Not long ago, arbitration lived in a fairly contained world. Disputes turned on pricing formulas, licensing terms, or whether a state had overstepped its treaty obligations.
That boundary is fading.
Any lingering uncertainty about the rise of ESG-related disputes, and arbitration’s suitability to resolve them, has largely been resolved: environmental issues now feature in roughly 30% of arbitral proceedings, while corporate social responsibility considerations appear in about 26%.
Cases now arrive carrying questions about carbon policies and the way companies manage entire chains of production. ESG has not been added on top; rather, it has started to rearrange what these disputes are about.
That shift brings something useful with it. Instead of broad promises, parties point to targets and measurable conduct. Tribunals are no longer insulated from the realities behind large projects or supply chains, they are asked to confront them – sometimes directly.
But the structure holding all of this together has barely moved. Arbitration still runs between defined parties, with tight control over who speaks, who claims, and who benefits. The people closest to the underlying harm are present in the story of the case, yet absent from the process that resolves it. Their role is felt but not formalized.
The picture is mixed in a very particular way. The content of disputes has caught up with the world outside. The procedure has not been fully followed. Whether those two layers will eventually align is where the real tension now sits.
The Hague Rules
The current expansion of ESG disputes in arbitration can appear abrupt, almost as if the field shifted overnight. In reality, the groundwork was laid earlier, at a moment when the central challenge was not how to argue ESG claims, but how to make business and human rights enforceable at all.
The adoption of the Hague Rules on Business and Human Rights Arbitration in 2019 belongs to that earlier phase. It marked a deliberate attempt to move beyond principle and into procedure.
The starting point was the UN Guiding Principles on Business and Human Rights. By the early 2010s, the UNGPs had achieved broad acceptance as a normative framework. They clarified the responsibilities of states and corporations and emphasized access to remedy. Yet they stopped short of creating mechanisms capable of delivering that remedy in transnational settings. The gap was not conceptual but operational; jurisdictional fragmentation, uneven enforcement, asymmetries between corporate actors and affected individuals made it difficult to translate standards into outcomes.
The Hague Rules were designed to address this precise limitation. Developed under the Hague Conference on Private International Law, they did not seek to invent a new system, they reworked the existing one. Arbitration offered portability and procedural flexibility. The question was whether it could be adapted to disputes shaped by public interest concerns.
What emerged was a hybrid framework. Core features of arbitration were retained, including party consent and international enforceability. At the same time, the Rules introduced adjustments aimed at reflecting the nature of human rights disputes.
Provisions on transparency and attention to imbalances between parties signaled a departure from purely private dispute resolution. The result did not fully replicate public adjudication, but it moved in that direction.
ESG within investor-state arbitration
Within the investor-state dispute settlement, ESG considerations increasingly operate as a conduit through which human rights arguments enter treaty interpretation.
Environmental degradation, labor conditions, land use, and climate-related harms are now framed not only as regulatory concerns, but as elements shaping the legality and legitimacy of state and investor conduct under investment treaties. As a result, ESG factors influence how tribunals assess standards such as fair and equitable treatment and indirect expropriation.
Earlier ISDS practice was largely one-directional. Investors invoked treaty protections to challenge regulatory change, including in the renewable energy sector. A series of cases against European states illustrate this pattern. In Masdar Solar & Wind v. Spain and Novenergia v. Spain, tribunals found that retroactive modifications to incentive regimes breached investor protections, leading to substantial damages awards.
Similar outcomes followed in claims against Italy arising from reductions to solar subsidies. These disputes established that climate-transition policies, if implemented abruptly or inconsistently, may generate liability even when pursuing environmental objectives.
More recent developments indicate a shift in argumentative structure, ESG increasingly informs the state’s defense.
The emergence of climate obligations within general international law has reinforced this transition. The 2025 advisory opinions of the International Court of Justice and the Inter-American Court of Human Rights articulate a framework in which states are expected to prevent environmental harm and mitigate climate change.
This has direct implications for ISDS, as states may now argue that regulatory measures affecting investments are not discretionary policy choices, but responses to binding or quasi-binding obligations grounded in human rights and environmental law.
The structural asymmetry of ISDS is also under pressure. Historically, investment treaties granted standing to investors while imposing obligations primarily on states, limiting the feasibility of counterclaims.
However, the consolidation of ESG norms introduces a potential doctrinal pathway for states to assert that investor conduct itself may be inconsistent with international standards. While still emerging, this approach allows tribunals to consider whether investor protection should be continued by compliance with environmental and human rights expectations.
The trajectory of ISDS suggests a gradual reconfiguration rather than abrupt transformation. Investor claims remain viable, particularly in cases of regulatory instability. At the same time, ESG considerations are reshaping the legal framework within which those claims are assessed.
These latest developments lead to a more intricate arbitral environment in which investment protection and public law obligations are increasingly evaluated in conjunction instead of in isolation.
Third parties in ISDS
Investor-state arbitration continues to operate within a narrow definition of who counts as a participant. Formally, only the investor and the host state hold procedural standing. Yet many disputes originate in projects that directly affect workers and local communities, including Indigenous groups. These actors appear in the background of the case, but rarely at its center.
