The threat posed by climate change is significantly disrupting the international investment landscape.  No field synthesizes this tension quite like investor-state dispute settlement (“ISDS”).  Few facets of ISDS are currently, or are likely to remain, untouched by climate change.  It impacts ISDS from the types of disputes arbitrators hear to the way investment arbitration itself is practiced.  There has been significant academic focus on assessing the suitability and appropriateness of utilizing ISDS to handle the challenges posed by climate change.1See, generally, Kyla Tienhaara, The Expropriation of Environmental Governance:  Protecting Foreign Investors at the Expense of Public Policy(2009); Gauthier Vannieuwenhuyse, Exploring the Suitability of Arbitration for Settling ESG and Human Rights Disputes, 40 J. Int’l Arb. 1 (2023); Yulia Levashova, Role of Sustainable Development in Bilateral Investment Treaties:  Recent Trends and Developments, 1 J. Sustain. Fin. & Inv. 222 (2011).X1  This article, however, emphasizes the extent to which investment arbitrators are responding to the heightened legitimacy crisis brought on by climate change.  The perception of regulatory chill is at the core of the tension, as the awareness that the ISDS system has undue power over public policy matters grows (section II).  Although investment arbitration has always been a “field of tension, oscillating between conflicts and cooperation,”2Emmanuel Gaillard, Sociology of International Arbitration, 31 Arb. Int’l 1, 17 (2015) (quoting Narasimhan Anand & Mary R. Watson, Tournament Rituals in the Evolution of Fields:  The Case of the Grammy Awards, 47 Acad. Mgmt. J. 59, 61 (2004)).X2 the challenges posed by climate change are altering the interplay between the needs of states and foreign investors (section III).  Against the backdrop of intensifying climate change, some investment arbitrators have sensed the urgency for self-correction by taking steps to address the system’s legitimacy crisis (section IV).  Ultimately, while the world’s ability to combat climate change hangs on public policy and business interests,3See Valentina Vadi, Beyond Known Worlds:  Climate Change Governance by Arbitral Tribunals, 48 Vand. J. Transnat’l L. 1285, 1289 (2015).X3 investment arbitrators must recognize their role in ensuring that international law adapts to climate commitments.

Initiatives such as UNCITRAL's Working Group III recognize that ISDS is not above criticism and, from some perspectives, is in the midst of a legitimacy crisis.1See generally UNCITRAL Working Grp. III, Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-fifth session (New York, 23–27 April 2018), U.N. Doc. A/CN.9/935 (May 14, 2018), https://documents.un.org/doc/undoc/gen/v18/029/59/pdf/v1802959.pdf.X1  The historical context of ISDS is at the root of this legitimacy crisis.

Comprised of a network of over 3,300 international investment agreements (“IIAs”), including bilateral investment treaties (“BITs”) and free trade agreements (“FTAs”), ISDS creates a system of decentralized arbitration between host states and foreign investors.2Tarald Laudal Berge & Axel Berger, Do Investor-State Dispute Settlement Cases Influence Domestic Environmental Regulation?  The Role of Respondent State Bureaucratic Capacity, 12 J. Int’l Disp. Settlement 1, 4 (2021).X2  The bulk of IIAs provide for arbitration according to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”),3Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 17 U.S.T. 1270, T.I.A.S. 6090, 575 U.N.T.S. 159.X3 with others heard under the umbrella of institutions like the Permanent Court of Arbitration (PCA) and the International Chamber of Commerce (ICC).4See Daphna Kapeliuk, Collegial Games:  Analyzing the Effect of Panel Composition on Outcome in Investment Arbitration, 31 Rev. Litig. 267, 282 (2012) (referencing About ICSID, ICSID, https://icsid.worldbank.org/About/ICSID).X4

ISDS was originally intended to foster “democratic accountability and participation . . . and the protection of rights and other deserving interests.”5Benedict Kingsbury & Stephan Schill, Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest—the Concept of Proportionality, 75 Int’l Inv. L. & Comp. Pub. L. 97, 75 (2010).X5  It was a product of international cooperation developed in a post-WWII effort to move away from “gunboat” diplomacy and create an independent, depoliticized dispute resolution mechanism between capital-importing states and foreign investors.6Anna T. Katselas, Exit, Voice, and Loyalty in Investment Treaty Arbitration, in 3 The Role of the State in Investor-State Arbitration 211, 316 (Shaheeza Lalani & Rodrigo Polanzo Lazo eds., 2015).X6  These arrangements were considered mutually beneficial.  Foreign investors gained rights that they could assert directly against host states to protect their investments.  These IIAs took investment disputes out of the domestic court system, avoiding the perception of the inherent judicial bias favoring states.  In theory, host states receive an uptick in foreign direct investment and reap the rewards of economic development and globalization in return for granting foreign investors these IIA rights.7See Kyle Dylan Dickson-Smith & Bryan Mercurio, Australia’s Position on Investor-State Dispute Settlement:  Fruit of a Poisonous Tree or a Few Rotten Apples?, 40(2) Sydney L. Rev. 213, 218 (2018).X7

These agreements were relatively uncontroversial between the 1960s and 1990s.  Harsher commentators have cast ISDS as a replacement for dysfunctional national courts in countries perceived to have a weaker rule of law.8See Thomas Schultz & Cédric Dupont, Investment Arbitration: Promoting the Rule of Law or over-Empowering Investors?  A Quantitative Empirical Study, 25 Eur. J. Int’l L. 1147, 1149 (2014).X8  However, there was a shift in the late 1990s, as investors began to use ISDS mechanisms against industrialized countries rather than less developed countries.9Id.X9  This transition loosely correlates with the boom in ISDS claims which began towards the end of the last millennium.10Malcolm Langford, Daniel Behn, & Runar Hilleren Lie, The Revolving Door in International Investment Arbitration, 20 J. Int’l Econ. L. 301, 307–08 (2017).X10

This boom has resulted in the ISDS system undergoing a “delayed but acute teenager’s crisis,”11Katselas, supra note 9, at 369.X11 and has heightened awareness of the impact of ISDS over states’ public policies—particularly climate policies—via a concept called “regulatory chill”.  The phenomenon refers to when a state defers regulating in a certain area to avoid an investment tribunal later finding them in breach of their IIA commitments and, crucially, liable to foreign investors for damages.  The phenomenon is thought to have pervasive consequences on state policies.12Julia G. Brown, International Investment Agreements: Regulatory Chill in the Face of Litigious Heat, 3 W.J. Legal Stud. 1, 1 (2013).X12  Emblematically, the development of investment arbitration has been compared to a “freight train barreling down a steep and treacherous hill,”13Katselas, supra note 9, at 315.X13 which states have been accused of jumping on board without fully appreciating the speed, or obligations, they have accrued.14Malcolm Langford & Daniel Behn, Managing Backlash:  The Evolving Investment Treaty Arbitrator?, 29 Eur. J. Int’l L. 551, 551 (2018).X14

Research has attempted to answer the question of whether regulatory chill exists.  For instance, Tarald Laudal Berge and Axel Berger found that regulatory chill exists, but the extent to which it impacts a state is not a one-size-fits-all problem.15Berge & Berger, supra note 5, at 3.X15  They found that the regulatory response to ISDS can occur at varying stages of the arbitration process.  The chill might be anticipatory (pre-arbitration), responsive (based on a threat or initiation of arbitration), or precedential (post-arbitration).16Id. at 7-8.X16  Moreover, they found that there is a stronger tendency of regulatory chill when the state has a higher bureaucratic capacity, as these states are likely to develop vetting processes to account for potential ISDS risks.17Id. at 1; see also Kyla Tienhaara, Regulatory Chill in a Warming World:  The Threat to Climate Policy Posed by Investor-State Dispute Settlement, 7 Transnat’l Env’t L. 229, 234 (2018).X17  According to Berge and Berger, “uncertainty over having to pay monetary awards under pending ISDS claims may influence respondent states’ regulatory behaviour,” especially when states have well-developed bureaucratic processes capable of identifying risks to regulation and communicating those risks across relevant government branches.18Berge & Berger, supra note 5, at 3.X18  

