Navigating Disputes: The Role of Arbitration in ESG Compliance under Companies Act, 2013
With Law (??? ??)
We, a young law firm growing globally from India, have reckoned ourselves to provide legal services with full throttle.
Introduction
The incorporation of Environmental, Social, and Governance (ESG) concepts into commercial transactions has become a critical concern in the ever-changing environment of corporate governance. This has led to increased scrutiny of the company’s activities ensuring that the companies adhered to ESG obligations. It also started discourse-related disclosures and disputes arising out of commercial transactions and the need for an effective dispute resolution mechanism.
In this article, the author will try to show how arbitration becomes a crucial and best-suited method for settling disputes arising out of ESG compliance obligations to compel companies to comply with developing ESG standards in their corporate practices. This article will further explore the role of arbitration as an impartial, adaptable, and expert-driven mechanism for resolving disputes pertaining to ESG due to its procedural flexibility, neutrality, and party autonomy principles.?
Understanding ESG in Corporate Transactions
The term ESG contains three words Environment, Social, and Governance each of these means different things. All these three terms are used to scrutinize cooperation for investment purposes and the sustainability of their economic activity. They help to guide the decision-making of organizations for the allocation of resources to ensure the sustainability of economic activity and long-term financial performance. All these three terminologies have their role to play in ESG implementation which are given below: -
Environmental: The “E” in ESG stands for “Environmental” and focuses on the corporation's attitude towards the environment. This criterion measures the steps companies take to safeguard or protect the environment, emphasizing matters like pollution, waste management, biodiversity, deforestation, greenhouse gas emissions, and climate change. Companies are also examining their environmental impact more carefully as a part of their due diligence procedure by assessing company resource management compliance with environmental law and carbon footprints.
Social: The “S” in ESG stands for “Social”. This facet looks at corporation's social impact on individuals, and groups through its work, policies, and social development goals. It takes into account human rights, diversity, inclusivity, employee relations, working conditions, and the wider implications on regional and international societies.
Governance: The “G” in ESG stands for “Governance”. It focuses on internal systems of rules, controls, and practices that ensure that corporations run in a transparent manner upholding integrity while selecting its leaders and being accountable to their shareholders. It addresses topics such as tax planning, CEO compensation, board diversity and structure, bribery and corruption, and shareholder rights, etc.
Further, the concept of ESG was incorporated into commercial transactions by incorporating ESG clauses in the commercial agreement. These ESG clauses were incorporated into the contract between the organizations to enable risk allocation or measure their progress in attaining ESG-related goals mentioned in the ESG clause. This incorporation of ESG clauses in contracts has also started influencing how organizations invest, run, and conduct mergers and acquisitions (M&A). Further, the disputes that can arise out of ESG obligations may be of various types. They can arise out of obligations put through binding agreements, international treaties, conventions, national laws, etc.
Companies Act and ESG compliance
The Companies Act, which acts as the legislative framework guiding Indian companies toward sustainable and ethical business practices, is essential to the enforcement of ESG compliance. Certain parts of the Companies Act, 2013 have been specially crafted to ensure that companies take into account their influence on society, the environment, and governance in addition to profit. The provisions that deal with the responsibility of the company towards ESG compliance are given below:
Mandatory CSR Spending: Companies with a defined net worth, turnover, or net profit are required by Section 135 of the Companies Act, read with the Companies (Corporate Social Responsibility Policy) Rules, 2014, to set aside a part of their income for CSR initiatives. This guarantees that Companies engage in corporate operations that include social and environmental issues.
Director's Duties: The Act establishes that directors must act in the best interest of the environment and the community. Directors are required by Section 166 to take into account how their choices will affect different stakeholders, including the environment.
Board Report: - Under Section 134 of the Companies Act the Board of Directors is required to include an energy conservation report with the annual financial statement of the company this provision ensures that the company works towards environmental sustainability by conserving the energy and being accountable for it.
Female Director: Section 149 of the Companies Act, 2013 requires that every publicly listed company must have a female director on their board. This ensures that the board is diversified and inclusive which ensures accountability and equity within the board. This section covers the social and governance part of the ESG.
Audit Committee: Section 177 of the Companies Act requires the board of every publicly listed company to form an audit committee consisting of a minimum of three directors with independent directors forming a majority. This section along with Regulation 18 of the listing regulation requires that the chairperson of the audit committee be an independent director. This brings transparency within the company falling within the governance part of the ESG.
This shows that the Companies Act both promotes and mandates ESG compliance, making it a crucial component of corporate governance in India.
