The Future of ESG in Africa: From Principles to Practice, and the Role of Arbitration in Dispute Resolution

ESG and ESG-Related Disputes in Africa: Emerging Trends and Solutions

Environmental, Social, and Governance (ESG) issues are increasingly shaping how businesses operate worldwide, and Africa is no exception. As a continent rich in natural resources offering attractive destinations for foreign investors, and home to fast-growing economies (second-fastest-growing region after Asia according to African Development Bank Group's biannual publication: Africa's Macroeconomic Performance and Outlook, January 2024), Africa is at the forefront of both opportunities and challenges in implementing ESG standards. At the recently concluded 5th edition of AfAA 2024 in Douala, Cameroon, themed "Arbitration Unbound: Advancing ESG in Africa," and during the Cameroon Arbitration Week (CAW) 2024, ESG and ESG-related disputes formed part of the discussions, reflecting their growing importance in African legal and business circles.

In response to the discussions at these events and inquiries from participants, I aim to address three key questions: What is ESG, and how is it perceived in Africa? Are ESG-related disputes likely to become common across the continent? And finally, what would be the most efficient mode of resolving such disputes in Africa?

What is ESG, and How is It Perceived in Africa?

ESG is not easily encapsulated by a single definition, but it can be understood as a framework that helps companies identify and report on non-financial issues related to their activities and revolving around environmental, social and governance parameters. ESG is thus meant to serve as a blueprint for sustainable development and ethical business conduct, which are essential in managing risks, ensuring long-term profitability, and maintaining stakeholder trust.

From an environmental standpoint, ESG covers constantly evolving topics including energy efficiency and renewable energies, greenhouse gas emissions, water management, biodiversity and forestry preservation, and waste and pollution reduction. In Africa, where industries such as mining, oil, and agriculture are prevalent, environmental impacts are significant. For instance, in Nigeria’s Niger Delta region, oil spills caused by petroleum companies have caused widespread environmental degradation, affecting local communities' health, livelihoods, and biodiversity. The Shell case in Nigeria is one such example, where oil pollution from extraction activities led to prolonged disputes between the company, local communities, and the Nigerian government, resulting in legal battles over compensation and environmental clean-up obligations.

The social component of ESG is more qualitative and addresses issues such as labour and social rights, land tenure and ownership, community engagement and aboriginal capacity building, ethics, health and safety, and diversity, equity and inclusion initiatives. In South Africa, for example, the Marikana massacre of 2012—where police opened fire on striking miners, killing 34—highlighted severe deficiencies in labour relations and worker rights within the mining industry. The incident, which stemmed from poor working conditions and wage disputes, emphasised the importance of social responsibility and the need for companies to proactively engage with local communities and ensure better labour standards.

Governance, the third pillar of ESG, focuses on corporate structures, processes and practices through which issues of common concern are decided upon and regulated, such as board diversity, executive compensation, reporting and accountability, and anti-corruption efforts. Many African nations have been tackling corruption within their governance structures, and companies in these regions are expected to adopt transparent governance frameworks. South Africa’s King IV Report on Corporate Governance has been a key guiding document for companies across the continent to improve governance standards.

ESG is now embedded in African development agendas. The African Union’s Agenda 2063 places ESG principles at the heart of economic growth and sustainability, in line with the United Nations' Sustainable Development Goals (SDGs). African companies, irrespective of size, are experiencing growing pressure from investors, regulators, and civil society to operate in line with ESG paradigm. These demands are especially strong in sectors like mining, energy, and manufacturing, which have traditionally had a heavy environmental and social footprint.

Are ESG-Related Disputes Likely to Become Common in Africa?

The answer is an emphatic yes. ESG-related disputes are not only likely to increase but may become a significant part of Africa’s legal and business landscape. Several factors contribute to this trend.

Africa is rich in natural resources, making it an attractive destination for international investment. However, companies engaged in resource extraction—such as oil, gas, and minerals—often face scrutiny over their environmental and social impacts. For instance, in Zambia, the operations of Konkola Copper Mines (KCM) have been linked to significant environmental damage, leading to health concerns for surrounding communities. In 2021, the Zambian government launched proceedings to revoke KCM’s license over ESG-related violations, particularly concerning pollution, which led to widespread unrest and calls for accountability from investors and local stakeholders.