Seemingly in response to the growing apprehension of regulatory chill, some states have slammed the breaks on the runaway ISDS train.  States such as India, Indonesia, South Africa, Bolivia, Ecuador, Venezuela, and recently Honduras have denounced the ISDS system.19See Sarah Z. Vasani & Nathalie Allen, No Green without More Green:  The Importance of Protecting FDI through International Investment Law to Meet the Climate Change Challenge, 5 Eur. Inv. L. & Arb. Rev. 1, 7 (2020); Pia Acconci, The Integration of Non-Investment Concerns as an Opportunity for the Modernization of International Investment Law:  Is a Multilateral Approach Desirable?, in General Interests of Host States in International Investment Law 165, 174 (Giorgio Sacerdoti ed., 2014); Honduras Denounces the ICSID Convention, ICSID (Feb. 29, 2024), https://icsid.worldbank.org/news-and-events/communiques/honduras-denounces-icsid-convention.X19  Other states have slowed their entrance into such agreements.  In 2012, fewer BITs were entered into than in any of the previous 25 years.20Katselas, supra note 9, at 316.X20  While partly explained by oversaturation and the development of more regional trade and investment agreements, this also implies a growing recognition that BITs may be less beneficial to states than initially anticipated.  States have also drafted modern investment agreements to incorporate greater regulatory considerations.21See Crina Baltag, Riddhi Joshi, & Kabir Duggal, Recent Trends in Investment Arbitration on the Right to Regulate, Environment, Health and Corporate Social Responsibility:  Too Much or Too Little?, 38(2) ICSID Rev. 381, 398 (2023) (referencing Netherlands Model Investment Agreement, art. 7 (2019)).X21  How these newer IIAs are interpreted depends on the disposition of investment arbitrators.  Finally, other states have excluded ISDS from their investment agreements altogether.22See Luke Nottage, Australia’s Ambivalence Again Around Investor-State Arbitration:  Comparisons with Europe and Implications for Asia, 39 ICSID Rev. 320, 321 (2024) (stating that Australia has taken to avoiding ISDS mechanisms in more recent treaty negotiations).X22

These legitimacy concerns have been growing against the backdrop of escalating climate tensions, with some hypothesizing that climate change-related regulations may become the poster child for chilled policy areas.23Tienhaara, supra note 1, at 17.X23  According to the Intergovernmental Panel on Climate Change (IPCC), investment arbitration leads to “countries refraining from or delaying the adoption of mitigation policies, such as phasing out fossil fuels.”24Climate Change 2022:  Mitigation of Climate Change at 1499, Working Group III Contribution to the Sixth Assessment report of the Intergovernmental Panel on Climate Change (2022), https://www.ipcc.ch/report/ar6/wg3/downloads/report/IPCC_AR6_WGIII_FullReport.pdf (emphasis added) (internal citation omitted).X24  Illustratively, according to Elizabeth Meager, New Zealand has moderated its approach to phasing-out fossil fuel production due to the potential threat of ISDS claims.25Elizabeth Meager, Cop26 Targets Pushed Back under Threat of Being Sued, Capital Monitor (Jan. 14, 2022), https://capitalmonitor.ai/institution/government/cop26-ambitions-at-risk-from-energy-charter-treaty-lawsuits/ (‘The climate ministers of Denmark and New Zealand have admitted to Capital Monitor that the threat of investor-state lawsuits has prevented their governments from being more ambitious in their climate policies.”); see also Kyla Tienhaara et al., Investor-State Dispute Settlement:  Obstructing a Just Energy Transition, 23 Climate Pol’y 1197, 1212 (2023).X25  This highlights the perceived effect of regulatory chill stemming from governments accounting for the risk of environment-related ISDS claims in their law-making.26See Tienhaara, supra note 20, at 233; Jess Hill, ISDS:  The Devil in the Trade Deal, ABC (July 25, 2015), https://www.abc.net.au/radionational/programs/backgroundbriefing/isds-the-devil-in-the-trade-deal/6634538 (discussing the concern over ISDS in Australia).X26  In this way, ISDS avoidance may become embedded or institutionalized into state decision processes.  There is also the case of cross-border regulatory chill, which may occur when investors strategically launch ISDS claims in jurisdictions where states have adopted progressive public interest policies (such as the environment) in a thinly veiled attempt to delay other states from implementing similar regulations.27Tienhaara, supra note 20, at 238.X27  The ISDS claims by Philip Morris against Australia and Uruguay for tobacco packaging regulation have been cited as examples of foreign investors attempting to stimulate cross-border chill.28Id.X28  New Zealand’s postponement of similar plain packaging laws for tobacco products until the ISDS claims were finalized demonstrates the effectiveness of the technique.29Id.X29  As well as environmental regulatory chill, historical anecdotal evidence indicates that states hesitate to regulate issues of corporate social responsibility and health to avoid costly investment arbitration awards.30Baltag, Joshi, & Duggal, supra note 24, at 17-18.X30  Both areas are intertwined with climate change action.

The diffusion of this tension corresponds with the increase in disputes with environmental considerations being submitted to investment arbitration.  From 2011 to 2020, over 150 disputes of this nature have been submitted to investment arbitration, up from 30 cases between 1970 and 2011.31Laurent Gouiffès & Melissa Ordonez, Climate Change in International Arbitration, the next Big Thing? 40 J. Energy & Nat. Res. L. 203, 216 (2022).X31  Clearly, investment arbitrators increasingly face environmental issues.32Katselas, supra note 9, at 316.X32

With the rise of environment-related ISDS claims, the system has seen changes in the behavior of states and foreign investors, which impact the nature of disputes brought before investment arbitrators.  Briefly, investors are bringing claims based on environmental policies that they argue violate standards of investment protection,1Gouiffès & Ordonez, supra note 34, at 219.X1 such as phasing out nuclear energy,2See, e.g., Vattenfall AB v. Germany, ICSID Case No. ARB/12/12, Decision on the Achmea Issue, ¶ 8 (Aug. 31, 2018).X2 revoking mining licenses3See, e.g., Lone Pine Res. Inc. v. Canada, ICSID Case No. UNCT/15/2, Final Award, ¶ 2 (Nov. 21, 2022).X3 or withdrawing investment incentives for developing renewable energies.4See, e.g., Infrastructure Servs. Luxembourg Sà.r.l v. Spain, ICSID Case No. ARB/13/31, Award, ¶ 5 (June 15, 2018).X4  Foreign investors may claim that a state has failed to uphold its climate change obligations according to international or domestic requirements.5Gouiffès & Ordonez, supra note 34, at 217.X5  As for states, there has been a rise in environmental counterclaims against foreign investors.6Id. at 218.X6  These are discussed below.

States

As noted in section II above, states have taken notice of regulatory chill, and two significant responses have been to initiate environmental counterclaims against foreign investors and employ new treaty drafting techniques.

Counterclaims

States have initiated environmental counterclaims against foreign investors, reversing the typical one-directional flow of obligations from the states to foreign investors.  In doing so, states are using ISDS as a sword rather than merely a shield.7Gian Maria Farnelli, Investors as Environmental Guardians?  On Climate Change Policy Objectives and Compliance with Investment Agreements, 23 J. World Inv. & Trade 887, 888 (2022).X7  Commentators note that this offensive action by states may act as a deterrent against foreign investors bringing claims.8Diego Mejía-Lemos, The Suitability of Investor-State Dispute Settlement and Host State Counterclaims for Implementing Climate Change International Responsibility, 32 Rev. Eur., Comp. & Int’l Env. L. 334, 336 ¶ 6 (2022).X8  Alternatively, counterclaims provide an opportunity for investment arbitrators to reduce the quantum of damages by setting off the initial claim with the cost of environmental harm.9Id. at 336.X9  Ecuador’s counterclaims in Perenco Ecuador Ltd. v. Ecuador10Perenco Ecuador Ltd. v Ecuador, ICSID Case No. ARB/08/6, Award (Sept. 27, 2019).X10 and Burlington Resources Inc. v. Ecuador11Burlington Res. Inc. v. Ecuador ICSID Case No. ARB/08/5, Decision on Counterclaims (Feb. 7, 2017).X11 are prime examples of how states may use ISDS to address climate change-related issues.12See Mejía-Lemos, supra note 43, at 336.X12  In these disputes, the foreign investors were held responsible for environmental damages to the Ecuadorian Amazon to the tune of over $50 million combined, offsetting some of the damages they were awarded.13Lucy Greenwood, The Canary Is Dead: Arbitration and Climate Change, 38 J. Int’l Arb. 309, 317 (2021).X13  Counterclaims in ISDS are a relatively novel phenomenon, but, when successful, they demonstrate an increasing willingness by investment arbitrators to consider the environmental effects of foreign investments.14See Aven v. Costa Rica, ICSID Case No. UNCT/15/3, Final Award, ¶¶ 738-47 (Sept. 18, 2018) (while the counterclaim was dismissed, largely due to deficiencies in its formulation, the tribunal found there was “no substantive reasons to exempt foreign investor of the scope of claims for breaching obligations under Article 10 Section A DR-CAFTA, particularly in the field of environmental law”).X14 

