Environmental, Social, and Governance (“ESG”) is a framework for assessing a company’s environmental impact, social responsibility, and governance standards. These principles are increasingly integrated as contractual provisions in construction and real estate projects, to ensure adherence to regulatory reforms and market expectations. New requirements—ranging from ecological building compliance standards and emission reduction targets to labor protections and human rights safeguards—are reshaping project oversights and delivery.
The surmounting weight of ESG obligations and compliance is a leading cause for conflicts. Disputes often arise over missed sustainability targets, non-compliance with building standards, or breaches of labor and ethical commitments. Arbitration, a private and binding form of dispute resolution, is regarded as the preferred mechanism for addressing such matters, offering confidentiality and flexibility in handling these sensitive allegations.
This shift is evident globally, and is particularly prevalent in the Middle East, where countries such as Egypt, Saudi Arabia, and the United Arab Emirates are aligning national development strategies with ESG objectives. This article seeks to examine how ESG considerations are influencing dispute trends in construction and real estate, the role of arbitration in resolving them, and notable developments in both the Middle East and Europe.
The Middle East: New ESG Standards and Heightened Dispute Risks
In the Middle East, ESG considerations are rapidly gaining prominence – and this notion is actively reshaping construction and real estate practices across the region. Countries such as the UAE, Saudi Arabia, and Egypt have announced ambitious sustainability agendas.
For example, The UAE and Saudi Arabia, have committed to carbon neutrality by 2050 and 2060 respectively. Saudi Arabia is heavily investing in NEOM, a futuristic city powered by renewable energy. Moreover, Egypt and the United Arab Emirates have both respectively hosted the Conference of the Parties of the United Nations Framework Convention on Climate Change (“COP”), reinforcing their commitment towards the environment. The UAE’s rendition, COP 28, solidified the global commitment to accelerated climate targets. These national targets and strides towards sustainability are now cascading down into project-level requirements.
As a result, large-scale construction projects in the Middle East now frequently include contractual ESG clauses – such as mandates to use sustainable materials, acquire green building certifications for eco-friendly like LEED or Estidama, reduce site emissions or follow strict labor welfare standards. Some contracts even allow for termination or penalties if ESG goals are missed.
While the nature of such disputes is inherently confidential, anecdotal evidence and industry commentary suggest a steady rise in arbitration proceedings related to ESG breaches in projects within the Middle East. Whether the issue stems from environmental non-compliance or labor rights violations, companies are turning to arbitration to resolve these matters discreetly and avoid reputational harm.
Rise of ESG-Related Disputes in Construction Projects
ESG-driven disputes have increased in frequency as sustainability shifts from a mere aspirational goal to an enforceable obligation. A myriad of businesses are integrating ESG commitments directly into contracts – and these clauses are increasingly a source of conflict.
Why are these clauses leading to disputes? A dispute primarily arises when one party is accused of failing to satisfy the promised ESG standards. For example, a contractor might be contractually required to use certain recyclable materials or to qualify for a green building certification, and if they fall short, the developer or project owner may raise a claim for breach of contract. Likewise, joint venture partners may clash if one party’s practices expose the project to ESG compliance issues. Even banks are imposing ESG-related conditions on loans for projects – and non-compliance can trigger defaults or legal action.
One prominent subset of ESG disputes is “greenwashing”, false or exaggerated claims about being environmentally friendly. In a commercial context, business partners might end up in arbitration if, say, a supplier misrepresented the eco-friendly attributes of a product, or a developer overstated a project’s environmental ratings. These claims often involve a breach of warranty, which arises due to parties’ failure to adhere to a specified provision of the agreement.
The reputational stakes are high – being perceived as environmentally or socially irresponsible can damage a firm’s standing with investors, customers, and the public. This is precisely why companies prefer to handle ESG controversies out of the public eye.
Why Arbitration Is the Forum of Choice for ESG Disputes
Given the sensitive reputational issues inherent in ESG matters, companies are increasingly steering these disputes towards confidential arbitration to mitigate the risk of reputational harm and avoid dealing with the public implications of traditional litigation.
However, arbitration offers other advantages for ESG cases besides privacy. It provides a neutral forum – an important feature if a dispute involves international parties or a state. For instance, in the Middle East, a European investor and a local contractor might be more comfortable arbitrating in a neutral venue rather than resorting to litigation in one side’s national courts.
