporate ESG standards in their supplier contracts, enhancing their due diligence commitments to ESG standards throughout the entire supply chain.

But contracts are not the only source of ESG commitments; legislation is also moving towards the mandatory inclusion of ESG policies.  An example is the German Supply Chain Due Diligence Act, recently in force, which imposes heavy diligence obligations on companies regarding ESG standards in the supply chain.2The New German Supply Chain Due Diligence Act (LkSG) – What Needs to be Done, RÖDL & PARTNER, Jan. 2, 2023, https://www.roedl.com/insights/supply-chain-act-due-diligence-obligations. X2 

The aforementioned, will certainly lead to disputes concerning novel issues of interpretation, enforceability and measurement of compliance with ESG-related provisions.  It will also impact disputes relating to breaches of contract claims for non-performance of ESG-related obligations or overstated ESG-related representations or warranties.3Stebbing & Furse, supra note 28. X3 

In terms of overstated ESG representations and warranties, the issue of greenwashing4“Greenwashing is the act of exaggerating the extent to which products or services take into account environmental and sustainability factors. Funds and advisers that engage in greenwashing may exaggerate or overstate the environmental and sustainability practices or factors considered in their investment products or services, while labeling and marketing themselves in a manner that makes it difficult for investors to distinguish them from funds and advisers that are truly using environmental and sustainability strategies.” Greenwashing, INVESTOR.GOV, https://www.investor.gov/introduction-investing/investing-basics/glossary/greenwashing.X4 is mentioned by the panelists as an attempt of some companies to capitalize on the growing demand for environmentally sound products.5Josie Moore, What is Greenwashing and what can you do About it?, WORKFORCLIMATE,https://www.workforclimate.org/post/what-is-greenwashing-and-what-can-you-do-about-it?gclid=Cj0KCQjwi46iBhDyARIsAE3nVrYAwT6wKi54WRPbRTcU4nxX8vQQ2qQQ3jBG0598ASWqnGVd7CeGgtYaAqPvEALw_wcB.X5  This will certainly give rise, as it already has, to disputes as well as sanctions for companies that incur in misleading statements and inaccurate reporting of their ESG policies.6In the United States most of these claims are under SEC Section 10(b). See Sue Choi, ESG Metrics: Safeguard Against Greenwashing or Safe Harbor for Greenwashing?, 14 GEO. WASH. J. ENERGY & ENV’T L. 27 (2023). X6  Greenwashing can be perceived as another reason to impose mandatory ESG reporting obligations.  This is because mandatory ESG reporting can further a more uniform methodology, which could overcome some of the market-based reporting shortcomings, such as the enabling of greenwashing practices.7Id.X7 

Given the international component of most of these disputes, and as many companies now include ESG-related provisions in their contracts to operate globally, international arbitration could become the natural forum choice for the resolution of disputes with ESG components.8Stebbing & Furse, supra note 28.X8  The fact that the parties can select arbitrators with experience and competence in ESG-related issues, and the fact that arbitration can respond to urgent matters that require relief through injunctions, provisional measures or emergency arbitrations, only reinforces international arbitration as an appropriate mechanism to resolve ESG-related disputes.9Mackinnon & Veinstein, supra note 3, at 93.X9 

B. Investment Treaty Claims

New international investment treaties and revised, existing treaties increasingly include human rights, due diligence and environmental obligations as well as other ESG-related substantive protections.10Id.X10  This could certainly give rise to novel claims and defenses in Investor-State Dispute Settlement (“ISDS”), with more claims being brought by, rather than against, states.11Stebbing & Furse, supra note 28.X11  States being entitled to bring claims (or counterclaims) against investors for ESG failures, and the dilution of investor protection where that protection conflicts with a state’s ESG objectives, are just a few examples.12Id.X12  Latin America, in particular, could be a point of interest, given that it is home to half of the world’s biodiversity and has seen environmental issues rise in the context of investor-state disputes.13Jack Ballantyne, GAR Live Miami: Has the ESG Era Already Begun?, GLOB. ARB. REV., May 27, 2022, https://globalarbitrationreview-com.proxygt-law.wrlc.org/article/gar-live-miami-has-the-esg-era-already-begun.X13 