Treaty Drafting

Where new IIAs have entered into force or existing agreements are modified, states have taken innovative approaches to treaty language to protect their regulatory autonomy while still attempting to attract foreign investors.15Christina L. Beharry & Melinda E. Kuritzky, Going Green:  Managing the Environment through International Investment Arbitration, 30 Am. U. Int’l L. Rev. 383, 389 (2015).X15  In particular, significant efforts have been expended to enshrine a “right to regulate,”16Baltag, Joshi, & Duggal, supra note 33, at 3.X16 including specifically the environment.  

Traditionally, states have attempted to preserve the right to regulate in preamble clauses.  Preambles can be helpful because they indicate the intention of the states at the time of contracting.  As per article 31 of the Vienna Convention on the Law of Treaties,17Vienna Convention on the Law of Treaties, opened for signature May 23, 1969, 1155 U.N.T.S. 331.X17 preambles form part of the overarching context for interpreting a treaty and may be deemed part of a treaty’s non-binding objects.18See J. Romesh Weeramantry, Treaty Interpretation in Investment Arbitration 3.91-92 (2012).X18  For example, in its preamble, the Finland-Zambia BIT (2005) references the States’ environmental policies in agreeing that “objectives can be achieved without relaxing health, safety and environmental measures of general application[.]”19Kathryn Gordon & Joachim Pohl, Environmental Concerns in International Investment Agreements:  A Survey at 29, OECD Working Papers on International Investment 2011/01 (2011), https://www.oecd-ilibrary.org/finance-and-investment/environmental-concerns-in-international-investment-agreements_5kg9mq7scrjh-en.X19  A more recent example is the preamble of the Singapore-Myanmar BIT (2019) in which the parties reaffirmed their “right to regulate and to introduce new measures, such as health, safety, and environmental measures relating to investments in their territories in order to meet legitimate public policy objectives[.]”20Agreement between the Government of the Republic of Singapore and the Government of the Republic of the Union of Myanmar on the Promotion and Protection of Investments preamble (2019), available at https://edit.wti.org/document/show/0edd9101-bae7-4cbe-8a43-f05351bd51a5.X20  While using preambles as an interpretative guide is a well-established practice, some tribunals however have found that the object and purpose of a treaty can derogate from its preambular intentions.21Baltag, Joshi, & Duggal, supra note 33, at 15.X21  Such a conclusion was reached in Phillip Morris Brands Sàrl v. Uruguay22Philip Morris Brands Sàrl v. Uruguay, ICSID Case No ARB/10/7, Decision on Jurisdiction (July 2, 2013).X22 where the preamble of the Switzerland-Uruguay BIT, which mentions the “important . . . role of foreign investment in the economic development process,”23Agreement between the Swiss Confederation and the Oriental Republic of Uruguay on the Reciprocal Promotion and Protection of Investments preamble (1988).X23  was deemed too general to “materially advance analysis.”24Phillip Morris v. Uruguay ¶ 201; but cf. Philip Morris Brands Sàrl v. Uruguay, ICSID Case No ARB/10/7, Award, ¶ [287]  (July 8, 2016) (finding that the State validly used its police powers, defeating the expropriation claim).X24  Some commentators hypothesize that an arbitrator’s tendency to downplay the importance of a treaty’s preamble may be attributed to their legal tradition, with a distinction between civil and common law approaches.25Beharry & Kuritzky, supra note 50, at 390 (arguing that the “differing legal cultures from which arbitrators are drawn” may impact the importance they place on a preamble, as “for example, an adjudicator hailing from a civil law culture may be more likely to view the treaty text, including the preamble, holistically”).X25

Regulatory language may also be used in the body of the IIA to the effect that the states will not breach an IIA obligation merely by exercising their regulatory power for a legitimate public policy objective.  This may be referred to as a “non-precluded measure” clause or “affirmation” clause and may incorporate exceptions, exclusions, or carve-outs.26Baltag, Joshi, & Duggal, supra note 33, at 20.X26  Such language was used in the EU-Singapore BIT, stating that “the Parties reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of . . . environment[.]”27Investment Protection Agreement between the European Union and Its Member States, of the One Part, and the Republic of Singapore, of the Other Part, art. 2.2 (2018), available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5714/download.X27  Such affirmation clauses essentially act as reservations in a treaty whereby states earmark certain regulatory matters as being unaffected by their treaty obligations.28Gordon & Pohl, supra note 54, at 14.X28  Further, affirmation clauses may function as a bar to compensation for claims based on environmental regulatory action.29Beharry & Kuritzky, supra note 50, at 392.X29  Uncertain interpretation of affirmation clauses persist despite being commonplace in IIAs.30Gordon & Pohl, supra note 54, at 11.X30  As a general rule, however, these clauses are read narrowly by investment arbitrators.  This is especially likely when the wording of the clause limits its application to regulations “otherwise consistent with this agreement,” requiring the level of protection conveyed by the clause to be compatible with the state’s treaty obligations.31Beharry & Kuritzky, supra note 50, at 392.X31  Only a small (but growing) number of treaties contain specific reservation clauses on the environment.  For example, the Hungary-Cabo Verde BIT provides that:

Non-discriminatory measures that the Contracting Parties take for reason of public purpose including for reasons of public health, safety, and environmental protection, which are taken in good faith, which are not arbitrary, and which are not disproportionate in light of their purpose, shall not constitute indirect expropriation.32Agreement between the Government of Hungary and the Government of the Republic of Cabo Verde for the Promotion and Reciprocal Protection of Investments, art. 6.4(c) (2019), available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5916/download.X32

The thinking behind such clauses is that the specific allowance for states to legislate on environmental matters is sufficient to defeat any claim in relation to such matters.33Baltag, Joshi, & Duggal, supra note 33, at 390.X33  Recent tribunal decisions however have revealed differing views regarding how such clauses should be interpreted, as there are significant variances between facts, treaties, and arbitrators.34See Roopa Mathews & Dilber Devitre, New Generation Investment Treaties and Environmental Exceptions:  A Case Study of Treaty Interpretation in Eco Oro Minerals Corp. v. Colombia, Kluwer Arb. Blog (Apr. 11, 2022), https://arbitrationblog.kluwerarbitration.com/2022/04/11/new-generation-investment-treaties-and-environmental-exceptions-a-case-study-of-treaty-interpretation-in-eco-oro-minerals-corp-v-colombia/ (discussing Eco Oro Minerals Corp v. Colombia, ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability & Directions on Quantum (Sept. 9, 2021)).X34  Unpredictability flows from this divergence.

Lastly, states have also employed language that places them under a continuing obligation to maintain environmental standards, such as the Japan-Korea BIT.35Gordon & Pohl, supra note 54, at 29 (citing the Agreement between the Government of the Republic of Korea and the Government of Japan for the Liberalisation, Promotion and Protection of Investment, Mar. 22, 2002).X35  These clauses act as a regulatory floor according to which states commit to not lower their environmental regulations.  While criticized as aspirational in nature, such wording aims to “avoid a regulatory race to the bottom by [s]tates”36Beharry & Kuritzky, supra note 50, at 394.X36 by encouraging countries to maintain higher regulatory standards than may otherwise be the case.  As such, they function as a regulatory safeguard between states—often with consultation mechanisms attached—rather than as a sword for foreign investors to use against host states.37See, e.g., Agreement Between the Government of Canada and the Government of the Republic of Latvia for the Promotion and Protection of Investments clause 5 (2009).X37  These consultation mechanisms do not appear to have been used for resolving environmental matters, but they have proven useful in other contexts38Id. at 395 (e.g., free trade negotiations).X38 and may prove useful in the future.