Arbitration as a mechanism to resolve ESG disputes
Arbitration as a dispute resolution mechanism provides a special platform for addressing complex issues, especially when it comes to treaty-based and commercial contract claims. It is expected to become more and more important in ESG dispute resolution as a result of the rise in ESG-related contractual terms and the addition of ESG provisions to international investment treaties. Arbitration's consensual nature and the capacity to select arbitrators with specific knowledge of ESG issues make it a useful instrument for controlling and reducing ESG risks.
Under the framework of the Companies Act, arbitration is becoming a prominent dispute resolution procedure for ESG compliance. In the recent past arbitration came out as a reliable process for resolving disputes as it provides a resolution path that is in line with the global trend of incorporating ESG ideals into investment treaties and commercial contracts.
Arbitration may become the first choice for companies to resolve their dispute as it guarantees that the disputes are settled quickly and transparently. The following benefits of arbitration as a mechanism to resolve ESG disputes are: -
Neutrality: For international parties who might be worried about prejudice in other legal systems or court litigation, arbitration offers an impartial forum that is separate from national courts.
领英推荐
Time-bound process: - Arbitration is time time-bound process where disputes need to be resolved in a fixed time. Hence it involves fewer procedural hurdles, this also makes arbitration a preferred mode of dispute resolution mechanism where disputes are settled more efficiently and quickly. On the other hand, litigation takes a longer time period due to its procedural hurdles. This also makes arbitration a preferred dispute resolution procedure.
Expertise: In arbitration, the parties have the liberty to choose their arbitrators who are experts in environmental law, corporate governance, human rights, and other ESG issues. This guarantees that professionals who comprehend the complexities of ESG concerns will be evaluating the disagreement.
Flexibility: Parties can customize the arbitration procedure to meet the unique requirements of their dispute according to its well-known procedural flexibility as the procedure of arbitration is decided by the parties. This may entail establishing deadlines, selecting relevant legislation, and figuring out the parameters of document disclosure.
Confidentiality: Arbitration is a process that is conducted between the disputing parties and kept out of the preview of the public to maintain confidentiality. Sensitive information is frequently at issue in ESG disputes. Confidentiality in arbitration is conceivable, something that isn't always achievable in open court procedures. This safeguards the party's reputation as well as the private nature of ESG strategies.
Enforceability: Because of agreements like the New York Convention, arbitral awards are typically easier to uphold worldwide than judicial rulings. For ESG disputes, which have international implications the worldwide enforceability of arbitral awards makes it a first choice for organizations.
Drafting an effective Arbitration Clauses for ESG Disputes
An effective arbitration clause for ESG disputes can be where the obligation related to the contracting parties related to compliance of ESG is inserted in contracts which contains assurances or targets related to ESG issues or disclosure and reporting obligations. They can be inserted in commercial contracts, sales, and supply agreements, mergers and acquisitions, etc. These clauses are inserted in a contract to ensure that the contracting parties comply with the applicable ESG policies.
Challenges of making arbitration a mechanism for ESG compliance
Arbitration is a potentially useful tool for settling ESG issues because of its flexibility and experience, but certain obstacles need to be overcome to make sure that everyone who is engaged benefits from the process. Hence, evaluating its benefits and challenges is crucial when considering arbitration's role in ESG compliance under the Companies Act.
Challenges: -
Complexity: The complexity of ESG disputes revies detailed examination of expert witnesses and evidence which is difficult to do in arbitration than in courts. Courts can examine the evidence and witness in a much-nuanced way with the help of the state which is essential in deciding ESG disputes.
Cost: When it comes to arbitration cost is one of the major problems that the parties face unlike in court where the court fees are minimal in nature arbitration is an expensive process. This poses difficulty for the parties who want to choose arbitration as a dispute resolution process.
Public Interest: Public interest is at the heart of ESG disputes as they are harming the public at large this poses a problem as arbitration proceedings are private where the information or dispute is only available to the parties involved in the arbitration.
Conclusion
Arbitration as a mechanism of dispute resolution appears to be a viable means of settling ESG conflicts under the Companies Act, and this seems to be the direction that arbitration will take in the future. Arbitration might become a key component of the ESG dispute resolution process.
In line with the worldwide movement toward sustainability and ethical business practices arbitration is able to provide a customized, effective, and professional dispute resolution process by adjusting to the particular requirements of ESG issues.
The inclusion of ESG clauses in contracts will be essential in ensuring that ESG principles are upheld in the event of a dispute as companies are incorporating these concepts into their operations more and more. All parties involved in the arbitration process must work together to improve arbitration procedures and bring them into line with ESG principles. The aim is to establish a conflict resolution process that advances the more general goals of social fairness, environmental preservation, and responsible governance.
References :