Investors should keep a close eye on the evolving ISDS landscape 8 min read
The overlap between international investment and environmental protection is expanding. This is clear from environmental protection provisions featuring in recent International Investment Agreements (IIAs) and international Free Trade Agreements (FTAs), and is also reflected in a mounting body of environment-related investor-state disputes.
We expect this to continue to develop in 2021 and into the future of investor-state arbitration.
- While environmental protection provisions feature regularly in modern IIAs, they have traditionally focused on state obligations. However, specific environmental protection obligations for investors are also starting to emerge, which may reflect a growing focus on the environmental impacts of international investors.
- Environmental factors may be an increasingly mainstream factor considered by tribunals in investment disputes, particularly as tribunals become more willing to recognise the right of states to regulate and protect the environment (including by taking action against climate change).
- Recent international political developments, including the US re-entering the Paris Agreement and China's restrictions on Australian coal, signal changes to the international investment landscape in 2021 and highlight where potential investor-state claims may arise.
- The growing pressure on countries to implement climate policies creates interesting potential implications for Investor-State Dispute Settlement (ISDS), a mechanism in IIAs and FTAs that allows foreign investors and states to resolve disputes in an international tribunal.
- Investors should prepare to see states implement stronger climate policies, with higher carbon-emission reduction targets, and for tribunals to be more open to host states' right to regulate in ways that protect the environment and advance climate action.
Innovative provisions in BITs
Many of today's IIAs and FTAs include provisions directed at allowing host states to regulate to protect the environment. These often include environmental protection clauses (clauses obliging host states to maintain particular levels of environmental protection and to strive to increase those protections) and non-regression clauses (clauses requiring host states not to reduce their existing domestic environmental protections to promote trade or foreign investment). While these clauses traditionally focus on state obligations, innovative clauses in recent investment treaties signal an increasing willingness to impose obligations on investors when it comes to the environment and climate change.
For example, the 2016 Morocco-Nigeria BIT imposes a number of obligations on investors relating to environmental protection. These include the requirement to apply the 'precautionary principle' when assessing the environmental impact of an investment. Under the precautionary principle, a lack of scientific certainty does not justify an investor postponing preventative measures where there is a risk of serious environmental damage.
In addition, companies in areas of resource exploitation and high-risk industrial enterprises must maintain an Environmental Management System (EMS) under ISO14001 (or equivalent). An EMS under ISO14001 encourages organisations to monitor their environmental impacts and risks. Depending on the nature of the project, this may encompass monitoring emissions, including GHG emissions.
While the 2016 Morocco-Nigeria BIT does not explicitly provide for states to enforce these obligations against investors through ISDS, these types of obligations potentially open the door to requiring investors under the BIT to assess, manage and mitigate their GHG emissions, for example.
Many IIAs exclude environmental provisions from being subject to arbitration, although this too may be changing. For example, the recent Iran-Slovakia BIT appears to permit parties to use ISDS when a state breaches its non-regression obligations.1 This development may facilitate claims by investors where states weaken their environmental protection laws, including where states roll back regulations aimed at reducing GHG emissions.
Concerns about 'regulatory chill' in the climate context – whereby states are discouraged from taking climate policy action for fear of claims by investors – have spurred recent discussions about investment treaty reform,2 particularly with regard to the Energy Charter Treaty.
The Energy Charter Treaty (ECT) is a longstanding multilateral investment treaty designed to facilitate international energy cooperation from Western Europe through to Central Asia and Japan, including by protecting foreign investment in the energy sector. Negotiation rounds to update the ECT are currently underway, and the EU has raised the need to align the ECT with Paris Agreement objectives.3
In October 2020, a document was discovered from the European Commission proposed removing coal, oil and gas from the investments protected by the ECT, and instead protecting investments in hydrogen and insulation materials. The private sector is also pressing for reform, with the Institutional Investors Group on Climate Change advocating that the ECT end protection of investments in fossil fuels in the interests of aligning Europe's economy with net-zero emissions and avoiding future locking-in of carbon assets.
If adopted, these proposals may challenge fossil fuel investors' ability to bring future claims under the ECT arising from impacts of state climate policy.
A recent string of cases highlight that environmental concerns and regulations may be playing a more substantive role in the decision making of investor state arbitration tribunals. These cases may signal a broader change in how future investment disputes with environmental aspects will be considered and decided.4 For example:
Al Tamimi v Oman
Oman terminated US investor Al Tamimi's lease agreements for quarrying in Oman, on the basis that Al Tamimi had allegedly operated machinery without necessary permits, failed to obtain permits for housing, and uprooted trees, among other things. In Al Tamimi v Oman5, Al Tamimi claimed indirect expropriation and breaches of the minimum standard of treatment obligations by Oman under the US-Oman FTA.
The tribunal considered a provision reserving each state's ability to ensure investments were undertaken in an environmentally sensitive manner, together with the environmental chapter of the treaty.6 In 2015, the tribunal held that the treaty placed a 'high premium on environmental protection'7, and this was significant to its decision to dismiss Al Tamimi's claim. It also held that a breach of the minimum standard of treatment by Oman required a 'gross or flagrant disregard for the principles of fairness', particularly where the investor's conduct concerned the state's environmental protection laws.8
A few recent cases have also seen the emergence of states bringing environmental counterclaims against investors for the environmental impacts of their investment activities.