Clearly, states have employed different drafting and interpretative techniques in an attempt to protect their right to regulate the environment, given the increased references made to the environment in relevant agreements.  As a result, no consistent approach to dealing with environmental references in IIAs has so far emerged, in part due to the varied, idiosyncratic language used to implement them.39Gordon & Pohl, supra note 54, at 8.X39  Regardless, these emerging references to the environment in IIAs signal an attempt by states to give investment tribunals interpretative scope to assess the relevance of environmental concerns when deciding IIA disputes.  These provisions are sowing the seeds for more expansive assessments by tribunals, nudging them in a more climate-conscious direction.40Baltag, Joshi, & Duggal, supra note 33, at 29.X40  Whether such attempts are effective at protecting state regulatory action that would otherwise be an IIA breach, ultimately depends on the construction that tribunals give to such clauses.  As an addendum, some commentators have encouraged states to go further in their treaty drafting by using stronger language or adding new requirements for investment arbitrations with an environmental element.41See Megan Wells Sheffer, Bilateral Investment Treaties:  A Friend or Foe to Human Rights 2009–2010 Leonard V.B. Sutton Awards:  First Place, 39 Denv. J. Int’l L. & Pol’y 483, 505 (2010).X41

Foreign Investors

This section looks at the repositioning of corporate drivers that may signal an evolving relationship between foreign investors and their attitudes towards ISDS.  It then looks more closely at the distinctions between investment arbitrations that have foreign fossil fuel investors as claimants compared to disputes with “green” investor claimants.

Investment Landscape

Stepping back, it is important to note that the investor landscape itself is changing significantly in response to the climate crisis.  Investors are being called on to rapidly shift their investment priorities as the risk of climate liability intensifies,42Kristin Casper, Climate Justice:  Holding Governments and Business Accountable for the Climate Crisis, 113 Proc. ASIL Annu. Meeting 197, 200 (2019).X42 often in the face of mounting shareholder pressure.  Shifting incentives have the capacity to alter how they engage with investment arbitration.

Tracing this movement back through time reveals a few key lessons.  Firstly, joint action by states catalyzed this crusade with a landmark United Nations (UN) report pithily titled Who Cares Wins,43United Nations (UN) Global Compact Office, Who Cares Wins:  Connecting Financial Markets to a Changing World (2004), http://www.unglobalcompact.org/docs/news_events/8.1/WhoCaresWins.pdf.X43 which was intended to encourage the world’s largest investors to uphold responsible, ethical, and sustainable investing principles.44Nelson Goh, ESG and Investment Arbitration:  A Future with Cleaner Foreign Investment?, 15 J. World Energy L. & Bus. 485, 486 (2022).X44  The report, published in 2005, minted the term “environmental, social and governance,”45UN Global Compact Office, supra note 78, at ii.X45 now more commonly referred to as “ESG”.  The development of the Principles for Responsible Investment (PRI)46What are the Principles for Responsible Investment?, PRI, https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment.X46 in 2006, also encouraged the active adoption of ESG measures and promoted investment transparency.47World Bank, Future Proof?  Embedding Environmental, Social and Governance Issues in Investment Markets:  Outcomes of the Who Cares Wins Initiative 2004–2008 at 8 (2009), https://documents1.worldbank.org/curated/en/476811468158704493/pdf/476600WP0Futur10Box338858B01PUBLIC1.pdf.X47  From 100 inaugural signatories, the principles have now been adopted by over 4000 institutions.48Goh, supra note 79, at 486.X48  These commitments are a product of the growing pressure corporations are under to demonstrate ethical behavior in relation to natural resources, emissions, labor, and their internal controls.  Sustainable business practices are increasingly a priority for investors and their stakeholders.  Now, the development of metrics, such as Bloomberg’s ESG scorecard,49Bloomberg Launches Proprietary ESG Scores, Bloomberg (Aug 11, 2020), https://www.bloomberg.com/company/press/bloomberg-launches-proprietary-esg-scores/#:~:text=Bloomberg%20today%20announced%20the%20launch,4%2C300%20companies%20across%20multiple%20industries.X49 quantify corporate compliance with ESG obligations and can be used by investors to make investment decisions.50Goh, supra note 79, at 487.X50  BlackRock, one of the world’s largest investment managers,51Who We Are, BlackRock, https://www.blackrock.com/uk/about-us/who-we-are.X51 cited sustainability as a core goal for its investments and promised to consider “ESG risk with the same rigor that it analyzes traditional measures such as credit and liquidity risk.”52Sustainability as BlackRock’s New Standard for Investing, BlackRock (2020), https://www.blackrock.com/corporate/investor-relations/2020-blackrock-client-letter.X52  Seismic shifts such as these embody the morphing objectives of corporations to embrace a desire to “protect the environment by embracing sustainable practices[.]”53Our Commitment, Business Roundtable, https://opportunity.businessroundtable.org/ourcommitment.X53  Clearly, ESG measures have entered the mainstream zeitgeist and now plays a crucial role in corporate strategy, as PRI signatories endeavor to “incorporate ESG considerations into investment analysis and decision-making processes.”54Goh, supra note 79, at 486.X54

Law firms have also caught on to this green trend, setting their own sustainability targets and lowering their carbon footprints.55Stephan Wilske & Zelda Bank, Is There an (Emerging) Ethical Rule in International Arbitration to Strive for More Climate Friendly Proceedings?, 14 Contemp. Asia Arb. J. 155, 166 (2021).X55  For example, the firm Herbert Smith Freehills LLP recently pledged to reach net zero emissions by 2030.56Alison Eyre, Inside Arbitration:  Towards Greener Arbitrations Achieving Greater Environmental Sustainability in the Way We Conduct Arbitrations:  An Update, Herbert Smith Freehills (Feb. 25, 2021), https://www.herbertsmithfreehills.com/insights/2021-02/inside-arbitration-towards-greener-arbitrations-achieving-greater-environmental-0.X56  Moreover, in 2020, the firm began offering their clients the option to utilize “greener” case management in arbitrations to align with their client’s internal environmental targets.57Id. (citing arbitrator Lucy Greenwood’s Green Pledge); cf. Lucy Greenwood, Viewing Our World Through a Different Lens:  Environmental and Social Considerations in International Arbitration, 3 Glob. Energy L. & Sustain. 159, 169 (2022).X57  This voluntary shift towards greener policies indicates the attractiveness of such practices to clients who are under a social obligation to consider the environment in their business operations.  This may trickle into how firms conduct their dispute resolution practices.58Wilske & Bank, supra note 90, at 168.X58

