ESG-Related Disputes in Latin America: The Evolution of the Litigation and Arbitration Landscape

Introduction

‘Ecuador’s new president faces growing ESG challenges.’^[2] ‘Argentina seeks to promote ESG-related issuances.’^[3] ‘Republic of Peru debuts its Sustainable Bond Framework.’^[4] ‘Brazil’s Unigel to build green hydrogen plant with $120 million investment.’^[5] ‘IDB Approves $300 Million Loan to Underpin Costa Rica’s Decarbonization Plan.’^[6] ‘Colombia to Foster Sustainable, Resilient Growth with IDB Support.’^[7] These recent headlines have one important thing in common: they all reflect Latin American countries’ focus on environmental, social and governance (ESG) issues.^[8]

ESG’s three pillars of environmental, social, and governance issues are addressed to different concerns and measured by different criteria. The environmental pillar focuses on a company’s impact on the natural environment. The social pillar deals with a company’s approach to its stakeholders, including shareholders, employees, and consumers, and encompasses ‘a company’s strengths and weaknesses in dealing with social trends, labour, and politics’.^[9] Lastly, the corporate governance pillar ‘pertains to the governance factors of decision-making, from sovereigns’ policymaking to the distribution of rights and responsibilities among different participants in corporations, including the board of directors, managers, shareholders and stakeholders’.^[10]

The global focus on ESG has precipitated worldwide pressure for companies to increase shareholder value by enhancing environmental, social, and corporate governance performance. The growing call for sustainable investment, and the increasing focus on climate change, diversity, human rights and anti-corruption measures, among other issues, has been accompanied by increased regulation requiring companies to identify and assess ESG risks and impacts, and evaluate their progress toward achieving their stated ESG goals, on the theory that such information is material to the investing public. For example, the Brazilian Securities Commission issued Resolution No. 59 on 22 December 2021, establishing, for the first time ever in Brazil, broad disclosure requirements for ESG-related information. Moreover, in 2019, Argentina’s National Securities and Exchange Commission created best-practices guidelines for the issuance of green, social and sustainable securities.^[11]

Developing mechanisms to ensure compliance with evolving ESG obligations takes time, mainly because it requires companies to implement a new set of principles and policies, as well as ‘to redesign internal controls and compliance programmes, create new functions and acquire additional expertise’.^[12] While companies in Latin America endeavour to comply with their ESG obligations, and have even assumed self-led undertakings – not required by any law – to ‘actively manage risks and opportunities related to emerging environmental and social trends, in combination with rising public expectations for better accountability and corporate governance’,^[13] the possibility of non-compliance with ESG obligations or the creation of new and independent ESG obligations through a company’s own undertakings have led to a sharp increase in ESG-related disputes. This is especially true with respect to environmental and sustainability-related issues, given the reliance of many national economies in Latin America on agriculture, mining, oil and gas, manufacturing and forestry, among other industries, and also given the fact that Latin America ‘supports rich biological diversity, with around sixty per cent of global terrestrial life found within it, alongside diverse freshwater and marine flora and fauna’.^[14]

This chapter analyses the evolution of ESG-related disputes in Latin America by conducting a review of recent available litigation and arbitration cases. As demonstrated below, ESG issues have generated complex disputes in a variety of industries. With respect to litigations in Latin America specifically, there have been an influx of new actions initiated in national courts in the Latin America region, largely as a result of prevailing and new obligations pursuant to national Constitutions, international agreements and other legislation and regulation aimed at protecting the environment. As to arbitration, there has been a sharp increase in the incorporation of environmental issues and related claims in both investor–state and commercial arbitrations alike, a trend that is likely to continue in Latin America given the region’s commitments to reduce emissions and protect the environment under international instruments and a recent push to promote renewable energy, which may be in tension with current investments in carbon and other traditional fossil fuels.

