UNCTAD seeks climate-related reforms to international investment treaties

In a new report, UNCTAD cited evidence that investor–state dispute settlement (ISDS) is being initiated by investors to challenge climate policies (22-page / 671KB PDF). It described this as “a major concern”.

UNCTAD has published a separate paper setting out options for reform to the suite of around 3,300 international investment agreements (IIAs) (19-page / 849KB PDF), which it said “lack proactive provisions aimed at effectively supporting climate action”.

“Reform of existing IIAs is essential to ensure that IIAs do not hinder states from implementing climate change measures and from achieving a just transition to low-carbon economies,” it said.

UNCTAD said it would prefer that “a coordinated multilateral approach to IIA reform” is taken, as this would provide for legal certainty. However, it said “more immediate, smaller scale reforms at the bilateral or regional level should be pursued in parallel”.

According to UNCTAD, there have been at least 175 environmental, 192 fossil fuel and 80 renewable energy ISDS cases lodged that relate to climate change policies. Most of the cases were raised with reference to IIAs that were finalised in the 1990s, which UNCTAD said “were often concluded with little or no attention to host states’ regulatory flexibility for environmental protection and climate action”.

UNCTAD said: “While not all claims brought by investors under IIAs are successful, ISDS is costly. In general, the disputing parties – including the respondent states – incur significant costs for the arbitrators’ work, the administration of proceedings and legal representation, all of which usually amount to several million dollars or more. In addition, claimants and respondent states face several years of uncertainty while ISDS proceedings concerning the challenged measures are ongoing. The amounts at stake in ISDS proceedings can be hundreds of millions and even billions of dollars. Moreover, ISDS proceedings may have reputational costs for the respondent states.”

“More immediate IIA reform steps are needed to alleviate ISDS risks and create the necessary policy space for states to take urgent climate action, including through a higher level of flexibility in undertaking regulatory changes,” it said.

One IIA, the Energy Charter Treaty (ECT), is in the process of being reformed. The revised ECT is due to be signed in November 2022 and will allow ECT members to phase out investment protections currently afforded to fossil fuel energy investments; in-keeping with the green agenda and decarbonisation objectives of signatory states. However, Poland recently drafted legislation aimed at withdrawing from the ECT. It has been reported that the country does not believe the ECT reforms will align with EU law.

Earlier this month, it was also reported that the first ECT claim against France has been brought by a German renewable producer before the International Centre for the Settlement of Investment Disputes (ICSID).

Clea Bigelow-Nuttall, who specialises in investor-state dispute resolution at Pinsent Masons, said: “The role and reform of investor-state arbitration as a mechanism to resolve climate change, environmental and energy-related disputes is and should be a hugely important focus for the international arbitration community as a whole. Reform of the current regime is necessary to make sure that states are able to move forward with the energy transition programmes that are essential to climate protection while continuing to provide legal certainty that is crucial to the promotion and protection of international investments.”

The role of arbitration in resolving energy disputes, and the impact, risks and challenges of climate change and the energy transition on business activity and disputes in the energy sector, are issues currently being interrogated in a study being led by Queen Mary University of London in partnership with Pinsent Masons. Parties to energy-related arbitrations, disputes practitioners, arbitrators, academics, experts and arbitral institutions are encouraged to complete the 2022 energy arbitration survey. The survey is open until 12 October and the results are scheduled to be published in January 2023.