What are climate change and sustainability disputes?
Disputes between foreign investors and states
Investment arbitration
Examples of climate change and sustainability investment arbitration
Is international arbitration an appropriate forum for resolving such disputes?
Use of international arbitration to drive "climate-positive" policies
Claims in other international fora
Comment
This article looks at climate change and sustainability disputes that might arise between foreign investors and states and considers the role of international arbitration in resolving such disputes. For a simple introduction to the types of climate change and sustainability disputes being brought in international arbitration and an exploration of climate change and sustainability disputes arising out of contracts, see "Disputes relating to climate change and sustainability are increasing – but what are they?".
What are climate change and sustainability disputes?
It is not easy to develop a succinct, all-encompassing definition of climate change and sustainability disputes. The range of disputes brought to date is vast. It is a global phenomenon, where legal issues cross multiple fields of law and various causes of action. In addition, the risk profile is in a state of flux due to developments in technology, industry, science, regulation and law, and as society grapples with how to address these complex legal issues and who should shoulder the fiscal burden.
One helpful definition is offered by the UN Environment Programme (UNEP), which defined "climate litigation" as "cases that relate specifically to climate change mitigation, adaptation, or the science of climate change". It is particularly useful in that it is a broad definition, but also expressly captures disputes arising out of the rapid and deep transitions currently underway in the energy sector especially, but all other industries as well. That is critical – as noted in a recent International Energy Agency report, "[a]chieving Net Zero emissions [for the global energy sector] by 2050 will require nothing short of the complete transformation of the global energy system". In the history of humanity, such deep, societal-wide change has never been attempted in such a short space of time. It will present significant opportunities but also large risks, many of which will lead to disputes.
One tweak may be made to the UNEP's definition – namely, to include "sustainability". These disputes often encompass issues that traditionally would not be viewed as related to climate change but that are interdependent and interrelated. For example, human rights and other fundamental rights traditionally have been viewed as a distinct category of dispute and indeed legal practice, but in recent years there has been a significant increase in claims that are essentially climate-change-related disputes formulated as fundamental rights arguments, brought under international laws or national constitutions that enshrine such rights. Other examples include biodiversity and land degradation issues that are impacted by climate change and vice versa.
Disputes between foreign investors and states
Significant financial investment will be required to reach net zero emissions by 2050. Some of that investment will be made by states. The gap will be filled by private investment, including foreign direct investment (FDI).
With this rapid increase in new FDI, there will be an increase in disputes between foreign investors and host states. In part, this is a numbers game – a proportion of all investments end up needing to navigate some form of dispute, and with a steep and rapid rise in foreign investment, a concordant rise in investor-state disputes should be expected. But many of these investments carry an increased risk of disputes due to their particular characteristics – for example, involving novel innovations (technologies, products or processes), new infrastructure and systems, new collaborations (including with state representatives), new markets and new competitors. Many will be subject to a changing regulatory environment as new regulatory regimes are introduced or old regimes are adapted to be fit for purpose.
In parallel, states are more broadly imposing legal, regulatory and other changes in response to climate change or sustainability issues. States might change licensing, tariffs, subsidy or taxation regimes. Key assets or infrastructure might be privatised or nationalised, or states might expropriate assets belonging to investors. A number of investments will be heavily dependent on state behaviour, whether that be ensuring access to infrastructure or resources, or in more challenging jurisdictions, ensuring protection and security of foreign investments or the ability to take capital out of the jurisdiction.
Significant unilateral changes to the investment environment could be made in the name of climate change, which could seriously impact the profitability or even viability of existing investments. Investors might face losing the entire value of their investment or asset. Where states do not take steps to mitigate the impacts of those changes on existing investors or fail to offer adequate compensation, high stakes, strategically important disputes could follow.
Investor-state dispute settlement (ISDS) is a mechanism that enables foreign investors to resolve disputes with host states. ISDS mechanisms are commonly found in international agreements between states, such as bilateral investment treaties (BITs) or multilateral agreements, sector-specific treaties such as the Energy Charter Treaty (ECT) or free trade agreements (such as chapter 11 of the North American Free Trade Agreement (NAFTA)). They may also be found in domestic legislation or in contracts between investors and states.
These instruments typically set out substantive protections that states agree to give foreign investors in their countries. Common protections include:
- fair and equitable treatment;
- full protection and security;
- national treatment;
- most-favoured-nation treatment;
- no expropriation without full (and prompt) compensation; and
- free transfer of capital.
