In very recent times, the world at large has seen an increase in awareness regarding Environmental, Social, and Governance (ESG) issues, including the resultant effects of climate change and environmental degradation.
Some notable developments have occurred, and these developments have started to affect and will continue to affect how Companies in the different jurisdictions are responding and will respond to ESG issues. The recent Shell decision which was given by the Hague District Court would be the first time a court has actually imposed a legal obligation on a company to reduce its CO2 emissions,1 a pointer to the fact that ESG issues are a growing concern in the international space. Also, The European Commission's 'Fit for 55%' policy2 is one which intends to achieve a 55% reduction in carbon emissions by 2030 and net zero by 2050, and is also a pointer to the fact that the global world is experiencing quite an upsurge in ethical standards concerning Environmental, Social and Governance (ESG) issues.
Nigeria, as one of the leading oil-producing countries in the world, is gradually experiencing this social awakening, especially within the oil industry, and in the civic and energy sectors. In Nigeria, one of the existent ESG-related regulations is the Environmental Impact Assessment Act of 19923. Among many other provisions, the EIA prohibits private persons and public bodies from undertaking or authorizing projects without a careful consideration of the possible adverse effect(s) of these projects on the environment. Also, the National Environmental Standards and Regulations Enforcement Agency (NESREA) Act of 20074 is an ESG regulation which is indigenous to Nigeria. The act ensures compliance with laws, guidelines, policies and standards of environmental matters.
Corporate sectors are now required to be transparent about their ESG due diligence, risk management, and reporting systems. To this end, in Nigeria, the Nigerian Stock Exhange's (NSE) Sustainability Disclosure Guidelines5 were enacted in 2018 to promote and enforce a system of accountability and transparency through sustainability disclosure. ESG-related clauses are popularly and more frequently being integrated into commercial contracts as a risk-mitigation strategy. Companies must now meet the demands for ESG transparency and accountability. Companies are equally now taking note of concepts such as risk management, due diligence, shareholder and employee activism, white washing, etc and these concepts sometimes result in ESG related disputes. In Nigeria, the Companies and Allied Matters Act (2020)6 in Section 305(3) and (4) requires Directors to always act in the best interest of the company, its members and its employees. Arbitration, being the preferred mode of dispute resolution in the international space, therefore, comes into play at this juncture. It is in this context that we examine the impact of ESG vis-a-vis International Arbitration, more particularly, the convergence between the two.
WHAT IS ESG?
ESG are factors that are used to evaluate how companies and countries in different jurisdictions view and make advancements on Sustainability. It comprises a range of factors that are used in determining whether or not an economic activity is sustainable for the purposes of investment decision-making.
According to a Thomson Reuters report of 2018,7 the wide range of factors for ESGs are divided into three categories, namely, Environmental, Social, and Governance. Environmental factors relate to: Climate Change and Greenhouse Gas Emissions (GHG), Energy efficiency, Resource depletion (including water), Hazardous waste, Air and Water Pollution, and Deforestation. Social factors relate to: Human Rights, working conditions including slavery and child labour, Local and Indigenous communities, conflict, health and safety, and employee relations and diversity. Governance issues relate to: executive pay, bribery and corruption, data protection, board independence, diversity and structure, tax strategy, transparency, and shareholder rights. In Nigeria, the Nigerian Sustainable Banking Principles (NSBP)8 take cognizance of ESG-related issues. Here, amongst many others, banks undertake to avoid, minimize and offset the negative impacts of their business operations on the environment and the local communities where they operate. They also undertake to promote positive impact in the society and respect human rights in all their business activities.
Worthy of note is the fact that although these ESG factors are not seen as financial performance indicators, there is already an overwhelming acceptance of the fact that these factors possess the capacity to pose material financial risks to countries and companies, which is why regulators are working to promote effective risk management of these ESG factors, in order to achieve sustainability goals and to manage risk to investors, the capital markets of different countries, and more broadly, the financial ecosystem.
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1. https://www.nytimes.com/2021/05/26/business/royal-dutch-shell-climate-change.html#:~:text=The%20District%20Court%20in%20The,of%202030%20compared%20with%202019. (Accessed November 20,2022)
5. Sustainability Disclosure Guidelines - Nigerian Exchange Limited (ngxgroup.com)
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