Additionally, responsible investors are increasingly requiring African companies to incorporate ESG compliance clauses into investment contracts in line with their own legal and regulatory obligations. These clauses often mandate companies to adhere to local and international ESG laws and regulations and take proactive steps to comply with anticipated regulatory changes. In Ghana, the country’s offshore oil and gas industry has faced similar challenges, as investors demand higher environmental and social standards from exploration companies to mitigate risks of environmental damage and community displacement. The failure to meet these obligations can lead to contractual disputes, which often require legal intervention.

Moreover, Africa is seeing the rise of public interest litigation driven by environmental and social concerns. In Kenya, the case of the Lamu coal power project highlighted the role of civil society in holding companies accountable for ESG violations. The project faced significant backlash from local communities and environmental groups, who argued that the power plant would have devastating environmental and health impacts. In 2019, Kenya’s National Environmental Tribunal cancelled the environmental license for the project due to non-compliance with sustainable development goals, demonstrating the growing power of ESG-focused activism.

As the awareness of ESG principles continues to grow in Africa, so will the number of disputes related to non-compliance, whether in the form of environmental degradation, human rights violations, or governance failure, exposing both companies and governments.

What Will Be the Preferred Mode of Resolving ESG-Related Disputes in Africa?

Arbitration is poised to be the preferred mechanism for resolving ESG-related disputes in Africa, just as it has become the leading method for resolving commercial and investment disputes. There are several reasons for this trend.

First, arbitration offers flexibility and neutrality, allowing parties to select independent arbitrators with specific expertise in ESG matters. This is crucial for resolving disputes that involve complex environmental, social, or governance issues. For example, in a case where a mining company faces accusations of environmental damage and human rights abuses, the selection of arbitrators who understand both the legal and technical aspects of mining and ESG standards becomes essential. Arbitration also allows for the appointment of experts who can assist the tribunal in understanding the intricacies of environmental or social issues leading to more informed decisions including on remediation and compensation.

Second, the enforceability of arbitral awards under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards makes arbitration particularly attractive for ESG-related disputes involving cross-border investments. Many African countries are signatories to the New York Convention, meaning that arbitral awards are recognized and enforceable in these jurisdictions. This is a significant advantage for international investors, who can rely on arbitration to resolve disputes and enforce decisions across multiple countries.

However, arbitration is not without challenges. One major issue is the principle of consent—arbitration traditionally requires all parties involved to agree to arbitration. In ESG-related disputes, particularly those involving local communities, this can become problematic, as many affected parties may not be signatories to the original investment contracts. For instance, communities impacted by large-scale development projects, such as dam construction or mining operations, may have limited access to formal arbitration processes, leading to concerns about inclusivity and fairness. In such cases, alternative dispute resolution mechanisms like mediation, community consultations, or multi-stakeholder dialogues should be constructively explored to complement arbitration and ensure broader participation.

Additionally, the power imbalance between large corporations and local communities remains a challenge. Local populations may lack the financial resources or legal expertise to engage in complex arbitration proceedings. To address these concerns, African arbitration institutions and governments could develop frameworks that ensure access to justice for marginalised groups affected by ESG violations. For example, African arbitration centres could implement special mechanisms to facilitate the inclusion of community representatives in arbitration or encourage companies to engage in pre-arbitration negotiations with affected stakeholders.

Despite these challenges, arbitration remains the most practical option for resolving ESG-related disputes in Africa, particularly when coupled with other complementary dispute resolution mechanisms. Arbitration’s flexibility, coupled with the global enforceability of awards, makes it a powerful tool for resolving ESG issues on the continent.

Conclusion

ESG issues are no longer optional for businesses in Africa—they are now integral to corporate responsibility, investment decisions, and long-term sustainability. The continent’s wealth of natural resources, coupled with the growing pressure from global investors and civil society for responsible business conduct, make ESG compliance a priority. As ESG-related disputes become more common, arbitration will likely be the preferred resolution mechanism due to its flexibility, neutrality, and enforceability.

However, to ensure equitable outcomes in ESG disputes, African arbitration centres, legal practitioners, and governments must continue developing frameworks that balance the interests of corporations, investors, and affected communities. By adopting proactive ESG practices, companies operating in Africa can not only avoid disputes but also contribute to the continent’s sustainable growth and development.