From Soft Commitments to Hard Liability: Can Arbitration Enforce ESG Obligations?

Vienna Blair is a third-year law student at the University of Warwick, currently undertaking an exchange year at FGV Rio Direito.

Introduction

Over time, the European Union (EU) has wrestled with the challenge of balancing sustainability commitments with commercial interests and investor protections. Historically, Environmental, Social and Governance (ESG) commitments were considered to be forms of “soft law”–merely voluntary governance frameworks–whose integration into commercial and investment practices was often an afterthought. Prompted by growing concerns surrounding climate change and environmental sustainability in the late twentieth century, a wider global shift occurred towards decarbonisation, sustainable governance, and climate-transition regulation. As a result, the consideration for ESG commitments has accelerated over the past three decades with the introduction of both the Kyoto Protocol and the Paris Agreement. Despite this evolution, for ESG commitments to be truly impactful, they must move beyond their traditionally voluntary character and acquire greater legal enforceability. Yet, ESG obligations do not independently become “hard law”; instead, their practical enforceability depends on mechanisms such as arbitration, which enables sustainability-related obligations to generate both legal and financial consequences (Thieffry, 2023).

This essay argues that although arbitration does not itself generate ESG obligations, it increasingly transforms sustainability-related commitments into enforceable legal and financial liabilities through both contractual and investment-based mechanisms. To critically evaluate the role arbitration plays in enforcing liabilities, regarding ESG obligations, this discussion first examines the periodic development of ESG as a form of soft law, as well as the international treaties that accelerated debates concerning its enforceability. The analysis then considers the growing incorporation of ESG obligations within commercial contracts and investment frameworks. Particular attention will be drawn to the Spanish Renewable Energy Arbitrations and RWE v Netherlands, highlighting the role and limitations of arbitration when enforcing ESG obligations. Finally, this will be followed by an assessment of the broader limitations of arbitration as an enforcement mechanism and considers its role, within the foreseeable future, with the emerging frameworks such as the Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760).

The Evolution of ESG: From Soft Law to Increasing Accountability

Prior to the emergence of Environmental, Social and Governance (ESG) frameworks, Corporate Social Responsibility (CSR) functioned as the dominant framework for corporate sustainability, concentrating on voluntary ethical business practice through encouraging the protection of human rights through the encouragement of respect and the remedying of corporate harms (Pelikánová and MacGregor, 2020, pp. 77–78). The ever-increasing globalisation of business activity, consequent impacts both social and environmental, has prompted the accumulating need for the incorporation of sustainability into the corporate governance frameworks that were once underpinned by CSR standards.

Alongside CSR, sustainability remained a present concern surrounding corporate governance, although as a separate entity, its deliberation is most significantly noted in its adoption under the United Nations Framework Convention on Climate Change (UNFCCC) treaty, the Kyoto Protocol (adopted in 1997, enforced in 2005). The protocol increased the pressure on states to adopt climate-related protections and regulatory measures (Massai, 2011, p. 44), shifting environmental concerns from the political sphere into the legal sphere. This helped lay the groundwork for later, environmentally focused, corporate governance frameworks (Massai, 2011, p. 44).

Subsequently, the rise of ESG surfaced, one of its, widely recognised, earliest articulations resides in the 2004 “Who Cares Wins” report published by the United Nations Global Compact (UNGC)—the world’s largest sustainability initiative, commonly credited with officially coining the acronym–which tied ESG commitments to corporate and investment governance. Its application highlighted how such commitments are increasingly becoming necessary in order to manage both operational and reputational risks (UN Global Compact, 2005, p. 10), foreshadowing the broader shift of ESG from a soft-law governance framework towards more enforceable legal obligations.

The United Nations (UN) Special Representative, John Ruggie, proposed the United Nations Guiding Principles on Business and Human Rights (UNGP)—adopted by the UN in 2001—which became a foundational framework that would later shape ESG governance frameworks. The UNGP, although non-binding, embedded many corporate social responsibilities, founded on a three pillar structure highlighting the responsibility of business to  “Protect, Respect, and Remedy” human rights/harms: emphasising due diligence, accountability, and responsible business conduct. Despite its focus on what is considered the “S” and “G” (regarding ESG), the UNGPs contributed to the wider integration of ESG commitments, as a whole, into corporate governance frameworks. Similarly the 2015 Paris Agreement accountability for states through transparency and reporting mechanisms (Miller, 2017, p. 7). Despite this agreement not imposing direct ESG obligations upon corporations it has intensified the pressure on states to implement climate-transition policies. In conjunction, these frameworks have strengthened the normative foundations of ESG commitments, contributing to them becoming increasingly capable of generating legal and financial consequences through regulatory measures, contractual obligations, and dispute resolution mechanisms such as arbitration; thus paving the way for future ESG frameworks to be both implemented and enforced.

