Resolving Investor Protection in Climate-Related Disputes: Some Legal Reflections

Insufficient Grounds for Relief

Unlike the UNFCCC, which affirms state’ regulatory autonomy in in implementing climate protection measures, ³⁵ the current IIA framework shows significant structural limitations in supporting states’ climate initiatives, creating tension between investment protection and climate action. Within the existing framework of 3,323 IIAs, ³⁶ a predominant proportion (over 85%) consists of “old-generation” agreements (signed from the 1980s to early 2010s), which were negotiated and concluded without substantive consideration of states’ regulatory discretion in environmental protection and climate action. ³⁷ These earlier agreements feature broadly formulated treatment standards and minimal safeguard provisions, making them poorly suited for addressing environmental challenges. This limitation is particularly evident in environmental and climate-related disputes, where most cases are decided under these old-generation agreements, ³⁸ potentially hampering states’ efforts to safeguard the environment or address climate change effectively. For example, among all the ISDS cases initiated in 2023, about 70% were brought under IIAs signed in the 1990s or earlier. ³⁹ All of the 175 ISDS cases brought against environmental protection related measures from 1987–2021 were initiated on the basis of IIAs signed before 2010, highlighting the need for addressing the large body of outdated old-generation IIAs. ⁴⁰ The ECT stands out as the most frequently invoked IIA in ISDS claims, reflected in the high volume of cases brought under it. According to UNCTAD, more than 20% of the 1,332 known ISDS cases between 1987 and 2023 have been brought under the ECT provisions. ⁴¹ This disproportionate utilisation stems directly from the ECT's problematic design: its ISDS clauses contain ambiguous language that favours investor interests over state regulatory authority. Particularly concerning are the ECT's FET and expropriation clauses, which were drafted with vague terminology that enables expansive interpretations by arbitration tribunals. EU member states have disproportionately borne the impact of these flawed provisions, facing a significant number of claims challenging their regulatory measures on renewable energy production, as seen in Spain's case discussed above. ⁴² Driven by concerns that the ECT was incompatible with modern climate goals, some members have withdrawn from it, including Spain, Netherlands, Denmark, France, and Germany. ⁴³ Another example of “old-generation” IIAs is the North American Free Trade Agreement (NAFTA), which faced criticism of lacking robust environmental protection, leading to several environmental measures being challenged under its ISDS provisions for alleged violations of the FET and expropriation clauses. For example, in Metalclad v Mexico, the tribunal ruled against Mexico for denying a permit for a hazardous waste facility based on environmental concerns, awarding the American investor $16.7 million. ⁴⁴

In contrast, more recent IIAs, signed since 2010, show some progress in protecting states’ regulatory authority and incorporating environmental provisions. ⁴⁵ For example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) includes a general exception for environmental measures and affirms parties’ right to regulate. ⁴⁶ The Canada-EU Comprehensive Economic and Trade Agreement (CETA) contains similar provisions. ⁴⁷ However, the inclusion of robust safeguards for state regulatory autonomy remains limited. Empirical evidence from UNCTAD's analysis of 284 IIAs concluded between 2012 and 2022 reveals significant gaps: only 17 agreements (16%) explicitly recognise states’ regulatory authority, 4 (1.4%) acknowledge environmental regulations, 6 (2.1%) address compliance with international environmental obligations, and 41 (14.4%) incorporate environmental exceptions in expropriation provisions. ⁴⁸ This statistical evidence demonstrates that even recent IIAs often fail to adequately protect climate policy space.

The numerical disparity between old-generation and new-generation IIAs presents substantial challenges for climate governance. A key issue lies in the lack of explicit provisions affirming states’ regulatory authority to pursue climate objectives. This gap creates a normative vacuum. As a result, tribunals have no clear guidance on how to assess the legitimacy and reasonableness of climate-related measures. This increases the risk of inconsistent interpretations of investment protection clauses. Consequently, investor interests may be prioritised at the expense of states’ climate commitments. The FET claims brought under the original ECT against Spain regarding its renewable energy subsidy reduction are good examples. ⁴⁹

Inconsistent Interpretation

The interpretation and application of IIA clauses in ISDS claims has been inconsistent, leading to uncertainty and unpredictability in the arbitral process. This inconsistency arises from a broad range of factors, such as the ambiguous drafting of key clauses, the absence of a binding precedent system, and the broad discretion given to tribunals. As a result, tribunals adopt different approaches based on the specific facts of each case, leading to unpredictability in the outcomes of ISDS proceedings. This inconsistency underscores the need for precise treaty drafting and the development of coherent interpretative frameworks to provide greater legal certainty for both investors and states. To illustrate these issues, this section examines two core clauses - Expropriation and FET - which have been most frequently invoked and subject to especially varied interpretations in past climate-related ISDS decisions.

