Global Development Policy Center, Boston University | 27 May 2025
Ending the era of investor-state dispute settlement
Most of the world’s countries have renewed their interest in leveraging industrial policies to address concerns about global competitiveness, economic security and much needed investment in low-carbon technologies. Indeed, to combat climate change, the world needs rapid, diverse and experimental action by all nations, regardless of development or income level. To enable such action, the current international investment regime must be overhauled to remove obstacles to policy change and facilitate economic restructuring toward more regional and local production in the new low-carbon economy.
At the core of the regime, which is composed of thousands of international investment agreements (IIAs), is a problematic enforcement mechanism known as investor-state dispute settlement (ISDS). ISDS cases have consistently posed threats to countries regulating in accordance with their domestic priorities. Moreover, cases related to the energy investments are on the rise and the monetary awards against states that may accrue as a result are substantial. Experts across international organizations, national governments and academic institutions have argued that the investment regime is not fit for the purpose of managing today’s global economy and especially the energy transition.
In a new Think 7 (T7) policy brief, Kyla Tienhaara, Rachel Thrasher and Kevin P. Gallagher outline how G7 countries, as significant participants in the IIA regime, are well-positioned to demonstrate leadership on this issue, and in so doing can modernize investment rules, reduce distortions and establish a new basis for global investment governance.
Policy recommendations
- Carve-out fossil fuels and/or climate policy. Carve-outs have already been deployed in IIAs to remove protection for other harmful investments and to protect state sovereignty in sensitive areas (e.g., tobacco control, tax policy).
- Remove ISDS from existing investment treaties. To accomplish the removal of ISDS efficiently, G7 countries, or some subset of them, could lead the development of a plurilateral agreement to alter all IIAs amongst the parties that sign up to it.
Navigating today’s global economy and meeting the needs of climate and debt crises is a complex challenge requiring substantial policy space. The current piecemeal approach to the reform of the investment regime is antithetical to a sustainable, just and inclusive future. Instead, G7 countries should pursue ambitious proposals to remove ISDS risk from all their existing and future IIAs. This will protect state sovereignty in the G7 and beyond.