Arbitration and the Enforcement of ESG Commitments

Traditionally, as discussed above, sustainability-related commitments existed as voluntary standards lacking direct legal enforceability. However, the increasing incorporation of these commitments into commercial agreements has enabled ESG considerations to assume contractual significance, rendering them capable of enforcement through arbitral mechanisms (Thieffry, 2023, 307). Their ability to assume contractual significance is gained through corporations voluntarily agreeing to be bound by them through incorporating them–through ESG clauses, sustainability provisions, supplier codes of conduct, and human rights commitments–into their contracts; this shifts the solely aspirational nature of these commitments into legally binding obligations between parties. Sustainability-related commitments alone are generally insufficient in generating legal consequences. Therefore, their incorporation into commercial contracts–which agree to arbitrate disputes–is fundamental in promoting responsible and sustainable business practices (Magalhães and Vieira, 2025, p. 2). It is not the breach of the commitment itself that gives rise to enforcement, but the breach of a contractual obligation containing sustainability-related commitments. Consequently, where parties have agreed to arbitrate conflicts, such breaches may enable companies to resolve and remedy through arbitration, thus generating enforceable legal and financial consequences to be generated from sustainability-related commitments. In turn this has guided companies towards implementing measures to mitigate the impact of their activities and improve their sustainability (Magalhães and Vieira, 2025, p. 2).

The progressive movement towards contractualisation of sustainable commitments–which may be enforced through arbitration–is reinforced by the imminent requirement for EU Member States to transpose the provisions of the Corporate Sustainability Due Diligence Directive (CSDDD) into national law by July 2028. The Directive encourages companies to obtain contractual assurances from business partners, both within EU Member States and from foreign countries (Bueno et al., 2024, p. 297), that they will comply with applicable due diligence obligations and, where necessary, secure corresponding assurances throughout the supply chain (Directive (EU) 2024/1760, p. 10). Consequently, this increases the likelihood of breaches of ESG commitments giving rise to contractual disputes capable of resolution through arbitration; given their requirement under the CSDDD to be implemented in corporate governance frameworks and commercial relationships through supply-chain obligations and contractual assurances.

Arbitration is not limited to the commercial sphere, it has additionally emerged as a significant mechanism through which disputes arising from sustainability-related regulation and investment protections are resolved. Due to the scope of ESG obligations across industries, this section will focus on the disputes arising within the energy sector specifically as they provide a useful lens through which arbitration’s enforcement function can not only be examined but applied to other industries. Given the rise in legal and commercial pressures surrounding decarbonisation, renewable energy investment, and climate-transition regulation, the energy sector provides a central point for analysing arbitration's role as an instrument for enforcing investment protection frameworks in which sustainability commitments have been embedded into; thus capable of generating both legal and financial consequences. This analysis will be conducted through the evaluation of the Spanish Renewable Energy Arbitrations–Eiser v Spain, Antin v Spain, and Masdar v Spain–and RWE v Netherlands.

The Spanish Renewable Energy Arbitrations arise from claims of Spain’s failure to uphold its investment incentives; in the early 2000s, Spain introduced attractive feed-in tariffs and subsidies to incentivise investments in renewable energy as part of its broader commitment to sustainable energy development and decarbonisation. Following the 2008 financial crisis, Spain faced a national economic tariff deficit resulting in the replacement and reform of significant parts of its investment incentive framework. However, the changes made to the framework evoked retaliation from the investors who argued that they faced a detrimental impact as they had relied upon those frameworks when making their investments; consequently numerous arbitration claims under the Energy Charter Treaty (ECT), particularly Article 10(1), were made. Arguably the landmark case arising out of these arbitrations was Eiser v Spain, Eiser argued that their investment had been dispossessed from its whole value characterising it as profoundly unfair and inequitable due to the once favourable scheme being eliminated (Restrepo, 2017, p. 127). Relying on Article 10(1) of the ECT, Eiser claimed that Spain had violated the article through failure to accord them fair and equitable treatment. This was reinforced through the debate that reliance on the stability of the renewable energy framework (OECD, 2004, p. 114) was a core component of the investment incentive thus leading to Spain’s subsequent reforms being found to be in breach of this obligation; resulting in Eiser being awarded approximately €128 million in damages (Pauker and Winston, 2021, p. 315). Eiser goes beyond a mere assessment of renewable energy policy, but exemplifies how in its use of fair and equitable treatment and legitimate expectations, sustainability-oriented regulatory frameworks can be transformed into a source of enforceable financial liability.

