The highly controversial practice of allowing investors to sue national governments before investment tribunals risks a chilling effect on meaningful action on climate change, environmental law experts have warned.

Legal experts from ClientEarth are calling governments around the world to address the risk that investor-state dispute settlement (ISDS) mechanisms could halt climate measures, such as phasing out fossil fuels or introducing carbon taxes.

Investment arbitration mechanisms like ISDS are included in around 3000 investment and trade agreements worldwide, like the trade agreement between the EU and Canada (CETA). They enable big corporations to side-line domestic courts and sue governments – whose environmental or social policies may affect their investment – in massive compensation claims.

Rapid exit

In a brief submitted to the UN Commission on International Trade Law (UNCITRAL), where discussions to reform the ISDS system are ongoing, legal experts have warned governments participating in the reform process that foreign investors may want to use ISDS to challenge and delay emission reduction policies needed to implement the Paris Agreement.

Co-author of the briefing, ClientEarth Trade and Environment lawyer Amandine Van den Berghe said: “The ISDS system has given rise to an alarming number of claims against environmental measures, which are already the fastest growing trigger for dispute. This poses a specific and concerning threat to the global fight against climate change.

“We are running out of time to take meaningful action to avoid catastrophic climate change.

“Amid this climate emergency, we call on governments to respect their international commitments, and push for a deep and systemic reform of ISDS, so that these mechanisms are not able to undermine efforts to save the planet.”

The briefing’s other co-author Dr Kyla Tienhaara from Queen’s University said: “A rapid exit from the system is by far the preferable option. The window for action to avoid catastrophic climate change is closing and we must quickly remove any obstacles that could prevent or delay the adoption of emission reduction policies.”

Environmental standards

As part of the last phase of the UNCITRAL ISDS reform process, ClientEarth urges parties involved to address the regulatory chill effect of ISDS on climate change policy.

The Vattenfall case is the most striking example of government watering down their environmental standards because of an ISDS dispute.

In their brief to governments, legal experts put forward a series of proposals – the first calls on UNCITRAL working parties to develop a mechanism that allows countries to move away from traditional investment treaties and ISDS.

Alternatively, for states that are not ready to withdraw consent or terminate their treaties, legal experts recommend a series of five measures, which when combined should ensure that only responsible investors who respect international climate commitments can utilise ISDS:

• Exempt all measures taken in pursuit of international obligations under the Paris agreement on climate change from challenge under ISDS;
• Require exhaustion of local remedies before recourse to ISDS;
• Allow counterclaims and ensure full participation for affected third parties;
• Ban third party funding of cases;
• Include climate change considerations in the calculation method for compensation.

This Author 

Brendan Montague is editor of The Ecologist. This article is based on a press release from ClientEarth.

Image: Stop ISDS.