Arbitrating Sustainability: ESG Disputes in International Arbitration between Europe and Latin America from an Italian point of view

Abstract. This article argues that the narrowing of the EU due diligence framework in 2026 will not reduce the role of arbitration in ESG matters but is more likely to increase it, because contracts are now left to do much of the work that legislation no longer does. On that premise, it considers the arbitrability of ESG disputes under Italian law, the ways in which such disputes are entering commercial and investment arbitration between Europe and Latin America, and the procedural pressures they create.

1. Introduction

Sustainability clauses in international supply contracts are often strikingly vague. A European buyer commits its Latin American supplier to “respect internationally recognised human rights”, or to use “best efforts” to reduce emissions, and the drafting stops there. What happens if the promise is broken is usually left to a single line at the end of the contract: the arbitration clause.

That line matters more than it used to. Environmental, social and governance (ESG) obligations have moved out of corporate reports and into contracts, statutes and treaties, and between Europe and Latin America the shift is especially visible. European companies face mandatory sustainability reporting and, from 2029, due diligence duties along their value chains. Latin American states host many of the mining and energy projects on which the energy transition relies. The EU–Mercosur Partnership Agreement, signed on 17 January 2026 and now before the Court of Justice at the European Parliament’s request, can only add to these exchanges¹.

However, it could be pointed out that the 2026 dilution of the EU due diligence regime does not make arbitration less relevant to ESG. It makes it more relevant, because contracts must now carry much of the weight that the legislature chose not to carry. The sections that follow test this claim against Italian law on arbitrability, against commercial and investment practice, and against the procedural demands that these disputes bring with them.

2. Are ESG disputes arbitrable?

The first objection is predictable. Environmental protection and human rights belong to the public interest, the argument runs, and the public interest is a matter for courts and administrations, not for private adjudicators. I do not find this persuasive, and Italian law offers good reasons why.

Article 806 of the Code of Civil Procedure allows parties to arbitrate any dispute over rights they can freely dispose of, unless the law provides otherwise. Italian case law has long kept apart two notions that are easily confused: a right that cannot be disposed of, and a rule that cannot be derogated from. A dispute governed by mandatory provisions, such as environmental standards or labour protections, does not become non-arbitrable on that account. The tribunal must simply apply them.

American courts reached a similar position decades ago. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985), the Supreme Court accepted that antitrust claims could be arbitrated in an international setting, on the understanding that national courts would have a chance to look again at the enforcement stage². Transposed to ESG, the reasoning holds. Damages claim for breach of a contractual human rights warranty concerns disposable rights; the criminal or administrative consequences of the same conduct do not. Some authors, in their study of ESG clauses in energy and climate contracts, likewise treat arbitration as a viable route for enforcement, while acknowledging how difficult these clauses have proved to implement³.

The real check lies elsewhere, in public policy. An award that ignores fundamental environmental or labour norms can be set aside at the seat, or refused recognition under Article V(2)(b) of the New York Convention. That, and not a restrictive reading of arbitrability, is where the protection of public interests belongs.

3. Commercial arbitration: sustainability as a contractual term

In commercial practice, ESG reaches arbitration mostly through contract: codes of conduct, audit rights, emission-reduction undertakings, human rights warranties. Directive (EU) 2024/1760 on corporate sustainability due diligence was meant to give these practices a statutory backbone. The Omnibus I package, adopted by the Council on 24 February 2026, cut it back considerably. The directive now covers only companies with more than 5,000 employees and EUR 1.5 billion in turnover, compliance begins in July 2029, and the EU-wide civil liability regime has gone, with the matter left to national law⁴.

Here lies what could be the central paradox of the subject. Without a uniform statutory remedy, due diligence obligations will travel down supply chains mainly in contractual form, passed from buyer to supplier and from supplier to sub-supplier. Literature already showed how EU sustainability rules already push the companies at the top of supply chains towards exactly these flow-down clauses, and how their enforcement tends to produce multi-party disputes, with the attendant problems of joinder and consolidation⁵. Since international supply contracts routinely contain arbitration clauses, many of these disputes are likely to be decided by arbitrators.

