Recent years have seen a steady increase in so-called "ESG" claims—i.e., those claims relating to environmental, social, or governance factors. A particular focus of this type of litigation has concerned climate change, with the majority of these claims being brought before national courts by nongovernmental organizations ("NGOs") or individuals arguing that governments or corporations have not taken sufficient action to combat climate change.
There is also an increase in awareness of this trend in arbitration, especially in investment arbitration—i.e., in arbitration brought by investors against states on the basis of bilateral or multilateral investment treaties (also sometimes referred to as "ISDS," as an abbreviation for investor-state dispute settlement). In contrast to the litigation claims brought before state courts where claimants allege too little is being done, investors frequently allege the opposite in ISDS arbitration: i.e., that states are frustrating companies' investments by introducing stricter climate-related regulation.
As discussed in our previous report, examples of such claims include the investment arbitration cases brought by two energy companies against the Netherlands due to the Dutch government's decision to phase out coal plants (RWE v. Netherlands, ICSID Case No. ARB/21/4; Uniper v. Netherlands, ICSID Case No. ARB/21/22) and a case brought against Italy's denial of a coastal drilling concession (Rockhopper v. Italy, ICSID Case No. ARB/17/14). Similarly, various stakeholders have brought or have noticed anticipated legacy claims under the North American Free Trade Agreement against the United States for their revocation of the Keystone XL pipeline project.
A recent study published by Science on May 5, 2022, estimates that government actions to limit fossil fuels could trigger claims worth up to $340 billion from investors in the oil and gas industry alone (see Kyla Tienhaara et al., "Investor-state disputes threaten the global green energy transition," Science, 5 May 2022, here).
In arriving at this figure, the study considers two scenarios:
- Under the first scenario, states would terminate all fossil-fuel projects that did not have a final investment decision by December 31, 2021.
- The second scenario would also ban projects that already have a final investment decision.
The high-end estimate of the study finds that the amount of potential fossil-fuel claims in investment arbitration would be higher than the total of global public climate finance spent in 2020. The authors suggest that states may want to terminate their bilateral investment treaties, negotiate the removal of arbitration clauses from multilateral trade agreements, or at least withdraw consent to investor-state arbitration for cases involving fossil fuels to "reduce existing ISDS threats."
While the current war in Ukraine may lead to a certain revival of investments in traditional energy infrastructure (e.g., gas and oil) in the short-term as further independence and diversification from Russian-supplied energy is sought, there remains a general consensus that legacy fuels such as coal, oil, and, to a lesser extent, gas should be replaced by renewable energy sources. These positions were outlined in the EU Commission's REPowerEU, a plan devised in 2022 to rapidly reduce dependence on Russian fossil fuels and speed up the green transition.
Many jurisdictions within the European Union can thus be expected to introduce national legislation in conformity with REPowerEU to accelerate the already intended gradual phase-out of fossil fuels in the coming years. As a result, many investors may find themselves in a situation where they may consider bringing a claim against states for their frustrated investment.
Whether ensuing investment arbitration claims will be successful, however, must be addressed separately. In this context, it is also important to bear in mind that many modern bilateral investment treaties contain carve-outs for environmental regulation, which would limit investors' chances of success. That being said, it seems likely that a higher number of investment arbitrations relating to fossil-fuel projects will have a climate angle going forward. Companies should recognize this option and continue to monitor the applicable ISDS framework in jurisdictions in which they have invested so as to be aware of any potential changes in the legal regime that may jeopardize viable claims.