Malfunctioning Exceptions

IIAs often incorporate exceptions and safeguards aimed at addressing critical policy objectives, such as environmental protection and climate change. These exceptions are intended to function as a safety valve, enabling host states to avoid liability for compensation under specific circumstances, even when they fail to comply with their obligations under the IIA. However, in practice, these exceptions often malfunction or are interpreted inconsistently, resulting in significant challenges in their application. The interpretation of such exceptions can vary considerably across cases, influenced by the specific terms of the IIA at hand and the composition of the arbitral tribunal. This ambiguity leads to inconsistent interpretations, making it difficult for both investors and host states to predict how a particular measure might be treated in an arbitration. For example, in Suez v Argentina, the tribunal found that Argentina's actions were not justified under the treaty's general exceptions, although the measures were taken for public policy reasons. ⁷⁷ In contrast, in Biwater Gauff v Tanzania, the tribunal upheld Tanzania's action related to water regulation, even though they had a detrimental effect on the investor, thus applying a more lenient approach towards the state's regulatory rights. ⁷⁸ This lack of uniformity in interpretation is a central cause of inconsistency in arbitral awards, which undermines predictability and creates uncertainty regarding the rights and obligations of both investors and host states. Overly expansive interpretations of these exceptions may extend beyond the intended scope of IIAs, potentially undermining the regulatory autonomy of host states.

One of the most contested exceptions in IIAs concerns environmental protection. The application of environmental carve-outs has been scrutinised in several arbitral decisions. A critical structural weakness in many environmental carve-outs is their failure to expressly include core investment protection standards such as FET and indirect expropriation. Consequently, even when states implement legitimate environmental measures, they remain vulnerable to investor claims predicated on these substantive protections. For example, in Eco Oro v Colombia, the tribunal held that Colombia's environmental measures could not be justified under the environmental carve-out in the Canada-Colombia Free Trade Agreement (FTA), ruling in favour of the investor. ⁷⁹ In Infinito Gold v Costa Rica, the tribunal determined that Costa Rica could not invoke the environmental carve-out as a defence for its denial of an environmental permit to the investor. ⁸⁰ Similarly, in Bilcon v Canada, Canada rejected the investor's application for a quarry project due to environmental concerns but the tribunal again ruled in favour of the investor. ⁸¹

These rulings demonstrate a significant limitation in the efficacy of environmental carve-out clauses. When these clauses lack explicit application to alleged violations of IIAs, they fail to function as effective defensive mechanisms for host states implementing environmental regulations. This deficiency is particularly evident in cases where tribunals have adopted inconsistent interpretative approaches regarding the scope and applicability of environmental carve-outs. Some tribunals have adopted a teleological approach that acknowledges the intended regulatory space preserved by environmental carve-outs, while others have adhered to strict textual interpretations that significantly constrain their protective scope. ⁸² This interpretative divergence renders the utility of such clauses highly unpredictable. It creates a regulatory dilemma for host states, which must navigate between fulfilling their environmental obligations and avoiding potential liability under investment treaties. Without comprehensive coverage extending to all substantive investment protections, environmental carve-outs constitute merely nominal safeguards rather than effective instruments for reconciling the competing imperatives of investment protection and environmental regulation. This limitation undermines the capacity host states to implement necessary environmental measures without incurring significant liability risks, impeding the objective to strike a balance between investors’ legitimate expectations and states’ regulatory autonomy in the international investment regime.

Legitimising States’ Right to Regulate by Incorporating Regulatory Authority Clauses

The insufficient grounds for relief in IIAs discussed in Section 3 (A) necessitate a fundamental reconceptualisation of state regulatory authority within the international investment framework. IIAs could incorporate explicit provisions that ensures host states’ right to address climate change and take climate-related actions. This is especially important in environmentally sensitive sectors like energy and mining, where regulations must keep evolving to meet emerging climate challenges. Contracting parties could explicitly recognise that climate change mitigation and adaptation measures operate in a rapidly evolving policymaking environment that requires flexibility and adaptation. This recognition could be expressed through specific IIA clauses that explicitly protect regulatory flexibility, including the authority to modify existing rules and incentive programs or create new ones as circumstances change. Such clauses would simultaneously legitimise necessary state regulatory climate action while aligning investment protection with international climate obligations.