They will not be easy cases. What does “best efforts” require when the risk is forced labour three tiers down the chain? How much weight should a tribunal give to an NGO report? Tribunals will probably lean on soft law, such as the UN Guiding Principles on Business and Human Rights (United Nations, 2011) and the OECD Guidelines for Multinational Enterprises (OECD, 2023), which give content to otherwise open-ended clauses.

Arbitral institutions have started to adjust. The ICC Commission report on climate change disputes (International Chamber of Commerce [ICC], 2019) and The Hague Rules on Business and Human Rights Arbitration (Center for International Legal Cooperation [CILC], 2019) both deal with imbalances of power and with the position of affected third parties. The Hague Rules take up an idea put forward a few years earlier by some authors⁶: an arbitral forum in which those harmed by corporate conduct could themselves bring claims. Whether companies will agree to such a forum remains, in my view, the open question.

4. Investment arbitration and the right to regulate

Investor–state arbitration is where the conflict between sustainability and investment protection shows most openly. The literature has long framed it as a problem of balance. Some⁷ mapped the points of friction between investment law and environmental law, distinguishing settled rules from proposals for reform, while others⁸ examined how proportionality and reasonableness can calibrate the intensity of review that tribunals apply to state regulation. Two recent cases show that balance at work.

In Eco Oro Minerals Corp. v. Republic of Colombia, a Canadian investor challenged Colombia’s ban on mining in the páramos, high-altitude wetlands that regulate the water cycle and supply water to millions of people. In its 2021 decision the tribunal rejected the expropriation claim and accepted the ban as a legitimate exercise of the State’s power to protect the environment. The final award, in July 2024, granted nothing, as the investor had not proved its loss. For Latin American governments the message is broadly reassuring: environmental regulation, as such, is increasingly accepted as a legitimate public purpose.

Italy’s own experience is more ambivalent. In Rockhopper v. Italian Republic, a British company invoked the Energy Charter Treaty against the ban on offshore hydrocarbon activities within twelve nautical miles of the coast⁹. The tribunal upheld the expropriation claim. On 2 June 2025, however, an ICSID ad hoc committee annulled the award under Article 52(1)(d) of the ICSID Convention, because one arbitrator had failed to disclose circumstances relevant to his impartiality. No actual bias was alleged (The Rockhopper annulment, 2025), and the merits were never reopened. What the case suggests, it is likely to argue, is that in climate-related disputes the credibility of the outcome depends heavily on the integrity of the process. That brings us to procedure.

5. Transparency, public policy and enforcement

Confidentiality has always been one of arbitration’s selling points. In ESG disputes it is harder to defend. When an award touches water supplies, indigenous land or emissions, people outside the proceedings have a legitimate interest in knowing how it was reached. Investment arbitration has moved in that direction through the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration and the Mauritius Convention that extends them (United Nations Commission on International Trade Law [UNCITRAL], 2014). In Latin America, the Escazú Agreement, in force since April 2021, adds a regional commitment to access to information and public participation in environmental matters (Economic Commission for Latin America and the Caribbean [ECLAC], 2018).

At the enforcement stage, Italian law strikes a sensible balance. Under Articles 839 and 840 of the Code of Civil Procedure, a foreign award is recognised unless, among other grounds, it is contrary to public policy. Since 2022, Article 9 of the Constitution has protected the environment and biodiversity “also in the interest of future generations”, and, therefore, could be expected this value to shape what Italian courts regard as public policy¹⁰. The review nonetheless remains confined to the outcome of the award and does not extend to its merits.

6. Conclusions

ESG issue has not invented a new kind of arbitration, but it is reshaping the existing one from within. On the commercial side, it turns sustainability promises into enforceable terms and makes arbitrators maybe the first interpreters of a body of private regulation that is still taking shape, all the more so now that the EU legislature has stepped back. On the investment side, it asks tribunals to weigh investor protection against the State’s right to regulate. In both settings, it raises the bar for transparency and impartiality.

For those drafting contracts between Europe and Latin America, the practical consequence is unglamorous but important. ESG clauses deserve the same care as price and delivery terms, with defined standards, a verification mechanism and a deliberately chosen seat. The broader point is less comfortable. Arbitration will keep its legitimacy in this field only if it learns to take account of people who never signed the contract but live with its consequences.

