ImpACT International | 10 November 2023
ISDS mechanisms: The power of highly anti-democratic corporate interest
In July 2023, the United Kingdom formally agreed to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with 11 other countries. Though it has been hailed as an opportunity for the UK to “enter or upscale their trade in these markets”, a number of civil society groups and academics have criticised the existence of ‘Investor-State Dispute Settlement Mechanisms’ (ISDS) within the trade deal.
Citing “huge financial risks”, a letter, headed by Global Justice Now, the Trade Justice Movement, the Canadian Centre for Policy Alternatives, 56 academics and 37 other civil society organisations, has urged Prime Ministers Rishi Sunak and Justin Trudeau to take “immediate steps” to ensure the treaty does not block their ability to establish and enact their own policies.
Investor-State Dispute Mechanisms are highly anti-democratic agreements within trade deals that give corporate interest the power to supersede democratic decisions if they believe it has harmed past, present or future profits. Essentially, the scope of a states ability to introduce new policies and change or remove old policies becomes highly restricted. Companies are able to strong-arm governments into following corporate policy goals, rather than the interests of the voting population. Disputes are settled outside of the host countries domestic legal and court systems by an unaccountable, three-person tribunal.
We at impACT, have previously discussed one of the more well-known Investor-State Dispute Settlement cases in recent years: the Honduras/Prospera dispute. The government of Honduras, after a military coup, introduced the highly questionable ZEDE policies, establishing highly unregulated economic zones. This enabled the Delaware-based company ‘Prospera’ to move to establish a ‘city-state’ where the company would exercise political, judicial, and administrative control (though they were still subject to some Honduran laws) within the nation. Under these laws, Prospera looked to build a ‘crypto-libertarian’ city-state on the island of Crawfish Rock. Beyond the deeply colonial aspects of this project, indigenous community members of Crawfish Rock did not give informed consent to the building of the city. In 2021, upon her election to the Presidency, Xiomara Castro immediately looked to remove the dubious ZEDE policies. However, as, in 1989, Honduras ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Prospera were able to begin legal action against the nation. Using the World Bank’s International Centre for Settlement of Investment Disputes, Prospera has tried to sue the nation for $10 billion USD, two thirds of the national budget. They have since threatened to remove themselves from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in protest.
Clearly, as is the case with Honduras, commitment to agreements and trade deals with ISDS mechanisms jeopardises the democratic integrity of any nation. This is a central argument of Global Justice Now and other signatories, who warn specifically of the dangers that ISDS mechanisms pose, namely reducing a states ability to “enact mandated climate and environmental policies”. Looking through the UNCTAD (United Nations Conference on Trade and Development) data, reveals that very often the interests of corporations deeply invested in the extraction of fossil fuels are represented through investor settlements. Whilst Global Justice Now and other signatories warn of the risks that the United Kingdom faces, particularly from “aggressive” Canadian Investors, UK-based corporations are regular users of the same mechanisms. Britain being a signatory to a number of treaties with ISDS allowances, ‘British’ corporations have regularly used such treaties (in particular the Energy Charter Treaty) to win exorbitant amounts of money in dubious cases against a number of states.
British corporations, particularly active in the extraction of fossil fuels, have often used ISDS mechanisms to ensure that environmental policies don’t impact profits. For example, Rockhopper, a UK-based oil and gas exploration production company, won an investor dispute case in Italy in August 2022. The state was ordered to pay 190 million euros, though this figure could rise to 250 million, after Italy decided to ban new oil and gas projects within 12 nautical miles of the coast. Though initial investments from Rockhopper only stood at £29.2 million, they were able to receive compensation for more than nine times the original investment due to claims to losses on future profits. In Slovenia, we see a similar pattern. The company Ascent Resources Plc. filed a suit claiming 500 million euros in damages against the Slovenian state after they began “populist campaign carried out by Slovenia against investors … prevent[ing] the development of Petišovci oil and gas field”. Clearly, extractivist companies like Rockhopper and Ascent Resources are using ISDS mechanisms to hamstring democratic action, particularly in relation to environmental and climate policies that exist in direct opposition to their interests. Beyond financially punishing nations, corporations using such language as ‘populist campaigns’ are clearly attempting to further degrade democratic processes in order to paint popular democratic decisions as irrational, providing a legal basis for continued ISDS disputes, and to protect their interests. Data recorded from UNCTAD reveals that British corporate interest regularly, over 100 times since 1987 (though there are more instances not recorded by UNCTAD), triggers ISDS mechanisms when states introduce policy that prevents profit extraction. With myriad other examples, it indicates that not only is Britain at risk of ‘aggressive’ use of investor dispute mechanisms, but other nations are at risk of anti-democratic corporate legal action from British business interest.
In a similar letter Public Citizen, AFL-CIO, Sierra Club, the Institute for Policy Studies and over 200 other civil society organisations, looked to highlight the anti-democratic dangers of ISDS mechanisms to President Joe Biden. Explaining that such mechanisms “creates unfair an playing field that priorities the needs of corporations over those of workers, their families, and the environment” and suggest that, the US should use legal mechanisms to terminate ISDS liabilities across all trade deals with ISDS enforced pacts. We at impACT would like to echo these wider, more inclusive, policy recommendations in Britain.
Sown into trade pacts and investment deals, British commitment to ISDS mechanisms has given exclusive rights to corporate interests over the rights of its citizens and domestic businesses. Whilst these policies continue to exist, the democratic integrity of Britain, particularly in relation to our ability to introduce cogent environmental policy, is at serious risk.
We implore Rishi Sunak to reconsider his commitment to corporate interest and remove all Investor-State Dispute Settlement mechanisms in all multilateral or bilateral trade deals and investment agreements. Of course, removing ISDS mechanisms within the CPTPP is a good start, but Britain must protect itself and other nations from its own corporate interests by removing all ISDS mechanisms.