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Banking on climate change : The rise of climate finance related disputes
By Kirsten Wolmarans , partner & Brittany Leroni , associate at Webber Wentzel
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Following environmental , social and governance ( ESG ) trends , South Africa ’ s banking sector is gearing up to provide sustainable financing .
This shift into a new era of clean energy will give rise to complex ESG related disputes , and stakeholders should consider including an arbitration clause in underlying contracts to mitigate their risks .
South Africa ' s economy and energy system is one of the most coal-dependent in the world . South Africa ' s ratification of the Paris Agreement has , however , set in motion a rapid energy transformation , with the goal of decarbonising the South African economy by 2050 . In the energy sector , South Africa estimates that the process of shifting to low-carbon technologies and the implementation of adaptation requirements to reduce greenhouse emissions will require roughly USD300-billion .
Sustainability-linked financing offers a significant opportunity for banks . Corporate clients , also looking to comply with ESG objectives , would rather partner with banks that have implemented ESG initiatives in their own processes and systems .
South Africa ' s top banks are opting to use the United Nations ' Sustainable Development Goals as a guide to inform their approach to business and are setting targets to link to the Paris Agreement , the local regulatory framework , the South African Financial Sector Code , and the King Code on Corporate Governance for South Africa .
However , doing the right thing , and becoming green , is not easy . In the absence of clear direction and regulation on how to best operate to achieve these goals , disputes will become increasingly common . This is especially the case where there is a gap between voluntary company commitments and practice . History has shown that this creates fertile ground for disputes .
Tracking global patterns , ESG-related disputes are arising in the context of multiple fields of law , across jurisdictions , and involving issues such as investment in renewable energy initiatives , asset divestment , breaches of representations or warranties relating to climate-change commitments , or where the receiving country is unable to meet environmental covenants which may be put in place under agreements . These disputes will be complex , and often the subject matter will constitute
Jukka Niittymaa | Pixabay
Doing the right thing , and becoming green , is not easy .
largely unexplored terrain . The South African banking sector will not be immune .
While the spotlight is on ESG , the reputational fall-out and financial repercussions of ESG-related disputes are likely to be significant for the party on the receiving end . Despite this reality , a risk that is often overlooked by parties to a contract is the dispute resolution mechanism . When the implementation of contracts goes awry , disputes arise , and how such disputes are resolved gives rise to a new set of risks .
An important risk mitigation factor that all banks should insist upon when entering into contracts is an agreement to arbitrate . By resorting to arbitration to resolve disputes , not only will the parties benefit from confidentiality , and the inherent flexibility to choose arbitrators with adequate knowledge of the relevant issues , but they will also be able to tailor the procedure to accommodate the dispute . This is especially the case when banks are implicated in disputes with an ' international ' element , such as a dispute between banks ( as investors ) and hoststates ; or where the parties have their places of business in different states ; or where the subject matter of the dispute is outside the state where the parties have their places of business . In these instances , the banks will be best equipped to resolve their disputes through international arbitration . Not only does this forum offer a neutral playing field in which to resolve the dispute , but the result is global recognition and enforcement of awards through the New York Convention .
To illustrate the advantages of electing arbitration , a local population may be directly impacted by an investment in a new gas pipeline to be constructed through a forest , impacting natural resources for the residents in the area . Entering a submission to arbitrate agreement will avoid court proceedings involving numerous parties , spanning several jurisdictions , with the potential of conflicting court orders . Instead , the arbitration proceedings will provide certainty , finality , and an enforceable award across states .
In summary , the legal and commercial pressures on banks and their corporate clients in moving towards a net zero target by 2050 will create additional risks and challenges . Not only will contractual relationships need to be overhauled , but so will internal practices and policies . To mitigate the risks of when a dispute arises stemming from ESG obligations , serious consideration should always be given to including an arbitration clause in the underlying contract . CLA
Doing the right thing , and becoming green , is not easy . In the absence of clear direction and regulation on how to best operate to achieve these goals , disputes will become increasingly common .
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