ESG in the litigation context

Latin America may be fertile ground for ‘climate change litigation’, that is, disputes that ‘raise material issues of law or fact relating to climate change mitigation, adaptation, or the science of climate change’.^[15] In general, climate change litigation ‘often falls into one or more of six categories: (1) climate rights; (2) domestic enforcement; (3) keeping fossil fuels in the ground; (4) corporate liability and responsibility; (5) failure to adapt and the impacts of adaptation; and (6) climate disclosures and greenwashing’.^[16] Climate change litigation generally encompasses the ‘E’ and ‘S’ in ESG, mingling both environmental and social components, and may also involve the ‘G’ pillar as well since such disputes may relate to corporate governance principles adopted by companies, particularly corporate practices and public disclosures surrounding environmental and social policies and impacts.^[17]

One of the main factors making Latin America fertile ground for climate change litigation is the fact that many countries in Latin America recognise by law some form of climate rights. Article 2.22 of the Peruvian Constitution provides that ‘every person has the right . . . to a balanced and appropriate environment for the development of life.’^[18] In Ecuador, the right to a healthy environment is recognised by Article 14 of the Constitution, which states that ‘the right of the population to live in a healthy and ecologically balanced environment that guarantees sustainability and the good way of living (sumak kawsay), is recognised.’^[19] Ecuador’s Constitution also recognises that nature has independent legal personhood, thus giving ‘Pachamama’ (or Mother Earth) legally enforceable rights.^[20] The Brazilian Constitution grants not only a series of environmental rights, but also duties: Article 225, for example, provides that ‘all have the right to an ecologically balanced environment, which is an asset of common use and essential to a healthy quality of life, and both the Government and the community shall have the duty to defend and preserve it for present and future generations.’^[21]

International agreements on climate change may also play an important role in environmental obligations and duties. In Latin America, there are two primary international agreements that create binding legal obligations that may give rise to climate change limitation:

• the Regional Agreement on Access to Information, Public Participation and Justice in Environmental Matters (the Escazú Agreement), which is a landmark environmental human rights treaty in Latin America and the Caribbean that aims to guarantee the ‘effective implementation of the rights of access to environmental information, public participation in the environmental decision-making process and access to justice in environmental matters, and the creation and strengthening of capacities and cooperation, contributing to the protection of the right of every person of present and future generations to live in a healthy environment and to sustainable development’;^[22] and
• the Paris Agreement Under the United Nations Framework Convention on Climate Change (the Paris Agreement), an international treaty whose goal is to cap global warming to well below 2ºC above pre-industrial levels and commits its signatory states to take action to reduce their emissions in the next few years.^[23]

To the extent that such international agreements are ratified by a state, they may give rise to claims against the signatory state. For example, in PSB et al. v. Brazil, four Brazilian political parties, Partido Socialista Brasileiro, Partido Socialismo e Liberdade, Partido dos Trabalhadores, and Rede Sustentabilidade, filed a constitutional action against the Brazilian federal government before the Brazil Supreme Court – Brazil’s highest judicial authority – alleging that it had failed to properly administer the Fundo Clima, a fund created in 2009 to finance projects aiming at the reduction of greenhouse gas emissions.^[24]

Referring expressly to the Paris Agreement, the plaintiffs contended that ‘by disbanding the fund’s technical committee responsible for assessing deforestation and disbanding the fund’s governance body, the government has failed its constitutional duty to preserve ecological processes and to protect the natural environment.’^[25] In this case – the first-ever climate-related dispute before the Brazilian Supreme Court – a vast majority of justices ruled in favour of the plaintiffs, recognising the federal government’s failure to allocate sufficient resources to the fund. In so doing, the Brazilian Supreme Court conferred upon the Paris Agreement a privileged hierarchical position in the Brazilian legal system and determined that the executive branch has the constitutional duty to provide necessary resources, including financial support, to secure Fundo Clima’s goal to mitigate climate changes.

As illustrated by the PSB case, climate change litigations often involve a sovereign or state-owned entity, which is arguably subject to some form of obligation to oversee or mitigate climate change, either through the state constitution, national legislation or international treaty. Climate-related actions against governments are usually commenced by the party that is purportedly harmed by climate change (including, in some cases, indigenous persons) or their representatives, such as NGOs, specialised organisations, or even (as was the case in PSB) political parties. Another example is Peña, et al. v. Republic of Colombia, et al., where a group of 25 minors filed a tutela, a legal remedy to protect fundamental rights, against the Colombian government seeking to stop deforestation in the Amazon region.^[26] Citing constitutional and treaty obligations, the Colombian Supreme Court sided with the plaintiffs and ordered the government to present an action plan to reduce deforestation. The Court’s reasoning, in relevant part, stated that the deforestation of the Amazon provokes in the short, medium and long term ‘an imminent and serious harm to the children, adolescents and adults directly affected by this suit, and, more broadly, to all Colombian citizens, both for present and future generations, since it uncontrollably releases carbon dioxide (CO2) into the atmosphere, producing the greenhouse effect, which transforms and fragments ecosystems, altering water resources and thereby harming the water supply of populated centers and causing soil degradation’.^[27]