Consistent with this is the case of Antin v Spain; like Eiser, the dispute arose following Spain's substantial reforms to its renewable energy regime–upon which investors had relied on when making their investments (Balcerzak, 2021, p. 94)–thus leading to Antin ultimately being awarded €101 million in compensation (European Commission, 2025, p. 1). Underlining the potential rise of a coherent arbitral approach to renewable energy disputes, given the support of the protection of regulatory framework stability and investor reliance beyond a single tribunal. Masdar v Spain, another investor in Spain’s Renewable Energy framework, further reinforced this approach as both cases balance the state's regulatory autonomy against the protections afforded under the Energy Charter Treaty (Brodlija, 2025, p. 376). Moreover demonstrating the consistent arbitral willingness to evaluate sustainability-oriented regulation through the perspective of financial impact and investor reliance.

The case of RWE v Netherlands arose following the Netherlands Prohibition on Coal in Electricity Production Act, RWE–a multinational German energy company owning and operating a coal-fired power plant in Eemshaven–filed a multi-billion euro claim under the ECT due to the novel prohibition requiring, by January 1, 2030, all coal-fired power plants to cease operations. RWE’s claim operated on the basis that the Netherlands Government had not ensured adequate resources and time to enable a transition away from coal, adversely affecting its investment, contrary to the ECT provisions (Koumpli, 2024, p. 55). Thus, the claim was triggered by the introduction of a climate-transition regulation–unlike the Spanish Renewable Energy Arbitrations which concerned the withdrawal of renewable energy incentives–demonstrating the continuous tension between an investors’ expectations that their investments will remain protected and a state’s sovereign right to pursue climate-transition policies (Efeçınar and Başoğlu, 2025, p. 401). Despite RWE being unsuccessful in their claim, its significance does not depend upon the investors succeeding in every claim; but the importance of sustainability-related claims becoming increasingly capable of giving rise to investment disputes through arbitration.

Critiques and Limitations of Arbitration in ESG-Related Disputes

Despite arbitration proving to be an effective mechanism for resolving disputes arising from sustainability-related commitments embedded in contracts and investor protections, it remains inherently limited in its scope. Arbitration is incapable of enforcing ESG commitments in their voluntary form and instead relies upon their prior implementation in binding legal obligations to give rise to claims. Furthermore, as arbitration derives its jurisdiction from the consent of the parties, its availability as an enforcement mechanism is dependent upon the pre-existence of a consensual arbitration agreement. Consequently, arbitration is limited to merely providing a means of enforcing commitments only once they have been legalised.

This drawback is also exemplified in the structure of investment arbitration. Despite ESG considerations increasingly influencing treaty interpretation, they appear not as binding substantive obligations, but remain secondary in nature to the investment protections, often as treaty preambles, upon which claims are based (Goh, 2022, p. 491). Thus, it is rare for sustainability-related concerns to constitute an independent basis upon which states may pursue claims against investors (Goh, 2022, p. 500); this creates asymmetry as they are unlikely to be enforced as obligations within their own right. Despite the relative infrequency in  claims, further issues regarding regulatory chill are raised due to the prospect of costly arbitrations (Efeçınar and Başoğlu, 2025, p. 410). Reflected in, the previously mentioned, Spanish Renewable Energy Arbitrations whereby the state was required to pay substantial compensation awards; as a result the potential for costly arbitrations arising is a risk which reduces states willingness to pursue bold ESG-related objectives, and prompts potential withdrawal from the ECT (Madsen et al., 2018).

Nevertheless, these limitations do not diminish arbitration's significance in relation to ESG-related commitments. Although arbitration is not a complete solution to ESG enforcement, it represents a significant development giving practical legal and financial effect to commitments that instead would remain largely aspirational.

Conclusion

As ESG obligations have increasingly become an international objective, their ability to generate enforceable liabilities has been contested. As explored throughout this paper, such obligations are generally incapable of generating enforcement in their voluntary form, due to their reliance on their prior incorporation into binding legal obligations to give rise to claims. In spite of this, arbitration has arisen as a mechanism, via contractual and investment-based frameworks, capable of transforming sustainability-related commitments into enforceable legal and financial liabilities. This is exemplified through the Spanish Renewable Energy Arbitrations, which demonstrates arbitration’s effectiveness in generating financial liabilities, and RWE v Netherlands, which illustrates the growing capacity of sustainability-related commitments giving rise to investment disputes. Thus, arbitration is a significant step in the right direction, giving both legal and financial effect to commitments that would instead remain aspirational; further demonstrated by developments such as the CSDDD which illustrates that sustainability commitments are increasingly being embedded within binding legal and commercial relationships, in which arbitration may function as an enforcement mechanism.

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