Recent treaty practice offers compelling models for effectively incorporating such regulatory authority without undermining legitimate investor expectations. For example, Article 3 of Canada's 2021 Foreign Investment Promotion and Protection Agreement Model reaffirms the parties’ right to “regulate within its territory to achieve legitimate policy objectives, such as with respect to the protection of the environment and addressing climate change; social or consumer protection; or the promotion and protection of health, safety, rights of Indigenous peoples, gender equality, and cultural diversity”. Similarly, the EU-UK Trade and Cooperation Agreement recognises the Parties’ respective rights to regulate in order to achieve legitimate public policy objectives such as the protection and promotion of e.g., public health and the environment including climate change. ⁹² The UK-New Zealand FTA further advances this approach through Article 14.18, incorporating provisions recognising states’ regulatory rights in pursuing legitimate policy objectives, including environment, health and climate change mitigation and adaptation. Furthermore, the CPTTP dedicates an entire chapter on the environment, affirming each Party's authority to establish, adopt or modify its environmental laws and policies in line with its own priorities. ⁹³ In addition, article 9.16 explicitly preserves the right of states to adopt measures they consider appropriate to ensure that investment activity in their territory is conducted in a manner sensitive to environmental, health or other regulatory objectives. These clauses provide a concrete legal basis for host states to implement climate-related measures. By explicitly codifying regulatory authority through carefully crafted clauses, future IIAs can create a more balanced and sustainable framework that respects both investment protection and environmental imperatives.

There has been much discussion on procedural reforms in ISDS, such as transparency, predictability and arbitrator independence. ⁹⁴ However, it is crucial to recognise that substantive provisions regarding state regulatory authority are a core part of investment treaty design. These cannot be adequately addressed through procedural reforms alone. While procedural innovations may contribute to improved stakeholder engagement, they do not address the fundamental need to balance investor protection and the regulatory authority of host state. Therefore, the incorporation of substantive provisions on state regulatory authority in relation to climate action is essential for creating a coherent legal framework. The key is to craft these provisions carefully, providing clear guidance to arbitral tribunals while maintaining enough flexibility to address evolving climate challenges.

Prevention of Arbitrary Interpretations

In response to Section 3 (B), preventing arbitrary interpretations of investment treatment clauses requires a combination of precise drafting, clear interpretative mechanisms, and procedural safeguards. As international investment law continues to evolve, developing a coherent and predictable framework for interpreting the key IIA provisions is essential to enhancing the legitimacy and effectiveness of ISDS. The cornerstone of preventing arbitrary interpretations lies in establishing precise and well-defined frameworks within IIAs. Treaty drafting techniques should be used to enhance predictability and consistency in treaty interpretation. Contemporary treaty practice has increasing evolved to offer more precise articulations of fundamental concepts, serving as a safeguard against interpretative inconsistency. For instance, the concept of indirect expropriation, historically subject to divergent interpretations, now frequently incorporates cumulative criteria requiring tribunals to examine various aspects. Annex 8-A of CETA establishes a comprehensive framework requiring tribunals to conduct a fact-based inquiry examining: (i) the economic impact of governmental measures, (ii) the duration of such measures, and (iii) the character of governmental action, particularly its object, context, and intent. ⁹⁵ Similarly, the Netherlands Model BIT provides granular clarity regarding “fair and equitable treatment” by exhaustively enumerating conduct that constitutes a breach, including (a) denial of justice, (b) fundamental breach of due process, (c) manifest arbitrariness, (d) discrimination on wrongful grounds, and (e) abusive treatment of investors. ⁹⁶ This approach significantly constrains tribunals’ interpretative latitude while preserving legitimate investor protections.

Moreover, IIA can also incorporate comprehensive interpretative annexes and explanatory notes providing detailed guidance on provision application. Such interpretative annexes and explanatory notes provide guidelines for arbitration on how key clauses should be interpreted. Some even provide specific examples illustrating the boundary between legitimate regulation and compensable interference. For example, Annex 9-B of CPTPP specifies that “non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances”. ⁹⁷ This provision creates a clear presumption that bona fide regulatory measures fall outside the scope of compensable expropriation, thereby reducing interpretative ambiguity for tribunals.