Similarly, in 2020, a group of nine Ecuadorian girls filed a protective action, effectively seeking a constitutional injunction, against the government of Ecuador in Herrera Carrion et al. v. Ministry of the Environment et al., claiming that gas flaring is unlawful and that Ecuador, by making it a common practice, violated the constitutional rights to health, water, food, sovereignty, a healthy environment and nature. The court of first instance denied the claims on the basis that the plaintiffs had failed to provide evidence to support a violation of fundamental rights. Reversing this outcome on appeal, the Court of Justice declared that Ecuador violated the plaintiffs’ fundamental right to live in a safe and ecologically balanced environment, mainly because Ecuador, in failing to employ pro-environmental technology, transgressed the plaintiffs’ right to a healthy life.^[28]

Peru faced a similar suit in 2019 in Álvarez et al. v. Peru, in which a group of seven Peruvian minors, represented by their parents, sued Peru via demand for environmental protection, seeking a court order requiring net zero deforestation in the Amazon by 2025. Based on the Peruvian Constitution and other national legislation, plaintiffs argued that their constitutional rights to a healthy environment, life, water and health had been infringed by Peru, in part because the Peruvian government had taken insufficient action to address climate change.^[29] While this case remains pending before the Superior Court of Lima, Álvarez and the other cases recently brought against sovereigns alleging constitutional, statutory, or other infringements are evidence of the increased frequency with which sovereigns may be subject to scrutiny and legal action for alleged violations of environmental and social obligations.

In addition to sovereigns and state-owned entities, private parties may also be targeted as defendants in climate change litigation. Such claims are usually based on corporate liability for past contributions to climate change, corporate human rights responsibilities, inadequate disclosure, or disinformation and fraud. For example, in 2020, three members of the Waorani Nation located in the indigenous Miwaguno community; the NGOs Acción Ecológica and Unión de Afectados y Afectadas por las Operaciones de Texaco; and the International Federation of Human Rights filed a protective action in a court in Ecuador against PetroOriental SA, a private Chinese oil company. In this case, the plaintiffs alleged that gas flaring resulting from PetroOriental’s oil extraction in Yasuní National Park, located in the Ecuadorian Amazon, contributed to climate change and constituted a violation of human rights, particularly the rights of nature and indigenous peoples who lived in the area most affected by the practice. More specifically, the plaintiffs argued that the gas flaring emanating from an oil concession operated by PetroOriental not only caused, but still causes, constitutional rights violations, mainly because gas flaring emits greenhouse gases. The Ecuadorian Court of Justice, however, rejected plaintiffs’ argument, reasoning that they had not provided enough evidence of how the gas flaring practice violated constitutional or human rights.^[30]

While many cases against private parties concern the environmental and social components of ESG, there has also been an increase in litigation and enforcement actions in Latin America involving corporate governance, and, particularly, anti-corruption efforts and environmental oversight. Enforcement actions might be taken by government regulators to force companies to abide by ESG regulations, including those related to governance. Enforcement actions may also spawn litigation in the form of civil actions brought by private parties for alleged failure to comply with ESG obligations publicised through previous proceedings.

The US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC), for instance, have been targeting Latin American companies in both criminal and civil matters, as part of ongoing initiatives and guidance provided by US regulators to combat corruption (even international corruption) and oversee compliance with environmental programmes and disclosures. The DOJ has announced a series of actions to help achieve its anti-corruption goals, namely:

• corporations will need to review their compliance programmes to ensure they adequately monitor for and remediate misconduct;
• the Justice Department will review the whole criminal, civil and regulatory record of individuals facing investigations;
• individuals facing investigations before the DOJ will have to identify all people involved in the misconduct and produce non-privileged information about their involvement; and
• there will be no default presumption against corporate monitors for those negotiating resolutions before the DOJ.^[31]

The DOJ has also recently launched a comprehensive environmental justice strategy ‘to guide the Justice Department’s litigators, investigators, and US Attorneys’ Offices nationwide to advance the cause of environmental justice through the enforcement of federal laws.’^[32] Consistent with President Biden’s Executive Order on Tackling the Climate Crisis at Home and Abroad, this strategy aims to take steps towards a more robust enforcement of environmental law.^[33]