Issues involving corruption, which entails a company’s good governance, have long been a part of investor-state disputes.  It is not uncommon for states and sometimes investors to resort to corruption defenses or claims in ISDS.  As corruption is viewed as against public policy, the issue has been raised as an illegality of the investment, as affecting the arbitral tribunal’s jurisdiction or as resulting in a denial on the merits of the claim, if the investment was procured or tainted by corruption.14See ALOYSIUS P. LLAMZON, CORRUPTION IN INTERNATIONAL INVESTMENT ARBITRATION (2014).X14  The recent Odebrecht scandal,15Odebrecht is one of the companies caught in Operacao Lava Jato, Brazil’s corruption probe into the state oil giant Petrobras. Dozens of companies acknowledged paying bribes to politicians including former president Dilma Rousseff and Michel Temer and other officials in exchange for contracts with Petrobras. Corruption cases were not limited to Brazil but also expanded to other Latin American countries where Odebrecht did construction business, such as Peru. In Peru, an arrest warrant was issued against former President Alejandro Toledo who was recently extradited back to Peru. The case gained notoriety after 2015 when the group’s chief executive, Marcelo Odebrecht, was arrested and sentenced to 19 years of prison. Since then, the group’s officials have admitted to various acts of corruption all over Latin America. Odebrecht was penalized for more than US $3.5 Billion dollars globally with a US $1.78 Billion-dollar penalty imposed under the Foreign Corrupt Practices Act (“FCPA”). Odebrecht’s corruption scandal was so big that it had to change its corporate name to Novonor. See Daniel Gallas, Brazil’s Odebrecht Corruption Scandal Explained, BBC NEWS, Apr. 17, 2019, https://www.bbc.com/news/business-39194395. X15 which occurred precisely in the infrastructure industry, proves it is especially vulnerable to these practices.  Notwithstanding, the increased attention to ESG issues by corporations and their adoption of anti-corruption programs could mean that in the future, allegations of corruption feature less frequently in investment arbitration.16Alison Ross, We Need to Talk About ESG, GLOB. ARB. REV., Apr. 19, 2022, https://globalarbitrationreview-com.proxygt-law.wrlc.org/we-need-talk-about-esg.X16 

C. Mediation and Dispute Resolution Prevention

Given the nature of ESG-related disputes, dispute resolution boards and mediation emerge as viable, cost-effective solutions to prevent and de-escalate such disputes.  On the one hand, the high and long-term impact of infrastructure projects in local communities exposes the projects to constant tensions, not only with local communities but also with other social stakeholders such as Non-Governmental Organizations (NGOs) or other interest groups.  These tensions could be dramatically reduced not only by the incorporation of ESG policies, as the panelists stress, but also through mediation mechanisms that incorporate the relevant actors and help balance the various interests in a sustainable and satisfactory manner.17Dr. Victoria R. Nalule, 6th ICC Africa Conference on International Arbitration, 3 ICC DISP. RESOL. BULL. 61 (2022), available at https://jusmundi-com.proxygt-law.wrlc.org/en/document/publication/en-6th-icc-africa-conference-on-international-arbitration.X17  On the other hand, as Christian Conejero points out, dispute boards can also serve to prevent and resolve ESG-related disputes at an early stage.  Dispute boards have been quite relevant in the infrastructure and construction industry, as their natural function is to assist parties in resolving or avoiding disputes and, ideally, preventing such disputes from escalating.18Aceris Law LLC, Dispute Boards and International Construction Arbitration, ACERIS L., June 7, 2020, https://www.acerislaw.com/dispute-boards-and-international-construction-arbitration/.X18  After all, it makes perfect business sense to avoid conflict.  As both panelists emphasize, good relations with the different stakeholders are crucial for infrastructure projects.

ESG, much like CSR, implies “a shift in the focus of corporate responsibility from mere profit maximization for shareholders to a broader spectrum of stakeholders, including community concerns like the protection of the environment and accountability on ethical as well as legal obligations.”1Doreen McBarnet, Corporate Social Responsibility Beyond Law, Through Law, for Law: The New Corporate Accountability, in THE NEW CORPORATE ACCOUNTABILITY: CORPORATE SOCIAL RESPONSIBILITY AND THE LAW 9, 9 (Doreen McBarnet et al. eds., 2007).X1  In that vein, ESG standards have become vital for business success.  As such, today they fall within the fiduciary duties of managers, overcoming old paradigms that traditionally excluded them.2The traditional view, as advanced by Milton Friedman’s school of thought, compared the legal obligation of managers to stewardship for the owners of the company. Their obligation is to focus on profit maximization, constrained only by the need to comply with regulations imposing particular duties. Going beyond these particular duties would mean acting beyond their legal powers (ultra vires), in breach of their fiduciary duties and powers. See Milton Friedman, A Friedman Doctrine - The Social Responsibility of Business is to Increase its Profits, N.Y. TIMES, Sept. 13, 1970, https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html.X2  Today, more and more corporations are compelled to encompass non-financial interests, which nonetheless have financial relevance.

The infrastructure industry is no exception.  The dialogue initiated by ITA on ESG in the practice of arbitration sheds light on the importance of incorporating ESG standards in the infrastructure and construction industry.  Given the infrastructure sector’s close link with economic development and its potentially high environmental and social impact, it requires effective governance and strategic planning to mitigate external business risks by incorporating ESG standards.

Overall, this dialogue provides insights and opportunities for practitioners to better understand how ESG policies are thought out and implemented in the infrastructure industry.  It also offers a window into the future.  As mentioned, there is a growing demand for ESG standards in concession contracts and bids, as well as an increasing inclusion of ESG standards in construction and infrastructure contracts and a progressive inclusion of ESG-related obligations in international treaties.  This certainly plants the seed for ESG-related disputes to be resolved by arbitration and other forms of alternative dispute resolution, which will grow and blossom, giving rise to novel issues.  In the end, ESG in construction and infrastructure is really all about Who(ever) cares, Wins.