To ensure the IIAs clauses are correctly interpreted, arbitral tribunals must adopt interpretative methodologies grounded in the customary rules of public international law, as codified in the Vienna Convention on the Law of Treaties (VCLT). The VCLT provides a structured framework for treaty interpretation that requires examining the ordinary meaning of terms, the context of the clause, as well as the treaty's object and purpose. ⁹⁸ It also permits consideration of subsequent agreements, subsequent practice, and relevant rules of international law applicable between the parties. ⁹⁹ Adherence to these principles promotes interpretative consistency across tribunals and reinforces the legitimacy of the interpretative process. Importantly, IIA clauses do not operate in isolation. They must be interpreted in harmony with other relevant international legal norms, particularly in areas such as human rights, environmental law, and sustainable development. Proper interpretation requires systemic integration - an approach that interprets treaty provisions in harmony with the full body of international law. Article 31(3)(c) of the VCLT serves as the normative basis for this approach. ¹⁰⁰

The case of Urbaser v Argentina illustrates the significance of proper interpretative methodology. The tribunal emphasised that investment treaty provisions must be interpreted within their broader legal context, including relevant human rights and environmental obligations. The tribunal explicitly invoked VCLT Article 31(3)(c) to integrate human rights norms into the interpretation of the Argentina-Spain BIT and confirmed the “right to water” was a human right under international law. ¹⁰¹ It held that Argentina's water service regulations, designed to protect the human right to water, did not violate FET standards. ¹⁰² This systematic approach prevented an isolated reading of investment protections that would have ignored Argentina's human rights commitments. Similarly, in Philip Morris v Uruguay, the tribunal applied VCLT principles to interpret Uruguay's regulatory measures on tobacco packaging within the context of the country's public health obligations. ¹⁰³ The tribunal explicitly acknowledged that Uruguay's sovereign right to regulate in matters of public health was preserved under the Switzerland-Uruguay BIT when interpreted in light of broader international legal obligations, including the obligations under the WHO Framework Convention on Tobacco Control. ¹⁰⁴ These rulings highlight how broader legal contexts, including multilateral environmental and public health commitments, can shape the meaning of investment protections.

Article 31(3)(c) of the VCLT also underpins the interpretation of environmental carve-outs, ensuring they are read in line with states’ broader international environmental obligations. Where environmental carve-outs are included, the broader objectives of sustainable development, environmental protection, and regulatory autonomy must inform the interpretative process. Exemplary exception frameworks preserve state regulatory autonomy while providing clear parameters for its exercise. The CETA specifically excluding environmental measures from indirect expropriation claims when non-discriminatory. ¹⁰⁵ Environmental carve-outs are also included in the Canada-Colombia Free Trade Agreement (FTA). ¹⁰⁶ Despite these advancements, scholars have raised concerns that tribunals often continue to apply traditional interpretative frameworks, even to modern IIAs that include detailed environmental provisions. The fundamental concern is that if arbitral tribunals interpret new generation IIAs through the same lens applied to older treaties lacking explicit environmental exceptions, then the additional complexity and detail become merely superficial additions. ¹⁰⁷ This critique highlights a crucial disconnect between treaty drafting and arbitral interpretation that must be addressed. To resolve this disconnect, reform must go beyond drafting to the development of new interpretative approaches that give proper legal effect to environmental and climate-related provisions. Tribunals need to shift from rigid, investment-centric reasoning towards a holistic interpretative model that genuinely values states’ environmental commitments. This reinforces the importance of the interpretative methodologies based on the VCLT rules discussed above. This evolution is not merely desirable but essential to ensure that enhanced treaty language translates into effective protection for legitimate public interest regulation, particularly in the face of the climate crisis.

Procedural framework is also crucial in ensuring consistent interpretation. Joint interpretation mechanisms, with the establishment of specialised committees for interpretation, enable contracting parties to issue binding interpretative statements clarifying provision meaning and application. CETA's Joint Committee demonstrates this approach through its comprehensive mandate to adopt binding interpretations of treaty provisions. ¹⁰⁸ Similarly, the Netherlands Model BIT establishes a structured framework for joint interpretative declarations by outlining a formal mechanism through which both treaty parties can collaboratively clarify the meaning of specific provisions. ¹⁰⁹ This framework not only promotes transparency and legal certainty but also ensures that interpretations reflect the mutual intent of the contracting states. Consequently, it limits the scope for inconsistent or overly expansive interpretations by arbitral tribunals.