From the criminal standpoint of corporate liability, the DOJ has recently prosecuted two foreign financial asset managers in connection with a billion-dollar alleged international money laundering scheme related to the Venezuelan state-owned oil company Petróleos de Venezuela SA.^[34] The indictment alleges that certain individuals conspired to launder the proceeds of ‘a corrupt foreign currency exchange scheme involving bribery of Venezuelan officials’ through banks in the United States.^[35]

Similarly, during the investigation of Operation Lavo Jato in Brazil, the DOJ made substantial efforts to combat corruption, bringing corruption-related charges against corporations and individuals due to criminal activities relating to alleged bribes accepted by public officials in exchange for public concession contracts and other advantages. There has also been a parallel push in many Latin American countries to initiate their own anti-corruption measures, including, for example, the Brazilian Anticorruption Plan, which aims to assist Brazil’s president in implementing policies against corruption,^[36] and the Brazilian government’s Federal Decree No. 11,129/2022, which amends the regulations implementing the Brazilian Clean Companies Act, Brazil’s 2013 anti-corruption law, clarifying and detailing, inter alia, ‘procedural mechanisms for the conduct of investigations and negotiation of leniency agreements by the [Office of the Comptroller General] CGU and Brazilian public prosecutors’.^[37]

On the civil side, the SEC recently initiated litigation against a publicly traded Brazilian mining company, Vale SA, contending it has made misleading ESG disclosures to investors about the safety of one dam that collapsed years ago.^[38] This enforcement action was the first filed by the SEC’s newly-founded Climate and ESG Task Force, which was initially formed to identify material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.^[39]

The above-mentioned cases demonstrate that both the DOJ and the SEC have been vigilant in requiring companies’ compliance with the ESG agenda, a trend that is likely to continue and increase as companies continue to prioritise ESG initiatives and make ESG disclosures an important part of their business models.

ESG in the arbitration context

ESG-related disputes may also arise in the context of an investment instrument between foreign investors and a state, or the commercial relationship between two or more parties governed by a private contract. In both cases, arbitration may be relied upon as a means of adjudicating these disputes.^[40] This is largely due to the acclaimed advantages arbitration has with regard to litigation. Unlike litigation, arbitration proceedings take place outside of any national court system, and may provide a more neutral forum for the parties with additional procedural flexibility. Parties’ ability to appoint their own arbitrators to adjudicate an ESG-related dispute may offer an important comparative advantage, given the ‘necessary expertise to identify and clarify the salient issues, for which ordinary courts may lack the requisite experience and subject-matter’.^[41] Moreover, arbitration institutions, such as the International Chamber of Commerce, have taken steps to provide guidance to parties, counsel and arbitrators as to the unique challenges and opportunities posed by ESG-related disputes, which may help facilitate resolution of disputes.^[42] On the other hand, given the public policy importance of ESG – and, in particular, environmental impacts and climate change – resolution of such disputes through arbitration, and particularly commercial arbitration, which generally proceeds confidentially, has engendered opposition from some commentators.^[43]

Regardless, there appears to have been a sharp uptick in cases involving some environmental component in recent years. A 2021 study by the London School of Economics identified at least 13 investor–state arbitrations in the past 10 years that included some challenge to environmental or climate change combating measures,^[44] and the number of such arbitrations may increase as governments in regions like Latin America coalesce around the need to adopt ambitious and, in some cases, seemingly abrupt, measures to pursue their environmental initiatives and ESG goals.

Latin American countries have been incorporating environmental language in their investment instruments since the early 2000s. This early language largely sought to confirm a state’s right to regulate the environment and public health. For example, the 2008 Peru–Japan bilateral investment treaty (BIT) provides that the countries’ investment goals ‘can be achieved without relaxing health, safety and environmental measures of general application’.^[45] More recently, some Latin American countries have more expressly sought to protect the state’s right to engage in legitimate environmental regulation in modern BITs or free trade agreements; for example, the 2018 Argentina–United Arab Emirates BIT specifies that ‘it is inappropriate to encourage investments by relaxing domestic measures relating to health, environment or other regulatory objectives’.^[46]

Such substantive provisions on environmental protection may ‘offer host States potential avenues of defence and counterclaims against aggrieved investors in respect of the State’s conduct’.^[47] Thus, although investor–state arbitration is commonly accepted as a mechanism by which a foreign investor can initiate claims against a foreign state, some more recent cases involving an environmental component have featured states’ presenting:

• the defence that the domestic measures in question were a necessary and proportionate action required to protect the environment; and
• counterclaims against foreign investors that have allegedly caused environmental impacts in the foreign state.