ISDS provides the mechanism for enforcing those commitments. If a state breaches its commitments, the investor has a right to bring a claim directly against the state, typically in international arbitration. This allows investors to have their disputes adjudicated in a neutral forum, before impartial arbitrators and in accordance with transparent institutional rules. Monetary compensation is the most common remedy. But other remedies may be available, such as declaratory relief and restitution, or interim relief to preserve the status quo while proceedings are ongoing.
States offer these protections to encourage FDI. In many sectors, such as energy and resources, foreign investments involve significant upfront investments in exploration, R&D and infrastructure, and a long-term commitment before profits are even seen by investors. Foreign investors also often bring not only the capital but the required technical skills and know-how to set up and run these major projects. States' investment treaty commitments give foreign investors comfort that they will be treated fairly and have a means of protecting their investment – otherwise, investors may have no meaningful remedy in the face of arbitrary, capricious or other unfair treatment by a host state.
Prior to ISDS, foreign investors had to resolve disputes before the states' own local courts. Investors often found themselves unable to obtain full – or indeed any – recovery. Obstacles included an absence of protections under the local law, sovereign or crown immunity rules, or a lack of judicial independence. Diplomatic intervention, to the extent available, was inconsistent and usually ineffective given the politicisation in direct discussions between sovereigns. ISDS emerged in the wake of World War II in part due to a desire to depoliticise investment disputes by removing them from the realm of diplomacy and interstate relations, as well as to stimulate foreign investment. In many ways, ISDS has been the backbone of global foreign investment.
Depending on the host state's legal regime, treaty protections and remedies can be more favourable than local law protections. For example, some domestic laws permit the state to expropriate property without providing any compensation or for less than full compensation – in the absence of treaty protections, investors would have no recourse should a state expropriate their investment.
The mere availability of treaty protections can also offer powerful disincentives for state misconduct. It can also facilitate a settlement where disputes do arise, preventing escalation and associated risks to unique often interdepended, long-term relationships.
Examples of climate change and sustainability investment arbitration
Investment arbitrations have been commenced in relation to renewable energy investments – in particular, solar, wind and hydropower. Many investments in renewable energies have been driven by government incentives such as subsidies or attractive tariffs, and the profitability of those investments (at least in the interim) may be reliant on those regimes. It is therefore unsurprising that a substantial number of investment arbitrations to date involve changes to renewables subsidy regimes. The claims (40 at last count) against Spain under the ECT following reforms Spain made to its renewable energy policies are a good example. Other European countries that pursued similar regimes have also faced ECT claims, and similar types of claims have been brought against Canada under the NAFTA. There have also been claims against states for alleged expropriation of renewable energy assets, or reneging on deals with investors in joint ventures for renewables projects. In some of those, the state was found to have breached its treaty commitments to the detriment of investors and substantial damages were awarded; in others, the state's defence prevailed.
Investment arbitrations have also been brought in relation to fossil fuel investments, including disputes concerning infrastructure, exploration and exploitation. In addition, a small number of claims have been brought in response to states' decisions to phase out nuclear power or the use or extraction of fossil fuels (in particular coal), ban mining of certain materials, or deny permits to allow construction of pipelines.
Research is being undertaken by Climate Change Counsel on ECT awards to assess the interaction between investor protection, energy policy and the clean energy transition. According to their preliminary findings, the fossil fuel cases studied to date generally addressed isolated issues that had nothing to do with climate change or the energy transition, whereas the renewable energy cases tended to be more systematic in character and concerned changes to the states' entire energy mix.(1)
Is international arbitration an appropriate forum for resolving such disputes?
Anti-ISDS advocates warn of the "chilling effect" of ISDS on public interest regulatory action. That chilling effect is often wrongly blamed on ISDS as a system, and is often misstated or exaggerated.
Most BITs preserve states' rights to pursue legitimate policy objectives, such as the protection of public order, security, morality and health, and taxation, among others. More recent BITs, such as the Netherlands' draft model BIT, expressly reference states' rights to regulate and address to deal with environmental and human rights issues.
ISDS awards do not interfere with states' rights to regulate, and nor do they invalidate the legislation or state conduct in question – they simply award compensation to investors where both state breach and damage is proved. ISDS offers investors a minimum safety net, to hold states to their commitments to act in good faith and not discriminate or expropriate private property of foreign investors without fair compensation.
On the whole, there is little evidence to support the allegation that companies are abusing ISDS. Of the 767 known ISDS arbitrations, only 32 awards dealt with state measures to protect the environment and public health.(2) Moreover, the statistics generally show ISDS outcomes are largely even and do not tend to favour either states or investors.
Concerns over the transparency of public interest disputes can also be dealt with, such as by states signing up to initiatives such as the Mauritius Convention on Transparency in Treaty-Based Investor- State Arbitration. Concerns over the ability of public interest groups to play a role in such disputes can be addressed by amicus curiae interventions.