It may also be emblematic of emerging legal theories on environmental duties.  In the short term, it is conceivable that foreign investors may find themselves under an “ethical or legally binding obligation to go green,”59Id. at 161.X59 according to the national laws of their corporations.  The likelihood of such an obligation increases as the rules and regulations around fiduciary duties and ESG requirements tighten globally.  The adoption of an implied or express fiduciary duty to incorporate climate change considerations into corporate decision-making has been evaluated by prominent members of the judiciary and the arbitral network.60See, e.g., Felicia Cheng & Dominique Yong, Hong Kong Arbitration Week Recap:  Is Arbitration Sustainable?, HKIAC (2019), https://www.hkiac.org/content/arbitration-sustainable; Lord Sales, Directors’ Duties and Climate Change: Keeping Pace with Environmental Challenges, Speech at the Anglo-Australasian Law Society (Aug. 27, 2019), available at https://www.supremecourt.uk/docs/speech-190827.pdf.X60  Further, such a duty has been explored in Australia, England, and Germany, for instance.61Wilske & Bank, supra note 90, at 168.X61  In this vein, France developed the pacte statute,62Cf. Code civil art. 1833 (Fr.) (“La société est gérée dans son intérêt social, en prenant en considération les enjeux sociaux et environnementaux de son activité.”).X62 which requires corporations to consider ESG in their business activities.63Christopher May, Investor State Dispute Settlement: Challenging Private Governance, in Handbook of Business and Public Policy 57, 69 (Aynsley et al. eds., 2021); Jean-Philippe Robé, Bertrand Delaunay, & Benoit Fleury, French Legislation on Corporate Purpose, Harvard Law School Forum on Corporate Governance (2019), https://corpgov.law.harvard.edu/2019/06/08/french-legislation-on-corporate-purpose/.X63  France has also implemented a duty of vigilance, requiring French companies to address their environmental risks and impacts via a public monitoring plan.64Gouiffès & Ordonez, supra note 34, at 205 (citing Law no. 2017–399 of 27 March 2017 on the Duty of Vigilance of Parent Companies and Ordering Companies (providing for a principle of precaution with respect to the environment)).X64  If foreign investors were under such a duty, the potential exists for the duty to be transferred to their lawyers and, in this context, arbitrators.65See Wilske & Bank, supra note 90, at 167.X65  Even if the duty itself does not transfer, pressure from clients will continue to stimulate environmentally friendly ISDS processes.

Distinguishing Claimants: Comparing Fossil Fuel & Green Investors

It is no secret that claims by foreign fossil fuel investors against host states comprise a historically significant use of the ISDS system.66See Lea Di Salvatore, Investor–State Disputes in the Fossil Fuel Industry:  IISD Report at iii (2021), https://www.iisd.org/system/files/2022-01/investor%E2%80%93state-disputes-fossil-fuel-industry.pdf.X66  However, the claimants utilizing ISDS are increasingly diverse, especially as disputes between states and green investors emerge.  Both types of claimants will be canvassed here to demonstrate the tightrope that investment tribunals navigate depending on the dispute before them.  Markedly, the public interest considerations vary significantly.  Although the claims are still generally based on alleged breaches of the investment standards relating to unlawful expropriation, fair and equal treatment, or full protection and security,67Gouiffès & Ordonez, supra note 34, at 217.X67 claims of green investors tend to focus directly or indirectly on the state’s failure to uphold its climate obligations68See, e.g., Allard v. Barbados, PCA Case No. 2012-06, Award, ¶ 3 (June 27, 2016) (claim related to Barbados alleged failure “to take reasonable and necessary environmental protection measures and, through its organs and agents, has directly contributed to the contamination of the Claimant’s eco-tourism site, thereby destroying the value of his investment”).X68 or redirection in climate policy.69See Vadi, supra note 3, at 1317; and see, e.g., Rockhopper Italia S.p.A. v. Italy, ICSID Case No. ARB/17/14, Final Award, ¶ 6 (Aug. 23, 2022) (regarding the production at the applicant’s oil and gas field that did not commence because Italy passed a law in late 2015 that banned offshore production near the Italian shoreline).X69

Fossil Fuel Investors

While not all foreign investors should be painted with the same brush, it is important to canvas the primary group that environmental regulatory chill benefits.  The spread of regulatory chill, or its perception, has roughly corresponded with a rise in the strategic use of ISDS as a central feature of foreign investors’ dispute settlement toolkit.  No example better conveys this than the concentrated use of ISDS by “big tobacco,” particularly with regard to Phillip Morris’ claims against Australia and Uruguay, as mentioned earlier.70See supra note 31 and accompanying text.X70  The Phillip Morris cases are examples of the extreme lengths big tobacco went to preserve market share in the face of the threat of being “regulated out of existence.”71Tienhaara, supra note 20, at 240.X71  These efforts included treaty shopping and corporate restructuring.72Id at 240-41.X72  These cases were broadly brought by big tobacco to contest the legitimacy of the regulatory safeguards that states implemented to increase public awareness of the poor health impacts of tobacco.73See World Health Organization, Plain Packaging of Tobacco Products:  Evidence, Design and Implementation, (2016), at 47, available at https://iris.who.int/bitstream/handle/10665/207478/9789241565226_eng.pdf?sequence=1.X73  It has been theorized that the claimant’s underlying objective in pursuing these cases was to stimulate cross-border regulatory chill to dissuade other states from adopting similar policies or at least to stall progress until the claim was decided.74Tienhaara, supra note 20, at 238.X74

This comparison is extremely relevant given the parallels between big tobacco and fossil fuel investors, likewise referred to as “big oil”.  Both industries are fighting for survival in the face of escalating regulation to counter the negative effects of their products or industries.75Id. at 239.X75  Both have a vested interest in preserving their industries for as long as possible.  And both have become repeat players in the ISDS system.  Parallels have been drawn between the strategic use of ISDS by the tobacco industry and fossil fuel corporations, with the view growing that the fossil fuel industry is improving the tobacco playbook to delay unfavorable regulatory action.76Smoke & Fumes, https://www.smokeandfumes.org/.X76  The ability to resolve disputes via ISDS is crucial to the continuation of the fossil fuel industry.  This is well understood by executives as demonstrated by their efforts to maintain the status quo.77Tienhaara, supra note 20, at 241.X77  ISDS is a fixed part of their risk management strategies.  For this reason, investment tribunals are likely to be increasingly confronted by disputes of this nature, as global climate policies shift away from favoring fossil fuels.

Green Investors

Turning the focus to green investors, ISDS may be used by foreign investors to advance environmentally friendly foreign direct investment (FDI).78Farnelli, supra note 42, at 889.X78  Green investors are essential to ensuring the smooth transition to low-carbon and renewable energy.79Fernando Dias Simoes, When Green Incentives Go Pale:  Investment Arbitration and Renewable Energy Policymaking, 45 Denv. J. Int’l L. & Pol’y.251, 251–52 (2016).X79  Many states are in desperate need of green FDI to meet their Paris Agreement80Paris Agreement, Dec. 12, 2015, 3156 U.N.T.S. 79.X80 commitments, as signatories agreed to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”81Id. art. 2(1)(c).X81  Conceptually, Anatole Boute suggests that investment arbitration may reduce the instability that currently comes with enacting climate mitigation policies and thus reign in the risk premium of such investments.82See generally Anatole Boute, Combating Climate Change through Investment Arbitration, 35 Fordham Int’l L.J. 613 (2011).X82  However, investors require credible commitments on the stability of climate policies.  The potential for regulatory changes creates significant uncertainty for investors and can undermine the profitability of their projects.  In essence, environmental claims or arguments by claimants may encourage states to uphold their climate obligations, positively reinforcing their climate policies.83Farnelli, supra note 42, at 891, 913-14.X83  Renewable energy investors have had some success with such claims, as seen in the slew of energy cases against Spain.84Vasani & Allen, supra note 22, at 8; see also, e.g., Cube Infrastructure Fund SICAV v. Spain, ICSID Case No. ARB/15/20, Award, ¶ 48 (15 July 2019) (in which the claimants successfully argued that Spain’s regulatory changes vitiated their legitimate expectations about their renewable energy investments).X84 

There are signs that these tensions are being recognized throughout the ISDS network.  The following section contemplates how arbitrators and the broader arbitration community are navigating these changing tides, through the lens of specific disputes and procedural changes.