In Perenco Ecuador Ltd v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), Perenco Ecuador Limited, a French-owned oil and gas company, initiated claims against Ecuador and Petroecuador, Ecuador’s national oil company, under the 1996 Ecuador–France BIT and two contracts for the exploration and exploitation of hydrocarbons in the Amazon. The claims arose out of ‘Ecuador’s enactment of legislative measures which increased its participation under the Participation Contracts on “extraordinary revenues” earned under the Contracts’.^[48] Perenco contended that such actions violated the fair and equitable treatment standard and unlawfully expropriated its investment. Ecuador counterclaimed that Perenco caused environmental damages while operating the oil blocks under the participation contracts.^[49]

Although Perenco raised jurisdictional challenges to Ecuador’s ability to allege counterclaims against it, the arbitral tribunal ultimately agreed with Ecuador’s argument ‘that if a legal relationship between an investor and the State [which] permits the filing of a claim by the State for environmental damage caused by the investor’s activities and such a claim is substantiated, the State is entitled to full reparation in accordance with the requirements of the applicable law’.^[50] While the tribunal granted an award of partial damages to Perenco, the tribunal also awarded, based on independent expert determinations, US$54 million to Ecuador for its environmental counterclaim, finding that Perenco was strictly liable for ‘any contamination in excess of regulatory standards shown to have occurred after 20 October 2008 up until the Consortium suspended operations on 16 July 2009,’^[51] according to the Ecuadorian Constitution.^[52] The dispute underlying the Perenco case also gave rise to a similar investor–state arbitration – Burlington Resources Inc v. Republic of Ecuador – in which the tribunal similarly awarded US$41 million in damages from environmental counterclaims.^[53]

In another foundational investor–state arbitration involving ESG, Urbaser SA and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, the Spanish investor Urbaser and two other foreign investors initiated claims against Argentina under the Argentina–Spain BIT, leading Argentina to advance a counterclaim that the investors had failed to provide the necessary investment into the disputed concession contract, thus violating their obligations under international law based on the human right to water.^[54] The arbitral tribunal recognised Argentina’s right to assert counterclaims and initially found that the investors ‘operating in the privatised water and sewage services sector in Greater Buenos Aires [were] in principle obliged under international law ‘not to engage in activity aimed at destroying’ and ‘to abstain’ from violating the population’s human right to water’.^[55] However, the arbitral tribunal dismissed the counterclaim, concluding that there was no underlying breach to support the counterclaim and that damages had not been demonstrated.^[56]

David R. Aven et al. v. Republic of Costa Rica is another case that highlights the state’s ability to bring environmental counterclaims.^[57] There, investors brought claims under the Dominican Republic–Central America–US FTA, which arose out of Costa Rica’s termination of their hotel, beach club and villas construction project, following the revocation of an environmental viability permit on the grounds that the property in question included wetlands and a protected forest. Costa Rica counterclaimed for breach of mandatory rules of environmental protection set forth in the Costa Rican Forestry Law, alleging that claimants’ actions ‘unlawfully impacted a wetland, which caused environmental damage to the Project Site’, thus claimants should repair the damage caused to the ecosystem.^[58] The tribunal issued an award finding that Costa Rica did not breach the FTA but dismissed Costa Rica’s counterclaim, reasoning that it did not meet the necessary requirements to state a counterclaim under Article 21 of the UNCITRAL Arbitration Rules, since there was ‘no precise statement of the facts supporting the claims but rather a reference to expert reports attached to those pleadings [and] Costa Rica only made a general reference to environmental damages in the Las Olas Project site attributed to the Claimants’ activity’.^[59]