Tribunal practice shows a certain degree of accommodation, through not a structural shift. In cases such as Urbaser v. Argentina, Bear Creek v. Peru, and Perenco v. Ecuador, arbitrators engaged with social conflict and community rights.
The analysis often acknowledged that investment activity produces effects extending beyond the immediate parties. Still, this recognition does not translate into procedural authority. Third parties do not shape claims, at most, they intervene through amicus submissions, which tribunals may consider but are not required to prioritize.
This creates an unusual configuration – harm is evaluated, but those experiencing it remain external to the decision-making process. The legal structure permits tribunals to reason about human rights impacts without integrating the affected individuals into the procedural core.
A parallel issue arises with third-party funding. Here, participation expands, but in a different direction. Financial actors enter proceedings to support claims, often in exchange for a share of potential awards.
Their presence reshapes incentives and case selection, particularly in high-value ESG disputes. Unlike communities and workers, these actors gain influence precisely because their role aligns with the economic logic of arbitration.
Commercial arbitration and ESG
Commercial arbitration introduces a different legal pathway for ESG-related disputes, one grounded in private ordering rather than treaty protections. Instead of asking whether a state has violated investor rights, tribunals examine whether contractual commitments have been honored. This shift matters because ESG obligations can be written directly into contracts, transforming abstract expectations into enforceable duties between commercial parties.
In sectors such as construction, infrastructure, and energy, ESG language now appears with increasing frequency. Environmental provisions may address emissions limits or waste handling. Social components often refer to labor conditions or even the overall impact of projects on surrounding communities.
Governance elements tend to focus on procurement integrity and due diligence procedures. Once embedded in the contract, these elements are no longer aspirational statements. They become part of the legal bargain, capable of triggering liability if breached.
At first glance, this model appears closer to addressing the realities faced by affected individuals. Obligations can flow through contractual chains, reaching subcontractors and suppliers whose conduct directly shapes on-the-ground outcomes. A failure at one level may generate consequences elsewhere in the chain, allowing disputes to capture at least part of underlying harm.
However, this mechanism does not alter who holds procedural control. Claims remain in the hands of contracting parties, and the dispute is framed in terms of compliance with agreed standards rather than the experience of those affected.
A further complication lies in how these clauses are drafted. Many agreements still rely on flexible language such as “reasonable efforts” or “best endeavors.” These formulations leave room for interpretation and make enforcement uneven.
Disputes often revolve around whether a party did enough, rather than whether a specific outcome was achieved. When layered across complex supply networks, this ambiguity can obscure responsibility and complicate evidentiary assessment.
More recent contractual practice shows a different direction. Drafters are moving toward clearly defined metrics and external reference points. Instead of broad commitments, clauses increasingly incorporate measurable targets or align with recognized international standards such as NEC4 Option X29 and FIDIC Climate Change provisions.
Even with these refinements, commercial arbitration does not fully resolve the question of victim participation. It offers a mechanism to enforce ESG commitments within business relationships, but it stops short of granting affected individuals direct standing.
The unresolved question – who actually benefits?
A recurring critique across both business and human rights and ESG practice is deceptively simple: Where, in all of this legal and contractual sophistication, do affected individuals stand?
The answer is often less reassuring than the frameworks suggest. On one end, communities encounter expanding layers of reporting and compliance processes that demand information.
On the other, even where ESG claims to succeed, the outcome may stabilize regulatory or contractual expectations without materially improving the conditions of those directly affected.
The American Bar Association Model Contract Clauses project attempts to address precisely this gap by rethinking how contracts distribute responsibility and incorporate affected stakeholders.
The Model Contract Clauses (MCCs) introduce a different logic into commercial agreements. Instead of treating human rights as a representation or warranty, they embed ongoing due diligence obligations across the life of the contract and require both buyers and suppliers to share responsibility for outcomes.
More importantly, the MCCs shift attention toward remediation. They emphasize identifying harm and addressing it, rather than merely allocating responsibility after a breach. In this framework, contractual relationships are not only about performance and risk allocation, but about continuous monitoring and response to adverse impacts.
The project also attempts to correct a long-standing imbalance in supply chain contracting. Traditional contracts tend to push responsibility downward, placing the burden of compliance almost entirely on suppliers.
The MCCs instead articulate shared obligations and introduce standards for responsible purchasing practices, acknowledging that buyer behavior itself can contribute to human rights risks.
Yet even this more refined model does not fully resolve the underlying concern. The clauses still operate within a contractual structure, meaning that enforcement depends on the parties to the agreement.
Workers and communities remain, in most cases, outside the formal dispute process. Innovation lies in improving how their interests are considered, not in granting them direct procedural control.
The difficulty, then, is not a lack of frameworks, but their level of abstraction. ESG metrics and arbitration mechanisms increasingly align with human rights language. The challenge is translating that alignment into outcomes that are visible at the level where harm occurs.
In that sense, the “devil in the details” is about whether legal design can move beyond representation and begin to alter who decides and who ultimately benefits.