Perenco v Ecuador
Perenco v Ecuador9 concerned the environmental impact of oil extraction activities by oil and gas company Perenco in the Amazon rainforest. Perenco initially claimed that Ecuador's imposition of a windfall profit tax and takeover of Perenco's oil extraction activities violated the France-Ecuador BIT.
Ecuador brought a counterclaim against Perenco, alleging that Perenco's oil extraction activities had caused significant environmental damage and breaches of Ecuador's environmental laws. In considering the counterclaim, the tribunal assessed Ecuador's domestic environmental law. Although Ecuador was ultimately ordered to pay Perenco compensation, Perenco was also ordered to pay Ecuador US$54 million under the counterclaim.
Aven v Costa Rica
Another significant development was David Aven v Costa Rica10, which recognised a state's right to apply and enforce its environmental protection laws against foreign investors.
Costa Rican authorities had issued injunctions to prevent a real estate development going ahead in potential wetlands and forests. The investors brought a claim alleging that Costa Rica's actions breached the Dominican Republic–Central America FTA (DR-CAFTA). Costa Rica argued that the investors' rights under the DR-CAFTA could be subordinated to a host state's right to protect the environment, and also filed a counterclaim against the investors for breach of environmental protection laws.
The tribunal held that DR-CAFTA's environmental protection provisions implicitly imposed obligations on investors around compliance with host states' environmental laws. The tribunal more broadly indicated that investors operating internationally were not immune from becoming subject to international law, particularly environmental protection laws.11
Climate policy has already given rise to investor claims, with mixed results. As climate change becomes an increasingly pressing item on the global agenda, we expect to see more cases of this nature in future investor state arbitrations.
Claims arising from states moving away from carbon-intensive investments
As an example, US-based Westmoreland Coal Company (WCC) recently brought a claim against Canada in response to the decision of one of Canada's provincial governments to phase out coal power by 2030.12 WCC claimed that Canada failed to compensate it for the financial impact of the policy, and that this amounted to expropriation (among other things).
This case has not yet been decided, but it suggests that future ISDS claims involving power companies could centre around issues of compensation for losses arising from regulatory changes aimed at reducing state GHG emissions.
Claims arising from states reneging on their commitments to renewable investments
Over the past decade, foreign investors in renewable energy projects have used ISDS as a means to hold states accountable for regressing regulations that incentivise renewable energy investment. A number of ISDS claims were brought by solar energy investors against Spain under the ECT after Spain introduced a renewable energy incentive scheme which it then rolled back in the wake of the Global Financial Crisis. To date, investors have succeeded in many of the claims13, with timing of the particular investment and the nature of Spain's commitment to the investor being critical to determining the legitimacy of the investor's expectation in each case.14
Environment and climate change is emerging as a focus point for reform discussions in ISDS treaties, including the ECT, while provisions in recent IIAs are signalling efforts by host states to facilitate greater environmental protection, including through low-carbon investment and growing environmental obligations for investors.
The past decade has also seen arbitration tribunals give greater weight to state's environmental regulations.
Investors should keep a close eye on this evolving ISDS landscape.
Under the non-regression provision in section B, the parties 'shall not waive or otherwise derogate from, or offer to waive or otherwise derogate from, [environmental] measures as an encouragement for the establishment, acquisition, expansion or retention in their territories, of an investment.' Its ISDS procedure allows for 'the submission of a claim of breach of the obligations under Section B to arbitration under this Section in accordance with this Agreement.' (see arts 10, 16). See Mitchell, Andrew D., and James Munro. "No Retreat: An Emerging Principle of Non-Regression from Environmental Protections in International Investment Law." Geo. J. Int'l L. 50 (2018): 625.
Tienhaara K and Cotula L (2020) 'Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets', IIED, London. https://pubs.iied.org/pdfs/17660IIED.pdf, 20.
See European Commission proposal: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2148
See, with respect to state-asserted counterclaims in the mining context, Yasmine Lahlou, Rainbow Willard and Meredith Craven, 'The Rise of Environmental Counterclaims in Mining Arbitration' (18 June 2019) https://globalarbitrationreview.com/guide/the-guide-mining-arbitrations/1st-edition/article/the-rise-of-environmental-counterclaims-in-mining-arbitration
Adel A Hamadi Al Tamimi v Sultanate of Oman, ICSID Case No. ARB/11/33.
Perenco Ecuador Limited v Republic of Ecuador, ICSID Case No. ARB/08/6.
Westmoreland Coal Company v. Government of Canada, ICSID Case No. UNCT/20/3.
See, eg, Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36 for an example of a successful claim by an investor. Conversely, Charanne, SCC Case No. V 062/2012, Award, ¶ 526 is an example of an unsuccessful claim.
See Amélie Noilhac, 'Renewable energy investment cases against Spain and the quest for regulatory consistency' (2020) QIL Zoom-In 21-31: http://www.qil-qdi.org/renewable-energy-investment-cases-against-spain-and-the-quest-for-regulatory-consistency/