Climate change and investor-state dispute settlement

Jones Day | February 2022

Climate change and investor-state dispute settlement

Climate change litigation is often viewed by companies as a risk. However, it is also an opportunity—if brought in the right forum—for companies exposed to certain climate-related government measures to vindicate their rights. The past decade has seen increasing use of such a forum: Investor-State Dispute Settlement ("ISDS"). In ISDS cases, individuals and entities of one State can bring claims directly against another State for unlawful government interference with their foreign investment, so long as the two States have entered into a bilateral or multilateral treaty—and there are more than 3,000 such treaties—allowing these claims. A majority of ISDS cases are governed by the Convention on Settlement of International Investment Disputes, or the ICSID Convention.

As many investment treaties were enacted before climate change was at the forefront of public consciousness, these treaties may be in conflict with measures taken to satisfy States’ new climate-related international obligations. As a result, in recent years investors have started to challenge States’ climate-related actions before ISDS tribunals. Indeed, according to one tracker, there are currently at least 13 pending climate change-related disputes brought by investors against States.

Among these challenges are claims for compensation following the introduction of climate-related measures diminishing the value of investments. In two separate cases filed in 2021, German energy companies RWE and Uniper brought claims against the Netherlands under the Energy Charter Treaty, alleging that the government’s planned phase-out of coal power plants by 2030 was a violation of the treaty. Investors have also sued States for amending or rolling back climate-related measures, notably in the case of changes to incentive programs introduced by European governments to encourage investment in renewable energy. In The PV Investors v. Spain, for example, a group of investors filed suit against the Spanish government alleging that a series of reforms to an earlier energy regime, including a 7% tax on power generators’ revenues and a reduction in subsidies for renewable energy producers, violated the Energy Charter Treaty. The tribunal ruled in favor of the investors, awarding them approximately $100 million in damages.

There also have been a number of ISDS claims stemming from environmental permitting decisions. In 2021, for example, Canadian TC Energy initiated a legacy claim against the United States under the North American Free Trade Agreement ("NAFTA") seeking $15 billion in damages following the U.S. government’s decision to revoke the company’s permit for the Keystone XL pipeline.

The ISDS regime does not, however, allow foreign investors to restrict States’ ability to engage in proportionate and necessary regulation in protection of the environment. Modern investment treaties expressly protect a State’s right to engage in legitimate environmental regulation. For example, Chapter 14 of the United States–Mexico–Canada Agreement, or USMCA, which replaced NAFTA, provides that "[n]othing in this Chapter shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health, safety, or other regulatory objectives." Moreover, even older treaties, which usually contain no carve-outs for environmental protection, have been interpreted to recognize legitimate environmental measures.

Nonetheless, government measures that are unreasonable, disproportionate, arbitrary, or discriminatory may trigger valid treaty claims. As such, ISDS tribunals are (and will continue to be) tasked with balancing the competing interests of foreign investors and host States.

ISDS is therefore likely to be an increasingly important avenue for the resolution of climate change disputes. Companies in industries most affected by States’ climate change obligations (e.g., fossil fuels, mining, etc.) should audit their corporate structure and change it, if needed, to ensure they are protected by an investment treaty. Such restructuring should take place before any climate-related dispute with the State has arisen or is reasonably foreseeable. Notably, some treaties have superior investor protections than others. It is thus important to assess which treaty would best protect the company from any adverse climate-related government measures.

source: Jones Day