Specific Disputes

In recent years, some arbitrators have expressed discontent about the parameters under which they render environment-related decisions.  How arbitrators have chosen to walk this line is an interesting illustration of this tension, particularly when an arbitrator has dissented from the majority view or offered an individual opinion.  Two such examples will be discussed here, specifically Eco Oro Minerals Corp. v. Colombia1Eco Oro Minerals Corp v. Colombia, ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability & Directions on Quantum (Sept. 9, 2021).X1 and Rockhopper Italia S.p.A. v. Italy.2Rockhopper Italia S.p.A. v. Italy, ICSID Case No. ARB/17/14, Final Award (Aug. 23, 2022).X2  This section also discusses Aven v. Costa Rica,3Aven v. Costa Rica, ICSID Case No. UNCT/15/3, Final Award (Sept. 18, 2018).X3 which involves the interpretation of environmental carve-out clauses as well as the use of counterclaims by a state.  These cases demonstrate the divergence in how tribunals approach climate change issues.4Greenwood, supra note 92, at 164.X4

Eco Oro v. Colombia

As background, in 2012, Colombia enacted protection measures for the Santurbán Páramo region, considered one of its “environmental jewels”.5Eco Oro ¶ 86.X5  These protection measures included suspending mining rights in the region where Eco Oro, a Canadian mining company, had held mining rights since 1994.  Initially, Eco Oro was exempt from these suspensions.  However, in 2016, its mining permits were withdrawn by the National Mining Agency after the Colombian Constitutional Court struck down the exception.  The company brought an arbitration claim under the Canada-Colombia FTA due to the ongoing projects it had in the area in which the claimant had invested over $250 million.6Canada-Colombia Free Trade Agreement, art. 805 (2008), available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/2569/download [hereinafter Canada-Colombia FTA].X6  Eco Oro claimed breach of the minimum standard of treatment requirement and expropriation.  The claim was successful on the former claim but not the latter, as the “measures were adopted as a part of Colombia’s valid and legitimate exercise of its police powers[.]”7Eco Oro ¶ 698.X7

The breach of the minimum standard of treatment was made out despite the environmental carveout clause found in article 2201(3) of the Canada-Colombia FTA,8Id. ¶ 361 (quoting Canada-Colombia FTA art. 2201(3)).X8 itself modeled after article XX of the General Agreement on Tariffs and Trade 1994 (GATT),9General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187.X9 which provides:

For the purposes of Chapter Eight (Investment), subject to the requirement that such measures are not applied in a manner that constitute arbitrary or unjustifiable discrimination between investment or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary:

(a) To protect human, animal or plant life or health, which the Parties understand to include environmental measures necessary to protect human, animal or plant life and health.10Id. art. XX.X10

According to the majority of the tribunal, the claimant was entitled to compensation because Colombia failed to treat it according to the minimum standard of treatment, which incorporated the fair and equitable treatment standard, as required under article 805 of the Canada-Colombia FTA.11Eco Oro ¶ 821.X11  According to the tribunal’s interpretation, which relied on article 31(1) of the Vienna Convention on the Law of Treaties, the environmental carveout at article 2201(3) did not preclude a finding of liability for the minimum standard of treatment because the provision did not provide an exemption from liability.  The tribunal viewed the lack of a liability exemption as standing in contrast to the exemption in annex 811(2)(b) of the FTA, which was explicit in stating that environmental measures “would not give rise to any right to seek compensation,” in expropriation cases.12Id. ¶ 829.X12  In essence, the tribunal applied an expressio unius est exclusio alterius type logic—as the treaty specifically barred compensation for one kind of breach, but failed to exempt another type of breach, this suggested the states must have intended such an outcome.  Otherwise, they would have broadened the compensation exemption beyond expropriation.  The tribunal reached this decision despite Canada entering a non-disputing party submission to the effect that it was its intention when signing the FTA that no liability should flow if the conditions in article 2201(3) were met.13Id. ¶ 836.X13  The tribunal’s interpretation is controversial because it does not align with the generally accepted interpretation of article XX of the GATT, under which liability does not flow from an act that falls within the environmental exception.14Mathews & Devitre, supra note 69, at 9.X14 

In contrast to the majority’s decision, arbitrator Philippe Sands did not agree that Colombia breached the treaty, arguing that “[t]he approach taken by the majority fails to respect the text agreed by the drafters of the FTA, and is likely to undermine the protection of the environment.”15Eco Oro ¶ 4 (Sands partially dissenting).X15  This partial dissent emphasizes the environmental significance of the Santurbán Páramo and the right of the community to implement legitimate conservation measures.16Id. ¶¶ 1-2 (Sands partially dissenting).X16  Substantial credence was given to the preservation of the environment by both Canada and Colombia, as stated in the plain language of the FTA, which the tribunal’s decision seemingly “undercuts.”17Id. ¶ 36 (Sands partially dissenting).X17  The dissent also calls for international law (and the arbitrators who apply it) to account for the “state of transition” that society is gripping with in the “age of climate change and significant loss of biological diversity[.]”18Id. ¶ 33 (Sands partially dissenting).X18  Sands comments that the “Respondent has not acted perfectly in its management of the páramo, but the [minimum standard of treatment] standard does not require it to have done so,” particularly in light of the precautionary principle.19Id. ¶ 34 (Sands partially dissenting).X19  This comment may be interpreted as a rebuke for tribunals that hold states to an unduly high standard, ignoring the importance of implementing environmental regulation and the bureaucracy that often surrounds such decisions, such as in the case below.

Rockhopper v. Italy

The Rockhopper decision sparked significant criticism for hindering efforts to tackle climate change and the quantum used to determine substantial damages,20See Toni Marzal, Polluter Doesn’t Pay:  The Rockhopper v Italy Award, EJIL:Talk! (Jan. 19, 2023), https://www.ejiltalk.org/polluter-doesnt-pay-the-rockhopper-v-italy-award/; Paolo Mazzotti, Rockhopper v. Italy and the Tension between ISDS and Climate Policy: A Missed Moment of Truth?, Völkerrechtsblog (Dec. 21, 2022), https://voelkerrechtsblog.org/de/rockhopper-v-italy-and-the-tension-between-isds-and-climate-policy/; Mazzotti, supra note 139, at [6]-[9].X20 amounting to nearly 190 million euros.21Rockhopper Italia S.p.A. v. Italy, ICSID Case No. ARB/17/14, Final Award, ¶ 335 (Aug. 23, 2022).X21  The former point will be the focus here but the latter point goes ways to revealing the sheer scale of some investment arbitration awards, even when the dispute orbits around a public policy decision.

The dispute related to the claimant’s project in the Ombrina Mare oil and gas field off the Italian coast.22Id. ¶ 5.X22  The project sparked significant local and national outrage due to environmental concerns.  In late 2015, public campaigning resulted in a legislative change that banned offshore production.  Subsequently, Rockhopper’s formal application for a mining concession was denied, after which it launched a claim against Italy under the Energy Charter Treaty.23Energy Charter Treaty, Dec. 17, 1994, 2080 U.N.T.S. 100.X23  The Tribunal found that this amounted to unlawful expropriation of the investment because the Claimant had a procedural right to the mining concession that accrued before Italy banned offshore production.24Rockhopper ¶ 6.X24

Due to this finding, the majority did not address the claimed breaches of fair and equitable treatment or impairment.25Id. ¶ 203.X25  Strangely, however, the majority’s decision begins with an acknowledgement of environmental issues at play and claimed that the finding for the claimant “passes no judgment whatsoever on the legitimacy or validity of those views.”26Id. ¶ 10.X26  As such, “the material factual circumstances which have led to the final result . . . are . . . discrete from the environmental considerations[.]”27Id.X27  This does not align with earlier discussion on regulatory chill, especially given the scope of the award.  The tribunal’s almost apologetic attempts to downplay the underlying public interest in the dispute highlights that some investment arbitrators feel they are stuck between a rock and a (hopping) hard place when deciding cases that involve the regulation of environmental protections, as they do not feel that the public interest in environmental matters are on “equal footing with international investment law.”28Jorge E. Viñuales, Green Investment After Rio 2012, 16 Int’l Cmty. L. Rev. 153, 174 (2014).X28

Furthermore, the majority did not fully consider the police powers doctrine in light of the precautionary principle because they found that the legislative change was not motivated by environmental concerns but was more likely due to political and community engagement.29Rockhopper ¶ 198.X29  This logic defies the reality that the political tension escalated from the public’s environmental concerns.30Mazzotti, supra note 139, at 3.X30

Pierre-Marie Dupuy, who issued an individual opinion despite substantively agreeing with his co-arbitrators, went to further pains to note a few key points.  According to Dupuy, it was to the claimant’s advantage that the tribunal’s finding of unlawful expropriation obviated consideration of the fair and equitable treatment claim, as “it would have been almost impossible to conclude . . . that Rockhopper could reasonably and legitimately expect a positive response from the Italian authorities to its application for an operating permit.”31Rockhopper ¶ 2 (Dupuy concurring).X31

Aven v. Costa Rica

In this dispute, the claimants alleged that the respondent breached its investment obligations under the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR)32Central America-Dominican Republic-United States Free Trade Agreement, Aug. 5, 2004, available athttps://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/7004/download.X32 by shutting down the Las Olas Project due to the alleged discovery of wetlands and forest grounds within the project site, despite previously granting all of the required documentation, including environmental viability approvals.33Aven v. Costa Rica, ICSID Case No. UNCT/15/3, Final Award, ¶ 6 (Sept. 18, 2018).X33  The State responded with a counterclaim that the claimants were liable for the environmental damage to the Las Olas Ecosystem and therefore were responsible for restoring it.34Id. ¶ 689.X34

The tribunal denied the claimants’ claims under CAFTA-DR largely based on its interpretation of article 10.11, which reads:

Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.