The state’s right to present counterclaims – based on environmental issues or not – is not universally accepted today and was certainly controversial not many years ago. In Spyridon Roussalis v. Romania,^[60] the foreign investor brought claims ‘arising out of disagreements over compliance with a post-investment obligation related to its purchase of shares in a large frozen-food warehousing facility from the Romanian government’s privatization authority’.^[61] Romania asserted several counterclaims against Mr Roussalis and two of his companies, Continent SRL and Continent SA, ‘arising out of the failure of Claimant and Continent SRL to make the USD1.4 million investment on which Claimant bases his Investment Claim’.^[62] The arbitral tribunal disagreed with the investor, finding the actions of Romania did not amount to violations of the 1997 Greece–Romania BIT. Addressing Romania’s counterclaims, the tribunal, by majority, concluded it had no jurisdiction to entertain them due to the parties’ lack of consent. According to the majority, ‘the BIT imposes no obligations on investors, only on contracting States. Therefore, where the BIT does specify that the applicable law is the BIT itself, counterclaims fall outside the tribunal’s jurisdiction.’^[63]

Professor Michael Reisman, in his capacity of arbitrator appointed by respondent (Romania), filed a dissenting award concluding that the tribunal did have jurisdiction to entertain Romania’s counterclaim, for ‘when the States Parties to a BIT contingently consent, inter alia, to ICSID jurisdiction, the consent component of Article 46 of the Washington Convention is ipso facto imported into any ICSID arbitration which an investor then elects to pursue [and] such counterclaim jurisdiction is not only a concession to the State Party: Article 46 works to the benefit of both respondent state and investor. In rejecting ICSID jurisdiction over counterclaims, a neutral tribunal – which was, in fact, selected by the claimant – perforce directs the respondent State to pursue its claims in its own courts where the very investor who had sought a forum outside the state apparatus is now constrained to become the defendant.’^[64] As seen above, Professor Reisman’s view has gained some traction in investment arbitration in recent years, especially in cases where states are seeking some sort of environmental damages.

These cases demonstrate how arbitration can be used by states both as a sword and a shield to confront issues of environmental harm within their borders, and counsel that investors should exercise caution prior to bringing claims against states that could entail an environmental component.

While states’ ability to bring counterclaims against investors for purported environmental or human rights violations is one way that states can affirmatively seek recovery in ESG disputes through arbitration, investors and other parties can also use arbitration to bring claims against the state, not for regulatory action, but for purported failure to take action to advance climate change initiatives or other related obligations to preserve the environment. In these situations, however, claimants may face a high standard to make their case. Depending on the relevant treaty provisions and applicable substantive law, it may be more or less burdensome for claimants to show that the state had a direct obligation to preserve the environment, that the state failed to act when it should to protect the environment, and that the state’s failure was the proximate cause of the damages sought by claimants in this regard.

For example, in the investment dispute between Peter Allard and the government of Barbados, initiated under the 1996 Barbados–Canada BIT, Mr Allard, as a Canadian foreign investor who invested in the acquisition and development of a sanctuary in Barbados, claimed that the state ‘failed to take reasonable and necessary environmental protection measures and, through its organs and agents, has directly contributed to the contamination of the Claimant’s ecotourism site, thereby destroying the value of his investment’.^[65] Mr Allard, however, did not persuade the tribunal that his decision to cease running the sanctuary as an ecotourism business derived from environmental degradation allegedly caused by the state.^[66]

Interestingly, states have relied on environmental carve-out provisions to justify some governmental measures that could have been harmful to investors. As a defence, states have occasionally argued that purported treaty violations caused by them were in fact measures adopted to comply with those states’ environmental treaty obligations, and therefore would not amount to any treaty violations themselves. In Eco Oro Minerals Corp. v. Republic of Colombia,^[67] Eco Oro brought claims against Colombia concerning the measures adopted by Colombia in connection with the páramo ecosystem in the Santurbán highlands that allegedly destroyed the value of Eco Oro’s investments in the country’s mining sector. Colombia contended that there could be no breach of the Canada–Colombia FTA of 2008 since the measures challenged by Eco Oro were taken by the government to protect the environment in accordance with Article 2201(3) of the treaty.^[68] The arbitral tribunal, however, found that Colombia was still liable for compensation regardless of the environmental exception. There was a similar outcome in Infinito Gold Ltd. v. Costa Rica,^[69] involving the development of a gold mine at Crucitas de Cutris in the economically depressed area of Cutris de San Carlos in northern Costa Rica. As a result of the environmental carve-out in Annex I, Section III(1) of the Canada–Costa Rica BIT of 1998,^[70] Costa Rica argued that it could not be held liable for the measures challenged by Infinito Gold because they ‘were adopted to maintain and/or enforce measures aiming at protecting the environment from possible negative effects of open-pit mining’.^[71] The tribunal rejected Costa Rica’s view, concluding that, as interpreted in accordance with other provisions, ‘Annex I, Section III(1) is not a carve-out from the BIT’s protections, but rather a reaffirmation of the State’s right to regulate [and it] does not exempt the Respondent from liability for breaches of the substantive protections granted by the BIT.’^[72]