References

• Center for International Legal Cooperation. (2019). The Hague Rules on Business and Human Rights Arbitration. CILC.
• Cronstedt, C., & Thompson, R. C. (2016, July 7). A proposal for an international arbitration tribunal on business and human rights. Harvard International Law Journal Online. https://journals.law.harvard.edu/ilj/2016/07/a-proposal-for-an-international-arbitration-tribunal-on-business-and-human-rights
• Economic Commission for Latin America and the Caribbean. (2018). Regional Agreement on Access to Information, Public Participation and Justice in Environmental Matters in Latin America and the Caribbean (Escazú Agreement). United Nations.
• International Chamber of Commerce. (2019). Resolving climate change related disputes through arbitration and ADR (ICC Commission Report). ICC.
• OECD. (2023). OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. OECD Publishing.
• Olmos Giupponi, B., & Figueroa, R. (2024). Navigating ESG arbitrability challenges in energy and climate: An in-depth analysis and future perspectives. European Energy & Climate Journal, 12(1), 13–27. https://doi.org/10.4337/eecj.2024.01.02
• Peter, A. (2023). Climate change and supply chain arbitrations: Impact of EU law on the BRI and non-EU entities. Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, 89(4).
• The Rockhopper annulment: ICSID procedural integrity and the ECT. (2025). Cambridge International Law Journal. https://cilj.co.uk/?p=5733
• United Nations. (2011). Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework. Office of the High Commissioner for Human Rights.
• United Nations Commission on International Trade Law. (2014). UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration. United Nations.
• Vadi, V. (2018). Proportionality, reasonableness and standards of review in international investment law and arbitration. Edward Elgar.
• Viñuales, J. E. (2012). Foreign investment and the environment in international law (Cambridge Studies in International and Comparative Law, No. 94). Cambridge University Press.

Cases

• Eco Oro Minerals Corp. v. Republic of Colombia, ICSID Case No. ARB/16/41, Decision (2021); Award (2024).
• Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).
• Rockhopper v. Italian Republic, ICSID, Decision on Annulment (2 June 2025). https://www.italaw.com/sites/default/files/case-html-files/italaw1826895_Decision-on-Annulment_2025-06-02.html

Legislation and treaties

• Codice di procedura civile [Italian Code of Civil Procedure], Articles 806, 839 and 840.
• Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958.
• Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), Washington, 1965.
• Costituzione della Repubblica Italiana [Constitution of the Italian Republic], Article 9, as amended by Constitutional Law No. 1 of 11 February 2022.
• Directive (EU) 2024/1760 of the European Parliament and of the Council on corporate sustainability due diligence, as amended by the Omnibus I package (2026).
• Energy Charter Treaty, Lisbon, 1994.
• United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (Mauritius Convention), New York, 2014.

Notas

1. Pending the opinion of the Court of Justice, the Commission announced in February 2026 that it would proceed with the provisional application of the interim trade agreement. ↩

2. This is the so-called “second look” doctrine: arbitrability is admitted, but national courts retain the power to verify, at the recognition stage, that the award has taken account of the mandatory rules at stake. ↩

3. Olmos Giupponi, B., & Figueroa, R. (2024). Navigating ESG arbitrability challenges in energy and climate: An in-depth analysis and future perspectives. European Energy & Climate Journal, 12(1), 13–27. ↩

4. Member States must transpose the amended directive by 26 July 2028. ↩

5. Peter, A. (2023). Climate change and supply chain arbitrations: Impact of EU law on the BRI and non-EU entities. Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, 89(4). ↩

6. Cronstedt, C., & Thompson, R. C. (2016, July 7). A proposal for an international arbitration tribunal on business and human rights. Harvard International Law Journal Online. ↩

7. Viñuales, J. E. (2012). Foreign investment and the environment in international law (Cambridge Studies in International and Comparative Law, No. 94). Cambridge University Press. ↩

8. Vadi, V. (2018). Proportionality, reasonableness and standards of review in international investment law and arbitration, Edward Elgar. ↩

9. Italy had withdrawn from the Energy Charter Treaty with effect from 1 January 2016. The claim relied on the Treaty’s survival clause, which continues to protect investments made before the withdrawal took effect. ↩

10. Article 9 was amended by Constitutional Law No. 1 of 11 February 2022, which also amended Article 41 on freedom of economic initiative. ↩