Furthermore, mandate transparency requirements are critical in preventing arbitrary interpretations while maintaining effective investor protection. It is a fundamental element of legitimate dispute resolution in international investment law. This has often been done by e.g., ensuring public access to documents, hearings and reasoned decisions. CETA is one of the IIAs that includes strong ISDS transparency rule. It incorporates UNCITRAL Rules on Transparency and requires the request for consultations, the agreement to mediate and relevant documents etc to be made publicly available. ¹¹⁰ Hearing “shall be open to the public” unless determines by the tribunal. ¹¹¹ Another example is the United States-Mexico-Canada Agreement (USMCA) which builds on the transparency rules of NAFTA but made them stronger. Documents such as notice of intent, notice of arbitration, minutes or transcripts of hearings, as well as orders, awards and decisions of the tribunal must be made publicly available. ¹¹² It also mandates public disclosure of pleadings, memorials and briefs submitted to the tribunal. ¹¹³ Such procedural safeguards provide a framework for predictable and consistent treaty interpretation, thereby enhancing legal certainty in international investment law.

Expressly Incorporating Climate-Focused Carve-Outs

The problems discussed in Section 3 (C) demonstrate the pressing need for a robust regulatory framework within IIAs that explicitly addresses climate action. Although modern IIAs commonly include environmental exceptions, evidence suggests that these general exceptions may be interpreted narrowly by arbitral tribunals. ¹¹⁴ This highlights the need for explicit climate-focused carve-outs that directly reference international climate commitments and provide clearer parameters for distinguishing legitimate climate action from compensable regulatory changes. Consequently, there remains a compelling case for specific climate-focused carve-outs in IIAs. Such specificity would not only prevent potential misinterpretation by arbitral tribunals that might construe general environmental exceptions restrictively, but also establish clear regulatory parameters for both states and investors. ¹¹⁵

Incorporating climate-focused carve-outs into IIAs requires a comprehensive approach that balances investment protection with climate action objectives. Such provisions need to specifically exempt climate action measures from ISDS proceedings, thus preserving regulatory sovereignty while preventing investors from challenging climate-related measures through arbitration. They could include explicit language detailing which actions are not compensable, with well-crafted treaty language that articulates the parties’ intent to align investment policy with global climate commitments and specifies that legitimate climate regulations do not breach IIAs. To ensure effective enforceability, climate-focused carve-outs could specifically exclude the application of ISDS in cases where the climate measures are taken by the host states in fulfillment of their obligations under the Paris Agreement and UNFCCC. Effective carve-outs could contain precise formulations such as “Non-discriminatory climate-related measures designed primarily to achieve emissions reduction targets under internationally recognised climate agreements, such as Paris Agreement and UNFCCC, do not constitute indirect expropriation or breaches of fair and equitable treatment clause.” Such carefully crafted climate-focused carve-outs ensure that states maintain the necessary policy space to implement climate measures while providing investors with clear guidance on the scope and limits of investment protections in the context of climate action.

Recent developments in treaty practice have seen various approaches to protecting climate action through specific carve-out provisions, ranging from general references to environmental protection to explicit climate-focused language. The CETA includes direct references to climate change, requiring parties to cooperate on environmental issues of mutual interest, specifically listing “climate change” as a priority area. ¹¹⁶ Similarly, USMCA Article 24.11 specifically addresses climate protection, stating that “the Parties recognise that air pollution is a serious threat to public health, ecosystem integrity, and sustainable development”. It also specifically requires parties to cooperate to improve air quality. ¹¹⁷ While the CPTPP does not contain a specific provision labelled “climate change”, it includes several provisions that relate to climate change mitigation and environmental protection. For example, parties affirm their commitments to preventing marine pollution from ships and to controlling emissions certain substances to protect the ozone layer. ¹¹⁸ In addition, Article 20.15 explicitly recognises emissions reduction and clean and renewable energy sources as cooperative areas, strengthening the legal basis for climate measures. These examples demonstrate the evolution of treaty practice towards more robust climate-focused provisions. They reflect a growing recognition that the investment protection regime must accommodate urgent climate needs. While approaches vary in their specificity and enforceability, the trend clearly points toward more specific and comprehensive climate provisions that safeguard regulatory space for implementing climate policies. This evolution represents a significant shift from earlier investment agreements that focused primarily on investor protection with minimal environmental safeguards.