Climate Change and Investment Treaty Arbitration

The pressure on States and corporates to take action to address the socio-economic and environmental impacts of climate change is rapidly increasing. This pressure has resulted in a substantial rise in the number of climate change-related disputes. Although many of these disputes have thus far been brought before national courts, arbitration is likely to become an increasingly important method for resolving climate change-related disputes in the near future, since these disputes are often of an international nature and may benefit from the use of a neutral forum. In particular, there is likely to be an increase in climate change-related investment treaty arbitration, given the rising influence of climate change in the investment treaty landscape. This will bring into focus a variety of considerations affecting investments which are subject to the protection of one or more investment treaties.

The investment treaty legal framework

There are currently over 3,000 international investment treaties (both bilateral and multilateral) in force across the globe which, together, constitute the underlying legal framework for international investment. These investment treaties, entered into between States, commonly include ‘investor protection’ provisions, by which contracting States agree to afford certain protections to investments undertaken in their territory by foreign investors.

Investor protection provisions often include a guarantee for the fair and equitable treatment of investments, and for their ‘full protection and security’, a guarantee against the expropriation of investments, and an undertaking by contracting States not to act in an arbitrary or discriminatory manner towards foreign investors, or foreign investments, within their territory. If these protections are breached by a contracting State, wronged investors will usually have the right to bring arbitral proceedings directly against that State under the investment treaty.

The protection of States’ right to regulate in new generation treaties, and those under revision

Certain new-generation investment treaties have incorporated environmental protection provisions in order to reflect the climate change-related commitments that States are signing up to in the wake of the Paris Agreement (for further information on the Paris Agreement, please click here). The environmental protection provisions under these investment treaties have included restrictions to the protections offered; for example, exceptions to treaty provisions that would otherwise be available to investors, in the interests of achieving environmental objectives and protecting States’ right to regulate.

Existing investment treaties are also being revised to include similar environmental protection provisions. The Energy Charter Treaty (ECT), for instance, is currently being revised in an attempt to align it with the goals of the Paris Agreement. As part of the revision process, it has been proposed that investments in fossil fuels should be carved-out from the ECT’s investor protection provisions. If accepted, this proposal would represent a dramatic change in the scope of the ECT, meaning that investors in fossil-fuel based industries may no longer by protected by the ECT’s ambit and may therefore not be able to bring claims in the future under this instrument.

As more investment agreements are concluded, or revised, in the future, investors should remain aware that similar exceptions to investor protection provisions will likely become more commonplace as States continue to implement climate change-related legislation.

Incorporation of climate change-related commitments upon investors

New generation investment treaties and revisions to existing investment treaties may also impose climate change-related obligations upon investors.

Some new generation bilateral investment treaties have, for example, mandated that investors conduct a full environmental impact assessment for any investment, and maintain an environmental management system throughout the life of their investment(s).

Although it is currently unclear whether contracting States could bring positive claims, or counterclaims against investors, on the basis of these provisions, failure to comply with these obligations may affect the admissibility of investors’ own claims against host States.

The incorporation of States’ climate obligations into investor protection provisions

While new generation investment agreements tend to (i) limit States’ exposure to investor-State claims resulting from pro-environmental action by States (by restricting investor protections) and (ii) impose climate-related obligations upon investors, both new and existing treaties place obligations upon States, too, to adhere to their climate-related obligations.

For instance, the proposed revisions to the ECT include an obligation on contracting States to “effectively implement…the Paris Agreement…including [a State’s] commitments with regard to its [Nationally Determined Contributions]“.

Even under existing investment agreements, it may be possible to argue that a State’s duty to afford full protection and security to an investor, or to respect an investor’s legitimate expectations (both common investor protections) extends to an obligation to respect its climate commitments. If a contracting State does not, for example, adhere to its Nationally Determined Contribution goals under the Paris Agreement, investors may have a legal basis to bring a claim against that host State for breaching its investment treaty obligations. That said, investors will likely face substantkwadial evidentiary challenges in proving that a host State’s failure to comply with its climate change-related commitments caused the investor to incur losses.

The future of climate change in investment treaty arbitration

Given the increasing influence of climate change in the investment agreement arena, it is likely that we will see a rise in the number of investor-state climate change-related disputes in the future. Contracting States and investors should therefore keep up-to-date with developments in this area over the coming years.

For further information on the overlap and interplay between the climate change and investment treaty legal frameworks, you can listen to the latest episode of our ‘International Arbitration: Across the Pond‘ podcast.

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