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When climate change and foreign investment collide

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Investors are taking governments to global tribunals over policy shifts – could it help or harm efforts?

Climate change, Covid-19, human rights, corruption. Fundamental social issues of our time are increasingly triggering responses by governments around the world – but what happens when those responses negatively affect existing foreign investments? 

In the past, claims for compensation by investors – which can amount to millions of dollars - have threatened to chill reform. More recently, they have held governments to account on green energy policy promises. Today, they could become a climate activism tool. 

No country knows the sting of investment disputes in the climate space more than Spain.

The Mediterranean nation faced and is facing at least 50 claims in international tribunals after it watered down a renewable energy subsidy in 2013, affecting both new and existing projects. Many resulted in significant awards, including one amounting to €128 million. Spain ultimately reinstated incentives (albeit adjusted).

As global efforts to transition to a net zero economy surge, there is growing support for the possibility investors might take it one step further: from suing countries for reversing pro-climate policies, to suing them because the impacts of climate change (and a state’s inaction on climate) have hurt their investment opportunity.

This sits in stark contrast to an older trend: investors using the system, known as investor-state dispute settlements (ISDS), to fight policies which protect the environment but damage their investments.

As we look ahead to more ambitious net zero targets, we are also seeing: 

The Spanish arbitrations set a framework for copycat claims against other countries. Investors have not necessarily set out to use investment treaty dispute resolution mechanisms to force action on climate change, but the disputes send a powerful message to governments that investors can and will act if renewable energy incentives are wound back.

The cost of transitioning to a net zero environment by 2050 will require roughly US$4 trillion in clean energy investments each year from 2030, according to the International Energy Agency.

Could investors pursue climate activism?

The impacts of climate change have the potential to cause enormous harm to a broad range of investments including in fishing, agriculture and horticulture, food and beverage, coastal land, eco-tourism sites and wineries.

An investor could potentially claim against a country alleging breach of its obligations under a bilateral investment treaty for failing to take steps to reduce the impact of anthropogenic climate change on their investment.

There is arguably a precedent for this: in 2009 Peter Allard, a Canadian eco-tourist operator who owned a wildlife sanctuary on the south coast of Barbados, sued the country for indirect expropriation in violation of the Canada–Barbados Bilateral Investment Treaty (BIT).

Allard argued the government failed to take ‘reasonable and necessary environmental protection measures’ and ‘destroyed’ the site, after a state-operated sewage treatment plant failed. He ultimately lost, but in its 2016 award the tribunal found that states could, under the right circumstances, be under an obligation to protect investments against environmental damage.

Climate disputes in domestic courts are increasingly successful, despite their novel nature. Whether foreign investment disputes can replicate this to force countries or companies to take action on climate change is an open question.

Could investor disputes in fact ‘chill’ climate reform?

As ISDS claimants are typically from high-income states, this may lead to an uncomfortable situation wherein investors from the wealthiest states challenge policies of low-income states designed to alleviate the impacts of climate change on that state.

Some investors are rumoured to have applied informal pressure against change using the threat of an investment treaty dispute. Governments may fail to regulate in the public interest because of that threat.

This means poor quality environmental protection regulations remain, to the disadvantage of people and the environment. Low-income countries may lack the resources to hire the highest quality legal representation to defend such claims. They may also hold concerns about the prospect of paying not only an award for damages but also legal costs, which in ISDS proceedings can be high: Australia paid an estimated AU$24 million (at least) to defend claims brought by Philip Morris relating to plain packaging laws. Uruguay had its costs in a similar claim covered by the Bloomberg Foundation.

The effect is difficult to prove.

Examples of cases that both support and undermine the possible existence of a chilling effect:

  • Australia went ahead with plain packaging reforms despite the action by Philip Morris
  • Germany (Hamburg) by contrast, eased water-use permit restrictions for a coal-fired plant as part of a settlement deal
  • Canada reversed a ban against a petrol additive
  • Canada (Alberta) pledged to phase out coal-fired power by 2030, which triggered a compensation claim for US$470 million from a US company with coal interests in Alberta. The case is ongoing but the sheer quantum of the amount claimed may be a deterrent to other jurisdictions from decarbonisation efforts.

In 2021 two coal power plant owners filed ICSID arbitrations against the Netherlands in reaction to 2019 legislation which prohibits the use of coal to generate electricity from 1 January 2030. Both companies made their views clear in the public consultation process prior to legislation being passed but the Netherlands proceeded regardless.  The Netherlands has stated that its legislation meets its international and European law obligations and that plant owners should not have expected that the government would not impose measures to reduce carbon emissions. 


Some countries are hitting back when investors make claims by seeking compensation for any environmental damage caused by the investment.

In the past tribunals haven’t admitted counterclaims against investors who bought the original claim. But claims over the past five years have upended this tradition.

In 2017 Ecuador successfully counter-claimed US$2.8 billion in compensation from an investor for a breach of its environmental laws. Ecuador successfully counterclaimed again two years later and was awarded US$54 million (although it is important to note that this matter was complicated – it did not begin as an environmental claim but one relating to tax and the company affected by Ecuador’s takeover of oil extraction activities was awarded US$448 million).

They reflect a growing willingness of investment treaty tribunals to allow states to use the ISDS process as a sword for seeking compensation for and mitigation of the environmental harm caused, or contributed to, by investors.

There are only limited examples of environmental counterclaims, especially compared to the growing body of cases in other international forums relating to questions involving the environment, such as the International Court of Justice. Leaving open questions as to what constitutes ‘environmental damage’ and threshold questions of liability.


In international law, some rights and obligations are of such widespread importance that they are owed by a country to the international community as a whole. They are erga omnes: a Latin phrase meaning ‘towards all’ or ‘in relation to everyone’.

There are very few recognised rights and obligations owed to all, since the concept first gained traction in 1970: prohibitions against aggression, genocide, slavery, racial discrimination, crimes against humanity and torture, and the right to self-determination.

Some have argued there is a new emerging obligation to all: environmental protection. Whether or not this is the case is arguable, but you can read an interesting discussion of it here and decide where you stand.

The upshot? Climate change-related disputes are likely to grow in number, complexity and size as the impacts of the climate crisis become more pronounced, raising thorny questions for investment treaty tribunals.

  • Want the in-depth take? Our experts have published a piece on this topic in the esteemed Global Arbitration Review, featuring as a chapter in its first investment treaty protection and enforcement guide. You can read it in full here.
  • Although we refer to ‘countries’, the technical term is ‘states’ under international law. We refer to ‘countries’ to align with commercial lexicon but acknowledge not all countries are recognised as legal states. Only those meeting certain criteria are – in brief, a permanent and stable population, a defined undisputed territory, and an effective and independent government.

Thanks to Jack McNally for assistance and KWM School of Opportunity student Olivia Stewart for research on arbitration cases.

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