The growing focus on ESG and Latin American states’ increased willingness to enact environmental measures and enter into international agreements and coalitions to help combat climate change will likely only lead to a further uptick in both investor–state and commercial arbitrations. In particular, as it relates to the Paris Agreement, Latin American governments and companies have started, and will continue, to undertake efforts to meet the relevant goals set forth therein, including engaging in the transition towards renewable energy.

Latin American countries’ energy transition is likely to originate new investor–state and commercial arbitrations alike. As it relates to investment arbitration, investors in traditional fossil fuels may attempt to challenge state action that imposes ‘increased costs for investments in carbon-intensive industries’,^[73] or seek compensation for their inability to operate carbon-based investments as a result of a state’s policy encouraging decarbonisation.^[74] In Latam Hydro LLC and CH Mamacocha SRL v. Republic of Peru, an investor–state case arising out of a renewable energy project, two US investors brought an International Centre for Settlement of Investment Disputes (ICSID) arbitration against Peru, contending that the country made promises designed to induce foreign investment in its renewable energy sector, but did not honour these promises and instead caused the ‘financial destruction of a 20-megawatt hydroelectric project near the Mamacocha Lagoon in Arequipa, Peru’ and ‘five (5) related hydroelectric projects upstream of the Lagoon’.^[75] While the case remains pending, the investors have claimed that Peru’s purportedly wrongful measures violated their right to be treated fairly and equitably, expropriated the Mamacocha project, and conferred more favourable treatment to other foreign investors.^[76] The case will be interesting to watch as a potential future precursor as to how investment tribunals may approach cases regarding renewable energy projects in Latin America.

An increase in commercial arbitrations – which are generally confidential and therefore may be more difficult to track than publicly-disclosed investor–state cases – arising from ESG concerns is also likely, as government measures with respect to the energy transition may affect companies’ regular contractual performance. In such cases, parties may seek to invoke various legal doctrines, such as changed circumstances that make compliance with contractual obligations too burdensome for one of the parties, or force majeure and hardship, to excuse contractual performance in light of regulations that make a business venture more difficult or less profitable than before, although such legal doctrines are generally subject to a heightened standard. More generally, government regulations may squeeze or reduce the financial returns for contractual counterparties or otherwise alter the prevailing economic equilibrium between the parties, which in general may produce a more contentious contractual relationship that is more likely to generate disputes. Drafting contracts properly and with a great deal of care may become even more important in this context. In an attempt to prevent ESG-related arbitrations arising from contractual interpretation, parties should give attention to the language they use in their agreements at the outset and well before any dispute can arise, avoiding as much ambiguity as possible.

Furthermore, Latin American companies’ initiatives toward cleaner energy might ‘impact contractual relationships with governments, third parties (such as suppliers, contractors, and other vendors in the supply chain) as well as workers whose current contractual conditions are likely to change’.^[77] Many contracts, for example, contain health, safety, security and environmental provisions, which are frequently used in the energy sector and describe the activities a contracting party should carry out to ensure it will comply with health, safety, security and environmental policies of a certain jurisdiction or company.^[78]

Conclusion

Latin America has long been a forum for climate change and environmental disputes. With an increased focus on ESG, including the incorporation of additional rights and obligations through countries’ Constitutions, new legislation and regulations, and international agreements committed to combating climate change and social issues, such disputes are likely to continue and escalate.

In general, this chapter reveals that the recent litigation and arbitration cases involving ESG in Latin America often involve sovereigns and state-owned entities. States and state-owned entities are often defendants in the litigation context, given the obligations they undertake to initiate and oversee climate change and other ESG-related initiatives, and the desire by allegedly aggrieved parties – such as indigenous groups or environmental NGOs – to use litigation to enjoin or enforce certain behaviour, though private parties may also be subject to such ESG-related actions. As it relates to arbitration, arbitration tribunals convened either pursuant to an investment instrument or a commercial agreement may adjudicate ESG claims and have experienced a recent uptick in cases involving some environmental component or environmental counterclaims specifically.

Footnotes