A controversial legal process known as investor-state dispute settlements (ISDS) is making it difficult for governments to mobilize finance for ambitious climate action.
When assets are protected by international investment treaties, like the Energy Charter Treaty, legal claims can be brought against countries by investors who feel they are negatively impacted by government policies. For example, Italy was recently ordered to pay UK-based oil/gas company Rockhopper more than €190 million for the Italian government’s refusal to grant an offshore oil concession. A May 2022 study in Science found potential ISDS claims globally could total as much as $340 billion.
Five young people whose resolve was hardened by floods and wildfires recently took their governments to the European Court of Human Rights (ECHR). Their claim concerns each country’s membership of an obscure treaty they argue makes climate action impossible by protecting fossil fuel investors.
The energy charter treaty has 52 signatory countries which are mostly EU states but include the UK and Japan. The claimants are suing 12 of them including France, Germany and the UK – all countries in which energy companies are using the treaty to sue governments over policies that interfere with fossil fuel extraction. For example, the German company RWE is suing the Netherlands for €1.4 billion (£1.2 billion) because it plans to phase out coal.
The claimants aim to force their countries to exit the treaty and are supported by the Global Legal Action Network, a campaign group with an ongoing case against 33 European countries they accuse of delaying action on climate change. The prospects for the current application going to a hearing at the ECHR look good. But how simple is it to prise countries from the influence of this treaty?
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Photo: Global Justice Now
14 November 2022
Statement on ISDS and climate
Civil society organisations are calling on governments to remove the threat that ISDS (investor state dispute settlement) poses to the climate. The following statement outlines our primary concerns and demands. We seek to put pressure on our governments as they meet at COP 27 in November 2022.
Please read it and consider signing on using the form at the bottom
Fossil fuel companies have access to an obscure legal tool that could jeopardize worldwide efforts to protect the climate, and they’re starting to use it. The result could cost countries that press ahead with those efforts billions of dollars.
Over the past 50 years, countries have signed thousands of treaties that protect foreign investors from government actions. These treaties are like contracts between national governments, meant to entice investors to bring in projects with the promise of local jobs and access to new technologies.
Climate change expert report warns that ISDS can block climate action
April 6, 2022: For the first time, the Intergovernmental Panel on Climate Change (IPCC) has warned that climate action is being jeopardised by trade agreements which give global corporations the right to sue governments through clauses known as ‘Investor State Dispute Settlement’ mechanisms, or ISDS.
In its Sixth Assessment Report on the impacts of climate change, the IPCC warned that ISDS can “be used by fossil-fuel companies to block national legislation aimed at phasing out the use of their assets.”
The report indicates that the problem is not isolated to one specific agreement or institution, but that a network of bilateral trade and investment treaties function to protect fossil fuel interests:
“A large number of bilateral and multilateral agreements, including the 1994 Energy Charter Treaty, include provisions for using a system of investor-state dispute settlement (ISDS) designed to protect the interests of investors in energy projects from national policies that could lead their assets to be stranded.”
Investor–state disputes in the fossil fuel industry
By Lea Di Salvatore
Executive Summary
The fossil fuel industry is the most significant contributor to climate change. As the consequences of burning fossil fuels become increasingly evident, policy-makers across the globe are stepping up their efforts to curb emissions.These actions inevitably aim at curtailing fossil fuel activities. However, under current international investment law (IIL), foreign investments in fossil fuel projects are granted special protection and access to investor–state dispute settlement (ISDS). Through this system, investors can bring claims to international tribunals regarding regulatory measures adopted by a host state that they allege breach their investment privileges under IIL.
This report analyses the trends in investor–state disputes initiated by investors in the fossil fuel industry to understand the extent to which this industry relies on ISDS to protect its investments.The emerging picture is that the fossil fuel industry has been a pioneer of the ISDS system and has been using it extensively to protect its investments. This protection can hinder the development and implementation of measures to tackle climate change and can present a major obstacle for countries seeking to phase out fossil fuels.
LONDON — The Energy Charter Treaty is not widely known, yet it’s feared the influence of this international agreement could be enough by itself to derail hopes of capping global heating to 1.5 degrees Celsius.
The ECT contains a highly contentious legal mechanism that allows foreign energy companies to sue governments over climate action that could hurt future profits.
