Updated: Oct 31, 2022
Image Credits: The Economist
With the number of Multinational Corporations (MNCs) shifting towards innovative methods for achieving sustainability, the long erroneous myth that profitability and sustainability cannot go simultaneously has been torn away. Instead, we have observed several corporations becoming cost-efficient through promoting innovation in sustainable technologies.
According to the review of the academic literature on “sustainability and corporate performance” conducted by Arabesque and the University of Oxford, 90% of 200 studies analyzed concluded that good ESG (environmental, social and governmental factor) standards lower the cost of capital; 88% show that good ESG practices result in better operational performance; and 80% show that stock price performance is positively correlated with good sustainability practices. Now, it has become imperative for the international community to evolve enhanced Commercial laws and dispute resolution mechanisms to promote sustainability in trade and investment for combating climate change.
Starting with a definition of what are climate change-related disputes, as per the ICC Commission Report, it includes “any dispute arising out of or in relation to the effect of climate change and climate change policy, the United Nations Framework Convention on Climate Change (“UNFCCC”) and the Paris Agreement.”
According to the report published by Gratham Research Institute, the trends in international climate litigation have increased many times over the past three decades. Interestingly, this has given a wide scope for dispute resolution mechanisms in climate litigation. Over the years, many corporations have chosen this method over traditional litigations. The contracts now include clauses that are sensitive to climate change, thus influencing the functioning of corporations for adopting climate-friendly practices. Several national courts have also included the aspect of climate change while penalising companies. For instance, the Norwegian court in Greenpeace Nordic Ass’n vs. Ministry of Petroleum and Energy, along with citing article 112 of its constitution, also pointed to the Paris Agreement goals while deciding dispute on granting license for deep-sea extraction of resources. It has opened the gates for International institutions on Alternate Dispute Resolution (ADR) to come forward to support the mechanism for efficient and time-bound resolution while solving disputes. This has become common parlance among MNCs to avoid stretchy and costly litigations and bad publicity. For instance, as per the ICC report, The ICC arbitration and ADR are increasingly used in commercial contracts involving energy, land use and urban infrastructure, and industry. As per the ICC Arbitration figures, in 2018, 26.6% of the new cases came from the construction and engineering sector, followed by the energy sector with 14.6%.
Image Credits: The Economist
THE CASE FOR GREEN TRADE
The phenomenon of green trade has been increasingly promoted over the years, especially by the UN and financial institutions. It revolves around the trading of goods with minimum greenhouse gas emissions, thus making it sustainable. It is related to the “systematic transition” to environment-friendly technologies related to logistics and manufacturing by both state and private corporations.
The International and National financial institutions and private foundations are giving a bulk of incentives (known as green finance) to corporations who adopt green trade, thus providing them with a substantial impetus to innovate and change their traditional practices. They are also funding green projects in order to increase the participation of MNCs in developing sustainable projects for the future. For instance, the world bank launched green bonds to raise funds for lending in green projects. Additionally, many international institutions are also ceasing to fund those projects that affect the environment invariably. The phenomenon is boosted significantly by countries through adopting Nationally Determined Contributions (NDCs) under Articles 3 and 4 of the Paris Agreement. Furthermore, articles 13 and 14 of the Paris agreement also mention the “transparent framework” that will monitor and “build mutual trust and confidence for effective implementation of the NDCs." Therefore, both nations and international institutions are supporting Green trade through several mechanisms for tackling climate change.
COMMERCIAL LAWS AND TRADE
The importance of evolving Commercial laws is gaining ground because it plays a significant role in facilitating and regulating the practices of MNCs. Climate sensitive commercial laws can provide a framework for corporations for a smooth transition from traditional to sustainable practices. It will also impose responsibility on companies to change their unsustainable practices.
But the governments and international institutions must be mindful of not discouraging the autonomy of the corporations. The World Trade Organisation(WTO) is playing a very crucial role in this regard. WTO has constantly focused on the “liberalisation of green trade” since the beginning of the Doha talks. It involves The removal of trade barriers such as customs duties, quota, and tariffs on environment-friendly trade for promoting the Green Agenda. It can be made effective through efficient commercial laws of both nations and the WTO. Economies of developing countries can also significantly grow through environmental liberalisation. Rio+20 Summit, held in June 2012, brought this phenomenon on the ground. It emphasised two issues 1) trade in environmental goods and services; 2)reducing trade-distorting subsidies. Therefore, Environment-friendly commercial laws can boost trade and investments worldwide while promoting sustainability at the same time.
With the world at the helm of new technologies and innovation, it has become imperative for us to execute new ways to tackle climate change. We must integrate trade and commercial laws into the environmental agenda for not just tackling climate change but also promoting innovation and bringing about new opportunities. Governments should act as a facilitator rather than regulators while promoting green trade and investment. International institutions play a significant role in promoting green policies for nations through consensus-building exercises. Promoting trade and development is an essential facet of the world economy and assimilating it with environmental liberalisation will have benefits in the long run. Therefore, it is high time for governments to improve their commercial laws and dispute resolution mechanisms that support economic growth and climate.
BY NAYAN CHANDRA MISHRA