Foreign investment is common for mining companies, but it is not risk-free. This risk can nevertheless be mitigated by investment protections contained in international investment treaties. Investor protections often include (i) obligations on the state to protect the investment from unfair governmental interference and (ii) dispute resolution with the state via international arbitration. However, newer treaties are also imposing requirements on investors, such as compliance with ESG-related standards. Investment arbitration therefore has a potentially growing role in resolving ESG-related disputes (as highlighted in an October 2023 report by the IBA), particularly in the mining sector, where appropriately balancing business objectives and ESG concerns is an increasing priority. This is likely to be particularly significant in Africa and Latin America due to the economic importance of mining in these regions. This is also the result of three key factors examined below: environmental regulation, local community relations and demand for minerals to power the energy transition.
Firstly, there has been an increase in environmental regulation, including in Latin America and Africa. While such laws/regulations may be necessary, if poorly implemented they could result in significant interference with investors’ rights and lead to investment arbitration. Conversely, environmental regulation may also be used by states as a defence. For example, in Cortec Mining v Kenya (2018), the tribunal lacked jurisdiction as the claimant’s failure to obtain the requisite environmental assessments made the project an unlawful investment. Similarly, in Burlington v Ecuador (2017), Ecuador successfully counterclaimed that the claimant had breached domestic law by causing environmental damage. Depending on the circumstances, increasing environmental regulation may therefore provide grounds both for the commencement or defence of an international investment arbitration.
Secondly, local community impact is one of the ESG aspects facing the most investor scrutiny, as noted by a 2024 EY Report. Consultation of the local community on proposed mining activity is therefore increasingly relevant, particularly in Latin America and Africa, where mines are often in proximity to indigenous communities. The possible socio-environmental impact of mining can lead to community-investor-state tensions and consequent site inaccessibility, delay and even project termination; potentially enabling the investor to initiate arbitration due to wrongful government interference/inaction. However, failure to comply with legal community consultation obligations may also affect an investor’s claim. For instance, in Copper Mesa v Ecuador (2016), the tribunal reduced the damages awarded by 30% as the investor had contributed to its own loss by exacerbating community relations and not conducting required consultations. A delicate balance should therefore likely be struck between community demands and investors’ rights.
Thirdly, the expected heightened demand for key transition minerals such as lithium and cobalt, (particularly abundant in Latin America and Africa) may lead states to raise taxes and royalties or implement measures such as local content requirements to increasingly control these resources. In some circumstances, these changes may also lead to arbitration if they appear arbitrary and/or are unduly applied to ongoing projects.
The potentially growing role of investment arbitration in resolving ESG-related disputes makes awareness of investment protections and how these interlink with the rapidly developing ESG framework increasingly important, particularly during pre-investment where potential investors should focus on (i) structuring the investment to benefit from treaty protection, and (ii) completing any ESG legal prerequisites. Then, if any legal/regulatory changes arise during the investment’s lifetime, the investor will be better placed to comply with heightened standards and to find a solution with the state; helping to reduce the risk of dispute.
This article was first published in the fifth edition of ‘The Legal Industry Review’
Authored by Melissa Ordonez, Lucas Aubry, and Emma Ball.