These “corporate court” cases, sometimes referred to as investor-state dispute settlements, are highly secretive, take place outside of the national legal system and can often lead to far larger financial awards than companies might otherwise expect.
[Somesh Dutta specializes in international dispute resolution. He is currently working with the Max Planck Institute Luxembourg for International, European & Regulatory Procedural Law as a Research Fellow and is a member of the International Max Planck Research School for Successful Dispute Resolution (IMPRS-SDR).]
In particular, developing economies with a large consumer base may have a crucial role in shaping the future of international investment adjudication, and thus an influence on the future flow of capital for global economic growth.
by Edwina Kwan, Amanda Lees, Patric McGonigal and Nick Horton
The global energy transition to counteract the impacts of climate change has seen an enormous growth of investments into renewable energy projects around the world. With China pledging to be carbon neutral by 2060 and other countries following suit, there are extensive opportunities for investment in renewables. However, the changing regulatory, political, and technological environment of the renewable energy sector poses real risks for investors. These risks are likely to lead to an increase in disputes between investors, host countries and commercial contracting parties.
Below, we highlight some recent international disputes in the renewable energy sector and consider the impact of these cases, in particular the first case against Japan, for foreign investors in renewable projects.
CCSI (Columbia Center on Sustainable Settlement, Columbia University) hosted an online discussion with George Kahale on issues surrounding valuation in ISDS disputes, which has become the most dangerous aspect of ISDS, as evidenced by the many enormous damages awards of recent years.
This discussion was open to all government officials, civil society, international organizations, and academics.
George Kahale is the chairman of Curtis, Mallet-Prevost, Colt & Mosle LLP. He has represented many governments and State companies in international transactions and disputes, including several of the world’s largest and best known international arbitrations.
Does investor protection increase foreign direct investment? A meta‐analysis
par Josef C. Brada, Zdenek Drabek, Ichiro Iwasaki
Abstract
We undertake a meta‐analysis of the effects of international investment agreements for the protection of foreign investors on foreign direct investment using 2107 estimates drawn from 74 studies. Our meta‐analysis finds robust evidence that effect of international investment agreements is so small as to be considered zero. However, our results do not rule out the possibility that the effect of these agreements is, in fact, positive and that current research methods are insufficiently powerful or precise to identify the underlying genuine effect. FDI from developed countries appears to be more responsive to the existence of investment protection, and there is evidence of publication–selection bias in favour of studies that find a positive effect for investor protection.
Does investor protection increase foreign direct investment? A meta‐analysis
Journal of Economic Surveys | 30 September 2020
Does investor protection increase foreign direct investment? A meta‐analysis
par Josef C. Brada, Zdenek Drabek, Ichiro Iwasaki
Abstract
We undertake a meta‐analysis of the effects of international investment agreements for the protection of foreign investors on foreign direct investment using 2107 estimates drawn from 74 studies. Our meta‐analysis finds robust evidence that effect of international investment agreements is so small as to be considered zero. However, our results do not rule out the possibility that the effect of these agreements is, in fact, positive and that current research methods are insufficiently powerful or precise to identify the underlying genuine effect. FDI from developed countries appears to be more responsive to the existence of investment protection, and there is evidence of publication–selection bias in favour of studies that find a positive effect for investor protection.
Japan backs ISDS in fierce debate at Energy Charter Treaty review
Reports on the Energy Charter Treaty process to ‘modernise’ continue to demonstrate entrenched opposition to efforts to make it support the Paris Climate Agreement to limit global warming to less than 2°C.
The European Union has proposed amendments that reinforce governments’ “right to regulate” on issues like public health and the environment. But any change requires unanimous agreement by the ECT’s 53 signatories.
On September 8, 2020, 97 European Parliament MPs and another 49 MPs from national parliaments in Europe content/uploads/sites/2/2020/09/Statement-on-Energy-Charter-Treaty-ENG_080920.pdf” target=”_blank” rel=”external noopener”>called for the “EU negotiators to ensure that the provisions in the ECT that protect foreign investment in fossil fuels are deleted and thus removed from the ECT. Similarly, ISDS provisions need to be scrapped or fundamentally reformed and limited. If this is not achieved at the end of the 3rd negotiation round planned for the autumn, we ask EU Member States to explore pathways to jointly withdraw from the ECT by the end of 2020”.
George Kahale III
Abstract
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