Many countries around the world are developing industrial policies in order to address concerns about global competitiveness and economic security, and to promote much needed investment in low-carbon technologies. Indeed, in order to combat climate change the world needs rapid, diverse and experimental action by all nations, regardless of development or income level.
Governments’ ability to take such action is, however, being constrained by their participation in International Investment Agreements (IIAs) which include a problematic mechanism known as Investor State Dispute Settlement (ISDS). ISDS allows foreign investors to bring claims directly against a host state when new policies or regulations affect the value of their investment or undermine their expectations. If the state loses the arbitration case, then it can be ordered to pay millions (or indeed billions) of dollars in compensation to the investor, with taxpayers footing the bill.
In the last decade, the number of ISDS cases has more than doubled, with investors involved in extractive industries and the energy sector the most frequent users of the system.[1] At least 249 fossil fuel ISDS cases have been filed against governments around the world.[2] These create ‘regulatory chill’, making governments hesitate when it comes to phasing out fossil fuels. Investors can use the threat of an ISDS case as a lobbying weapon in order to stop governments moving forwards with the energy transition.
Notorious ISDS fossil fuel cases include:
- Canada being sued for $20 billion because a Liquid Natural Gas plant in Quebec was rejected by both the federal and provincial government on climate change grounds and due to the potential for local environmental impacts.
- The Netherlands being sued by ExxonMobil for billions of euros because of the decision to bring forward the closure of the Groningen gas field following more than 1,600 earthquakes caused by gas extraction.
- Australia being sued by Clive Palmer (an Australian citizen) via a subsidiary located in Singapore, because he was refused a coal mining license and a license for a coal-fired power plant on climate change grounds. He is demanding that Australian taxpayers compensate him to the tune of $78 billion (yes, billion…).
- Colombia being sued by the Glencore mining company for an undisclosed amount following the Colombian Constitutional Court’s ruling that a local stream could not be re-routed in order to allow the expansion of its coal mining operations.
- Germany compensating two East German lignite mining companies with €4.4 billion due to the fear of ISDS lawsuits. Independent analysis by EMBER suggests that an appropriate level of compensation would have been €343 million.[3] Germany is currently being sued by Swiss publicly owned utility Azienda Elettrica Ticinese (AET), in relation to the German coal phase-out.
Many more cases could be included here. On average investors claim $1.4 billion from states in such cases.[4] In 2023, the International Institute for Environment & Development and the Columbia Center for Sustainable Investment calculated that states had paid out more than $82 billion in damages to fossil fuel investors, a sum equivalent to the combined GDP of the world’s 45 smallest economies.[5]
The United Nations has recognised the barriers that ISDS is creating to climate change mitigation[6] and leading politicians and economists such as Mary Robinson and Joe Stiglitz have spoken about the need to dismantle the system, which Stiglitz describes as “litigation terrorism.”
There has been progress in recent years, with an effective civil society campaign in Europe persuading the governments of 12 leading European countries[7] to leave the Energy Charter Treaty, the treaty under which the largest number of fossil fuel-based ISDS cases have been filed. Governments including South Africa, Indonesia, Ecuador, and Bolivia have also conducted national reviews of their investment agreements, and then moved to terminate them so as to reduce the threat from ISDS.
Around the world more than 80 countries are now taking some kind of action to reform older investment agreements or negotiate new ones that favour sustainable development.[8] Governments increasingly recognise that ISDS constrains their sovereignty and policy space, but Global South governments are often threatened by financial institutions and Global North investors if they try to move away from the system. While there is positive momentum, progress is currently far too slow.
Funders for Fair Trade, a pooled fund supported by the Oak Foundation, Open Society Foundations and the Rockefeller Brothers Fund, has been making grants to civil society groups helping to tackle the ISDS system. Funder briefing calls are being held every two months, and nearly 50 different foundations and funder networks have taken part in these calls.
While this growing awareness is welcome, funders have been slow to start making grants on ISDS, and there are big gaps in civil society capacity in certain countries and regions, and in relation to skillsets needed to help governments liberate themselves from the ISDS system.
Photo by Eelco Böhtlingk on Unsplash
If you are interested in learning more about this issue, and the ways in which governments can be helped to reassert their sovereignty when it comes to the energy transition, then please contact jon@fundersforfairtrade.org
[7] Denmark, France, Germany, Ireland, Italy, Luxembourg, Poland, Portugal, Slovenia, Spain, The Netherlands, and the United Kingdom decided to leave the Energy Charter Treaty, as did the European Union (which was a signatory in addition to the member states). These governments recognised the tension between ISDS and their climate change commitments.
Q3 2025 Climate Solutions Magazine
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