According to the tribunal, this environmental carve-out “essentially subordinate[s] the rights to investors under Chapter Ten to the right of Costa Rica to ensure that the investments are carried out ‘in a matter sensitive to environmental concerns[.]’”35Id. ¶ 412.X35  However, the tribunal found that the State’s ability to assert this right by implementing environmental laws and policies is not absolute.  Rather, this right must be exercised in a “fair, non-discriminatory fashion, applying said laws to protect the environment, following principles of due process, not only for its adoption but also for its enforcement.”36Id. ¶ 413.X36  The tribunal did not find that the State had breached this standard.

In affirming its jurisdiction over the counterclaim, the tribunal held that counterclaims were within the ambit of the ISDS provisions.37Id. ¶ 740.X37  Accordingly, the foreign investor was under an obligation to abide by the State’s environmental protection measures, given that there were “no substantive reasons to exempt foreign investors from the scope of claims for breaching obligations under Article 10 Section A DR-CAFTA, particularly in the field of environmental law.”38Id. ¶ 739.X38  In respect of the counterclaim itself, the tribunal rejected it on procedural grounds.39Id. ¶ 747 (citing UNCITRAL Arbitration Rules arts. 20-21 (2010)).X39  Notwithstanding the rejection, admitting the counterclaim builds on the previous attempts at state counterclaims in Urbaser S.A. v. Argentina40Urbaser S.A. v. Argentina, ICSID Case No. ARB/07/26, Award (Dec. 8, 2016).X40 and Burlington Resources Inc. v. Ecuador41Burlington Resources Inc. v. Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims (Feb. 7, 2017).X41 to a lesser degree (as the tribunal’s jurisdiction to hear the counterclaim was not in dispute).42See Urbaser ¶ 1195 (“it can no longer be admitted that companies operating internationally are immune from becoming subjects of international law”); Burlington ¶ 60 (noting that jurisdiction over Ecuador’s counterclaims was not challenged).X42  Notably, the Aven tribunal agreed with Urbaser in that “it can no longer be admitted that investors operating internationally are immune from becoming subjects of international law,” particularly “when it comes to rights and obligations that are the concern of all States, as it happens in the protection of the environment.”43Aven v. Costa Rica, ICSID Case No. UNCT/15/3, Final Award, ¶ 738 (Sept. 18, 2018) (internal quotations omitted).X43

Red Eagle v. Colombia

Red Eagle Exploration Ltd. v. Colombia44Red Eagle Exploration Ltd. v. Colombia, ICSID Case No. ARB/18/12, Award (Feb. 28, 2024).X44 is another arbitration centered on Colombia’s Páramo region and follows a similar fact pattern as Eco Oro, involving many of the same players.  It also involves a Canadian-incorporated mining company, Red Eagle Exploration, operating in Colombia, that was adversely affected by Colombia’s decision to restrict mining in the region by cancelling mining licenses.  Canada similarly entered a non-disputing party submission.45Id. ¶ 39.X45

Notably, arbitrator Phillipe Sands was also present on this tribunal and he backed up his dissenting opinion in Eco Oro, by finding that article 805 of the Canada-Colombia FTA was not breached. In this matter, however, this was the majority view shared with arbitrator Rigo Sureda, while arbitrator José Martínez de Hoz dissented and found that the FTA was breached.46Id. ¶ 2 (Martínez Hoz dissenting).X46

With reference to clauses establishing most favored nations,47Canada-Colombia FTA art. 804.X47 the majority considered that fair and equitable treatment was a component of the minimum standard treatment,48Id. art. 805.X48 rather than a distinct standard to be applied.49Red Eagle ¶ 290.X49  The majority of the tribunal found that Colombia did not breach the minimum standard of treatment required of it under the FTA.  Specifically, the tribunal found that the claimant failed to make out that Colombia’s actions breached their legitimate expectations, lacked transparency, or engaged in arbitrary or unreasonable conduct, lacked proportionality, or were disproportionate or discriminatory.50Id. ¶¶ 301, 305-06, 309, 312, 315 (unanimous with respect to legitimate purpose).X50 

In part, the tribunal found that the claimant’s legitimate expectations could not have been breached because the mining ban was in place when the mining titles were acquired and the large-scale Vetas Project was never grandfathered in.51Id. ¶ 297.X51  In forming this view, the tribunal endorsed the view of the minimum standard of treatment based on the existence of legitimate expectations expressed in Glamis Gold v. United States,52Glamis Gold, Ltd. v. United States, UNCITRAL, Award (Jun. 8, 2009).X52 as opposed to that in Tecmed v. Mexico,53Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. (AF)/00/2, Award (May 29, 2003).X53 which does not.54Red Eagle ¶ 295 (citing Tecmed ¶ 154).X54  The tribunal therefore held that the minimum standard of treatment may be breached where the claimant demonstrates the existence of “at least a quasi-contractual relationship between the State and the investor, whereby the State has purposely and specifically induced the investment,” though the mere existence of a quasi-contractual relationship is not sufficient in itself to establish a breach.55Id. ¶ 294 (citing Glamis Gold ¶ 766).X55  The majority also noted that there was a lack of evidence that Colombia ever made any representations on which the claimant relied or that induced the claimant into making the investment.56Id. ¶¶ 299-300.X56

The dissenter, however, found that the claimant did indeed have legitimate expectations at the time it acquired its mining titles; that it would be entitled to engage in mining activities or, if it was deprived of its rights, it would be entitled to compensation; and that Colombia had a sufficiently predictable legal framework for investments.57Id. ¶ 131 (Martínez Hoz dissenting).X57  He agreed with the Eco Oro tribunal that these expectations were breached when Colombia engaged in a “regulatory roller-coaster” due to the constant and contradictory decisions made during the process of delimiting the Páramo.58Red Eagle ¶ 137 (Martínez Hoz dissenting) (quoting Eco Oro Minerals Corp. v. Colombia, ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability, & Directions on Quantum, ¶ 718 (Sept. 9, 2021)).X58

The claimant’s expropriation claims also failed.59Id. ¶ 404.X59  The majority of the tribunal was not satisfied that the claimant had ever acquired a vested right to mine in the Páramo, under local law, which is a prerequisite for a finding of unlawful expropriation under article 811 of the FTA.60Id. ¶ 397-99.X60  A party cannot be deprived of a right it never had.  The tribunal found that the claimant’s mining rights were conditional on being granted a licence, at Colombia’s discretion.  The majority also noted that, had such a right existed, the expropriation claim would likely still have failed because Colombia’s conduct fell within the scope of its police powers, as the documentary evidence demonstrated that Colombia’s “measures were plainly designed and applied to protect the public policy goal of environmental protection.”61Id. ¶ 400.X61  No rare circumstances arose in this instance such that the public policy measures fell outside the ambit of Colombia’s police powers.62Id. ¶ 401.X62

The impact of the FTA’s environmental carveout clause was also in dispute, but the tribunal declined to consider the scope or impact of the clause because it considered such an analysis unnecessary, as no primary obligation under the investment chapter was breached.63Red Eagle ¶ 428 (discussing Canada-Colombia FTA, art. 2201(3), chapter 8).X63  In doing so, the Red Eagle tribunal endorsed the view in Eco Oro that “Article 2201(3) is not an objection to the jurisdiction but rather a defense on the merits.”64Id. ¶ 175 (citing Eco Oro ¶¶ 379-80).  The dissenter commented further on this provision and formed the view that Article 2201(3) did not exempt Colombia from liability if it breached article 805.  Id. ¶ 152 (Martínez Hoz dissenting).X64