Arbitration also grants parties the ability to select specialized arbitrators with ESG or industry expertise, which can be crucial for technically complex issues. Moreover, the enforceability of arbitral awards under the New York Convention ensures that the arbitral decision is recognized globally. Major arbitral institutions and legal practitioners recommend arbitration as the preferred resolution method for ESG and climate-related disputes, due to these aforementioned features of neutrality, flexibility, and enforceability.
The trend is clear: as ESG clauses proliferate and disputes begin to follow, arbitration is poised to become the de facto forum for ESG conflict resolution.
The European Ripple Effect: ESG Regulations Cascading into the MENA Region
Looking ahead, European ESG regulations are set to significantly influence the Middle East, especially for projects involving European investors or supply chain partners.
The Corporate Sustainability Reporting Directive (CSRD) refers to the EU law requiring companies to report on sustainability, and the proposed Corporate Sustainability Due Diligence Directive (CSDDD) will impose broad obligations on European companies – and by extension, on their partners globally. These obligations include environmental reporting, human rights due diligence, and supply chain transparency.
Although the timeline for implementation has been slightly delayed, the substantive qualities of these regulations remain in place. For Middle Eastern developers or contractors working with European firms, this means a heightened risk of contract disputes, warranty claims, or even termination for non-compliance.
Consider the example of a Gulf-based supplier failing to meet environmental standards required by a European-funded infrastructure project. That breach could trigger arbitration under ESG clauses implemented to reflect CSRD or CSDDD requirements to protect the environment and human rights.
Examples of ESG Disputes and Arbitration Outcomes
Although many ESG disputes are private, a few key cases provide insight into how these issues are playing out in arbitration.
- Contractual Warranty Dispute – In a European case involving a breach of an environmental compliance warranty during an M&A deal, the tribunal found the seller liable due to pollution issues discovered post-transaction. This illustrates how technical ESG clauses in commercial contracts can lead to arbitration and, subsequently, restore the rights of the aggrieved party.
- Rana Plaza Accord Arbitrations – Following the tragic collapse of the Rana Plaza factory in Bangladesh, global brands filed a claim for arbitration under the Safety Accord , a legally binding agreement between global brands and unions to ensure workplace safety in the garment industry and enforce remediation against suppliers. This is a clear example of an ESG arbitration dispute that seeks to preserve labor and safety obligations.
- Masdar v. Spain – The Abu Dhabi-based renewable energy investor successfully brought a treaty arbitration against Spain, after the state rolled back on solar energy incentives. The tribunal ruled in Masdar’s favor, underscoring how climate policy changes can evidently trigger investor-state arbitration.
- Rockhopper v. Italy – A UK energy company won a significant arbitral award against Italy, after the State’s environmental legislation effectively blocked its offshore oil project. This case exemplifies the tension between environmental regulation and investor rights, and the role arbitration plays in resolving these conflicts.
These cases showcase that ESG claims are no longer speculative. they are reflected in current arbitration practices– and the Middle East is increasingly in the mix.
Sustainability Arbitrations: The Arbitration Community Embraces ESG Values
It’s not just the substance of disputes that is changing – arbitration procedures themselves are making a shift towards sustainability.
The Campaign for Greener Arbitrations has led the charge in reducing the carbon footprint of arbitral proceedings. Paperless filings, virtual hearings, and e-bundles are now standard practice, and are encouraged by major arbitral institutions. Law firms and tribunals alike are committing to minimizing unnecessary travel and adopting sustainable case management.
The Saudi Center for Commercial Arbitration (SCCA) has gone further. Its 2023 Arbitration Rules, explicitly encourage parties and tribunals to consider how technology can reduce environmental impact. This is particularly important given Saudi Arabia’s boom in megaprojects and the expected wave of ESG related disputes.
Institutions such as the ICC, LCIA, and DIFC-LCIA, have also embraced digital tools and sustainability protocols. The result: arbitration is now being conducted in a way that aligns with the ESG values at the heart of many disputes.
Conclusion: “Green” Arbitration Goes Mainstream
ESG obligations are now a central part of construction and real estate projects – and a growing source of conflict. Across the Middle East and Europe, businesses must be prepared to handle disputes over environmental compliance, labor standards, and sustainability claims.
Furthermore, arbitration is becoming the preferred forum to resolve these sensitive, reputationally charged disputes, given its prioritization of confidentiality and tailored approach.
For companies operating in the Middle East, the key takeaway is clear: ESG is no longer optional – it’s operational. And as ESG clauses become standard provisions in contracts, “green arbitration” is becoming the new normal.