Any possible chilling effect would not be the result of arbitration as a process, rather it would be the result of the substantive terms agreed by the state in the treaty. In the rare instance that older treaties do not provide exceptions for states to pursue legitimate policy objectives, there may be a case for renegotiation of those terms. But there is little benefit in a wholesale abandonment of the dispute resolution process that helps states and their investors resolve disputes, especially where no viable alternative dispute resolution mechanism is currently in place.
Use of international arbitration to drive "climate-positive" policies
Often overlooked is the potential for BITs and ISDS to facilitate and enforce sustainable development and "climate-positive" policies. As noted above, a significant proportion of claims to date have related to investments in renewable energies. In addition, some BITs impose obligations on states to promote sustainable development, climate-positive trade or sharing of environmental technologies.
The Netherlands' draft model BIT is again a good example – states must ensure "high levels of environment and labor protection" and "reaffirm their commitment" to international human rights and environmental treaties, including the Paris Agreement. It also allows tribunals to take into account investors' conduct where they have not complied with the United Nations (UN) Guiding Principles on Businesses and Human Rights and the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises.
ISDS tribunals have already shown a willingness to engage with such issues. In Urbaser SA & Ors v Argentina, in the context of investor claims under the Spain-Argentina BIT, Argentina counterclaimed that the investors had breached international human rights obligations (the asserted right to water). The tribunal held that it had jurisdiction over the counterclaim and that consideration of international human rights obligations was within its competence. Ultimately, Argentina failed to establish any breach of obligations owed by the claimants, but the tribunal's willingness to accept jurisdiction was a significant development.
Claims in other international fora
There has been a notable increase in climate change and sustainability claims being brought before other international adjudicatory bodies, often by activists (despite anti-IDS sentiment) challenging conduct by states, companies and investors.
Some international bodies are viewed as offering favourable "soft law" and procedure for climate change and sustainability claims as compared to domestic courts, which may be actively unfriendly or impose difficult evidential and legal burdens (especially as regards jurisdiction and standing).
In particular, litigants are looking to bring claims under international law, treaties and conventions relating to human and fundamental rights. Key treaties include:
- the UN Declaration on Human Rights;
- the UN Convention on the Rights of the Child, International Covenant on Economic, Social and Cultural Rights, International Covenant on Civil and Political Rights;
- the Rio Declaration on Environment and Development;
- the UN Declaration on the Rights of Indigenous Peoples; and
- the OECD Declaration on International Investment and Multinational Enterprises.
Claims may also be brought under regional treaties such as:
- the European Convention for the Protection of Human Rights and Fundamental Freedoms;
- the American Convention on Human Rights; or
- the African Charter on Human and Peoples' Rights.
The general view is that, unlike states, companies do not have direct obligations under international law to protect human rights. But there is a growing recognition that they have a responsibility to respect human rights, to avoid causing harm or contributing to adverse human rights impacts, and to seek to prevent or mitigate adverse impacts directly linked to their operations, products or services. See for example, the UN Guiding Principles on Business and Human Rights.
Decisions under these conventions are generally not mandatory nor binding. But they are often influential – they influence how judges, governments, regulators, investors and other stakeholders, and the general public view the issues. And a number of such claims have resulted in a mediated settlement agreement.
Climate change is leading to new economic realities and legal frameworks to which all state and corporate entities must adapt. It is a challenging environment in which foreign investors encounter both significant opportunities as well as risks. In this environment, investors should undertake careful assessment of the risk profile of new and existing investments and implement mitigation measures, including dispute resolution strategies. For foreign investors, this includes considering whether a new investment can be structured so as to benefit from investment treaty protections. These may offer investors safeguards against host state conduct (especially where no domestic recourse is available), serve as a powerful deterrent against misconduct and facilitate settlement before a dispute escalates.
For further information on this topic please contact C Mark Baker, Kevin O'Gorman, Martin J Valasek or Tamlyn Mills or at Norton Rose Fulbright by telephone (+1 713 651 7708) or email ([email protected], [email protected], [email protected] or [email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
Dylan McKimmie, partner, assisted in the preparation of this article.
Endnotes
(1) Annette Magnusson, Climate Change Counsel, "Energy Charter Treaty Arbitration and the Paris Agreement: Friends or Foes?", 7th EFILA Annual lecture, 28 October 2021.
(2) Statistics reported in Annette Magnusson, "New Arbitration Frontiers: Climate Change", in Evolution and Adaptation: The Future of International Arbitration, ICCA Congress Series No. 20, Kluwer.