ESG as the New Weapon in International Arbitration

This article is part of the "International Arbitration Perspectives" series. 

Arbitrations raising environmental, social and governance (ESG) concerns are no longer new to market participants or practitioners. Any doubt about the popularity of ESG claims and the fact that arbitration is well positioned to deal with them has been dispelled, with environmental aspects now present in 30% of arbitrations and corporate social responsibility present in 26%.¹

Recent policy changes, landmark judicial decisions and increasing sophistication on ESG obligations indicate meaningful shifts in the use of ESG across investor-state and commercial arbitrations.

From Investors Suing States to States Counterclaiming Investors

The last decade has seen a wave of investors bringing claims against states based on the rollback of financial incentives or states’ changes to climate policies—starting with Spain, Italy, Germany and more recently Romania, amongst others. Last of a kind, in August 2025, the UK faced its first ever ISDS-claim: a Singapore-based investor is seeking millions after the UK revoked approval for a new coal mine on climate grounds.²

While sustainability rollback and policy changes are expected to continue in the United States and across Europe, likely leading to new ISDS claims by investors throughout 2026, 2025 marked a turning point in the nature of the sustainability obligations that states can rely on to defend themselves and potentially counterclaim against investors.

Historically, ISDS has been asymmetric: (1) investment treaties empower investors to bring claims against states but not states to bring claims against investors; and (2) only states bear obligations, but not the reverse, making counterclaims difficult.

On 3 July 2025, the Inter-American Court of Human Rights (ICtHR) issued an advisory opinion regarding the obligations of states to take measures to mitigate and adapt to the effects of climate change.³ Importantly, the ICtHR found that states have an obligation to mitigate climate change—which comes with rights for states to regulate corporate behaviour to achieve their climate objectives. The ICtHR indicated, amongst other things, that: “[i]n cases of conflict between international investment obligations and the duty to protect the climate system, the latter must prevail. States cannot invoke investor expectations as a justification for failing to adopt the urgent regulatory measures required to achieve the 1.5C goal, as no property right can supersede the collective right to survival”.

Shortly after, on 23 July 2025, the International Court of Justice (ICJ) issued a landmark advisory opinion, concluding that international law requires states to prevent significant harm to the climate.⁴ The ICJ expressly indicated that failure to do so could trigger legal responsibility: “[a] failure to comply with climate obligations constitutes an internationally wrongful act giving rise to State responsibility. Such responsibility entails the legal obligation to cease the act, provide guarantees of non-repetition, and make full reparation for the injury caused, including to those States most vulnerable to climate-related catastrophes.”

Read together, these opinions significantly strengthen states’ potential to bring counterclaims as it established positive environmental obligations under customary international law, which will enable tribunals to look beyond BITs and potentially find investors in breach of obligations that bind them.

ESG Obligations in Commercial Contracts

ESG is no longer a buzzword but a set of tangible obligations which tribunals are increasingly enforcing. To wit, companies’ social and environmental obligations are finding expression in contractual clauses and, consequently, in arbitration.

For example, in the construction industry:

• Environmental factors include water and energy consumption, waste management, greenhouse gas emissions and the carbon footprint of building materials.
  
  
• Social factors encompass workplace safety practices, community impact, diversity and inclusion initiatives and the broader societal implications of development projects.
  
  
• Governance factors address supply chain management, due diligence in onboarding contractors, procurement transparency and ethical business standards.

As sustainability becomes embedded in contracts, supply chains and procurement requirements, the potential for disputes grows. The integration of ESG clauses into construction contracts notably introduces significant interpretation and enforcement risks, particularly as aspirational language, and terms such as ‘best endeavours,’ reasonable efforts’ or ‘target compliance’ are common. Complexity is compounded by cascading obligations across subcontractors and suppliers, where disputes may arise over who bears responsibility for failures, how compliance is measured and whether reporting requirements are met.

Another challenge is the overlap of contractual liability with regulatory and criminal regimes since ESG breaches may expose parties to penalties under environmental, health and safety, or employment laws—all of which will likely heighten the stakes of disputes and necessitate specialised expertise in both contract law and technical ESG standards. To mitigate these risks, modern contracts—such as those utilising NEC4 Option X29 or FIDIC Climate Change provisions—are shifting toward quantitative targets and standardised international benchmarks.

As sustainability evolves from a peripheral concern to a core enforceable requirement, we expect tribunals to refine their approach, with new legal theories arising to balance the economic interests of businesses, investors and contractual parties against sustainability, social and governance objectives.

New Sectors

While ESG-related arbitrations are expected to rise across industries and areas of law, key areas to watch in 2026 include:

• Critical Minerals: The significant growth in artificial intelligence (AI) and the technology industry more widely has led to a surge in demand for critical minerals such as lithium, cobalt and nickel and a corresponding surge in disputes. One notable case that attracted significant attention in 2025 is the resumption of proceedings in AVZ v. Democratic Republic of Congo.⁵ The dispute centres around the Manono Project, considered one of the world’s largest hard rock lithium deposits and a crucial source for electric vehicles’ battery materials.
  
  
• Carbon Capture, Use & Storage (CCUS): numerous countries have put in place CCUS incentives, with the US, UK, Canada and Norway being often recognised as leading the charge.⁶ Given the scale of investment, disputes are bound to arise as investors aim to capitalise on subsidies and commence construction of new CCUS projects.

^{1 2025 International Arbitration Survey – the path forward: realities and opportunities in arbitration, Queen Mary University of London and White & Case.
2 Woodhouse Investment Pte Ltd and West Cumbria Mining (Holdings) Ltd. v. United Kingdom (ICSID Case No. ARB/25/37).
3 Inter-American Court of Human Rights, Advisory Opinion AO-32/25 of 29 May 2025.
4 Advisory Opinion of the International Court of Justice, No. 187, dated 23 July 2025.
5 AVZ International Pty Ltd., Dathcom Mining SA, and Green Lithium Holdings Pte Ltd. v. Democratic Republic of Congo (ICSID Case No. ARB/23/20). See also related ICC case: AVZ International Pty Ltd, Dathcom Mining and Green Lithium Holdings v Société Congolaise d’Exploitation Minière (ICC Case No. 27720/SP/ETT/SVE).
6 The United States offers US$80 per tonne of CO2 stored and US$50 to US$180 per tonne of CO2 removed via direct air capture, the United Kingdom established a billion-pound CCUS infrastructure fund, Norway committed US$1.8 billion to similar projects including the Northern Lights project and Canada announcing a US$8 billion spend to store 15 million tonnes of CO2 by 2030.}