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The ways in which these opinions are framed are as diverse as the legal principles and facts of the cases upon which they rest.  Regardless, they share a common thread:  a discernible unwillingness of most arbitrators to minimize the contentious environmental nature of the disputes before them.  These statements demonstrate that investment arbitrators are conscious of the theoretical and traditional constraints on the ISDS system and the world in which they operate.  However, investment arbitrators are increasingly sensitive to “the wider legitimacy crisis faced by international investment law, especially in cases concerning environmental issues.”65Freya Baetens, Protecting Foreign Investment and Public Health through Arbitral Balancing and Treaty Design, 71 Int’l & Comp. L.Q. 139, 154 (2022).X65

It is interesting to consider why investment arbitrators, like Sands and Dupuy, are deciding to rock the status quo by speaking out, especially given the conservatism of the profession and the constraints it operates under.  Again, applying frameworks developed in other contexts may prove useful.  Take Albert O. Hirschman’s 1970s framework for explaining the limited responses at a consumer’s disposal in the face of deteriorating product quality:  exit, voice, and loyalty.66Albert O. Hirschman, Exit, Voice, and Loyalty:  Responses to Decline in Firms, Organizations, and States 25 (1970).X66  Previously, Katselas has applied this framework to international investment arbitration in order to understand the voluntary associations between states.67Katselas, supra note 9, at 323 (citing Hirschman, supra note 185).X67  In the state context, exit refers to total, partial, or selective treaty termination and voice refers to political protest (e.g., criticizing ISDS) or prescriptive action (e.g., treaty replacement or amendment).68Id. at 335, 348.X68  From the above, it is clear that states are dabbling with both approaches.  It is conceivable that the voluntary association between states extends to arbitrators who voluntarily associate with ISDS by accepting tribunal appointments and, in doing so, assume or maintain their role in the investment arbitration club.  When applied to arbitrators, on the extreme end of the spectrum, exit may refer to their unwillingness to engage in investment arbitration with environmental elements.  Importantly, the frequency of arbitrators exiting ISDS for such reasons are unknown.  In contrast, voice connotes an arbitrator’s willingness to engage with climate change concerns in the investment arbitration appointments they accept and within the system more broadly.  The illustrations in this chapter have attempted to demonstrate the increasing steps taken by arbitrators to exercise their voice in relation to investment arbitration’s legitimacy crisis.  A snowballing use of voice by arbitrators indicates their loyalty to the concept and institution of investment arbitration is strong in this respect.69Id. at 319.X69  They would prefer ISDS to evolve and redefine its mission rather than become defunct.  As Katselas noted, “a balance between politics and law is both possible and necessary to attain if the club is to survive.”70Id.X70

It may be extrapolated that they comment on such matters as an implicit signal to the international community of their dissatisfaction with the constraints placed upon them by IIAs, which prevent the arbitrators from fully accounting for the public interest.  It may be viewed as an appeal to the international community (states, investors, and the public) to address the issues exposed by the dispute.71Ruth Breeze, Dissenting and Concurring Opinions in International Investment Arbitration:  How the Arbitrators Frame Their Need to Differ, 25 Int’l J. Semiotics L. 393, 409, 412 (2012).X71  This demonstrates a bildungsroman-type  acknowledgement from arbitrators that their opinions and decisions contribute to the development of investment arbitration and may be relied upon as persuasive precedent by future tribunals.72Id. at 412.X72  Arguably, a movement away from the mere acknowledgement of non-investment concerns, such as social and environmental factors, to the integration of these concerns into ISDS frameworks via innovative treaties and applicable rules interpreted broadly is a necessary step to ameliorate the field’s legitimacy crisis.73Acconci, supra note 22, at 176.X73 

Initiatives

A tangible sign that the investment arbitration community is paying attention to the change in stakeholder attitudes stems from the initiatives gaining traction.  There appears to be no shortage of ideas regarding how to improve investment arbitration’s relationship with climate change issues.  However, there is a lack of consensus as to the best course of action.  A few promising initiatives and ideas will be briefly discussed, with the caveat that some of the actions have been suggested in the context of international arbitration broadly.  However, some of these ideas may equally be applied to investment arbitration. The purpose of this discussion is to demonstrate that these self-led shifts symbolize a wider recognition by the industry that a black-letter, case-by-case approach to tackling climate change is inefficient and dangerous for all parties.74Id. at 183.X74  Furthermore, these varied approaches to dealing with the crisis are an endorsement of the agency approach and a recognition of professional responsibility.  Overall, these efforts have the potential to morph into soft law, which may further point to the emergence of the ethical duty discussed earlier.  Soft laws are important as they can fill the gaps to “address issues that are considered in the ‘grey zone’ or where the appropriate approach to the issue is still hotly debated.”75Wilske & Bank, supra note 90, at 172.X75  Soft laws are therefore indicative that the traditional norms are in the midst of a transitional stage and they attempt to anticipate the laws of tomorrow without binding the present.76Id. at 171.X76  Crucially, soft laws may act as the climate change guidance that arbitrators are crying out for.

While ICSID is of particular relevance to this discussion given the Convention’s dominance in ISDS, other arbitral institutions are taking action on climate change.  For instance, the ICC has recognized its role in this space via its guide, Resolving Climate Change Related Disputes through Arbitration and ADR.77International Chamber of Commerce (ICC), Resolving Climate Change Related Disputes through Arbitration and ADR (2019), https://iccwbo.org/wp-content/uploads/sites/3/2019/11/icc-arbitration-adr-commission-report-on-resolving-climate-change-related-disputes-english-version.pdf.X77  To the extent that investor-state disputes are heard under the aegis of the ICC, the guide provides that where the relevant treaty references the Paris Agreement, arbitral tribunals are “obliged to give greater consideration to international climate change obligations bearing on states, and specifically the Paris Agreement.”78Id. ¶ 5.63 (citing, e.g., 2018 Netherlands Model Bilateral Investment Treaty art. 6.6).X78  Irrespective of such a reference, the ICC also proposes that international obligations tend to be interpreted on a progressive basis and may inform how tribunals determine an investing party’s legitimate expectations, particularly concerning fair and equitable treatment.79Id.X79

Investment arbitration outcomes have far-reaching effects beyond the consenting parties, with the potential for particularly adverse ramifications with respect to environmental matters.  An environmental reckoning is on the horizon for international investment arbitration due to a culmination of forces pushing the field to become more climate conscious.  The burden of climate change mitigation does not rest solely on the shoulders of investment arbitrators.  The challenges require commitment from all parties involved, particularly states, and continuous pressure from the public.  It cannot be ignored, however, that ISDS has substantial power to help or hinder this recalibration.  Investment arbitrators must recognize and embrace the role they can play in addressing climate change concerns.

Further, foreign investors hold contradictory roles in relation to environmental issues.  As it stands, they fund the greatest emitters of greenhouse gases and have a significant monetary interest in maintaining their plum position.  On the other side of the spectrum, foreign investors are capable of assisting in greening economies by investing in renewable energy projects.  This paradox gives rise to mixed messages in relation to investment arbitration and highlights the exceptionally fine balance that tribunals are expected to strike between state regulatory power and the starkly different motivations of foreign investors.  Arbitrators will need to show a commensurate commitment to global governance to the extent it fulfills the needs of the international business community, in recognition of the core reality that “[i]nternational arbitration exists to serve the needs of international business.”1Joshua Karton, International Arbitration Culture and Global Governance, in International Arbitration and Global Governance:  Contending Theories and Evidence 74, 168 (Walter Mattli & Thomas Dietz eds., 2014) (quoting Fabien Gélinas, Arbitration and the Challenge of Globalization, 17(4) J. Int’l Arb.117, 117 (2000)).X1  Fortunately, international cooperation is the bedrock of ISDS.