UNCTAD publishes report on international climate change investment trends and policy developments

Reuters | 10 November 2022

UNCTAD publishes report on international climate change investment trends and policy developments

UNCTAD has published a report on international climate change investment trends and policy developments, which aims to inform the debate on climate finance at COP27. It includes trends in international investment agreements and statistics on investor-state dispute settlement.

UNCTAD has published a report International Investment in Climate Change Mitigation and Adaptation: Trends and Policy Developments, which aims to inform the debate on climate finance at COP27 and incorporates key findings from numerous sources, including the World Investment Report 2022.

The report provides the latest international climate change investment trends and policy developments, including trends in international investment agreements (IIAs) and statistics on investor-state dispute settlement (ISDS) in energy and environmental cases by reference, in particular, to outcome.

The IIA regime consists of 3,300 treaties: 2,871 bilateral investment treaties (BITs) and 429 other treaties with investment provisions, providing access to ISDS. Referring to the 2021 report of the Intergovernmental Panel on Climate Change (IPCC), which highlighted the risk of ISDS being used to challenge climate policies, the report suggests that reform of existing IIAs is essential to ensure that they do not hinder states from implementing climate change measures. That reform can be taken at the multilateral, regional, bilateral and national level but a coordinated multilateral approach to IIA reform is preferable.

The old-generation IIAs (that is, those concluded between 1959 and 2009, representing 85% of all IIAs) do not contain provisions to preserve states’ regulatory right for environmental protection or climate action but serve as a basis for virtually all existing ISDS claims. New-generation IIAs (that is, those concluded since 2010) may contain environmental provisions aimed at safeguarding the state’s policy space and specific climate action provisions, often accompanied by narrower access to ISDS. However, both old and recent IIAs lack pro-active provisions aimed at effectively supporting climate action.

The report provides a summary of the general environment-related and specific climate action provisions contained in the new generation IIAs. It also highlights several initiatives aimed at contributing to reform of the IIA regime in light of climate change objectives, including the modernisation of the Energy Charter Treaty (ECT).

The report suggests that progress on IIA reform is critical to enable countries to address the challenges of climate change and that two broad strategic objectives should be considered:

  • How to minimise the risk of ISDS claims based on measures taken for the protection of the environment or for mitigating climate change.
  • How to ensure that IIAs pro-actively promote and facilitate investments that are conducive to climate change objectives.

The report calls for holistic climate-responsive reform of the IIA regime and for making individual IIA provisions climate-responsive as well, and it includes a useful table of suggested reform options.

The report notes that the urgency of climate action has highlighted the need to reform the IAA regime and that the use of ISDS to challenge climate policies is a major concern.

Data is provided on previous and known (that is, those that are not confidential) IIA-based ISDS cases brought by investor claimants in environmental, fossil fuel and renewable energy cases, as described below.

Overall, the report finds environmental measures and other regulatory actions by states can give rise to costly ISDS claims, and that the overwhelming majority of ISDS cases concern old-generation IIAs. The report goes on to call for the immediate reform of the IIA regime to safeguard a state’s right and duty to regulate in the public interest and to make IIAs more climate-responsive.

There have been at least 175 environmental cases. Out of 118 concluded cases, 40 per cent were decided in favour of the state (jurisdiction declined or claims dismissed on the merits) and 38 per cent in favour of the investor (with damages awarded), with the remaining cases discontinued, settled, having an unknown outcome or the tribunal finding a breach but not awarding damages.

Notably, all cases were brought on the basis of IIAs signed before 2010, with the vast majority based on those signed in the 1990s. The ECT was the most frequently invoked IIA with 80 cases. Also, developed regions were the most frequent respondents (67 per cent), going against the general trend of developing countries facing the most claims. In relation to the home states of claimants, 95 per cent were initiated by investors from developed regions.

There have been at least 192 fossil fuel cases. Of the 144 concluded cases, 31 per cent were decided in favour of the investor, 22 percent were decided in favour of the state and 32 per cent were settled. The remaining cases were discontinued, settled, had an unknown outcome or no award of damages.

While the report finds that the measures challenged in the underlying disputes did not necessarily relate to climate action, it also notes that such investors may use existing ISDS mechanisms to challenge climate action measures aimed at restricting or phasing out fossil fuels.

There have been at least 80 renewable energy cases, 43 of which have concluded. Out of those concluded cases, 53 per cent were decided in favour of the investor, 40 per cent in favour of the state, with the remaining cases discontinued or the outcome unknown.

In many of these cases, the measures challenged involved governments legislative amendments to reduce feed-in-tariffs for renewable energy production, with Spain being the respondent state in 60 per cent of cases. Notably, more than 90 per cent (72) of these cases were initiated under the ECT and were almost exclusively brought by claimants from developed regions against other developed countries (98 per cent).

The report suggests that these cases demonstrate how IIAs may increase the costs of adapting energy regulatory frameworks in host states and that states need flexibility for the necessary regulatory experimentation leading to climate adaptation.

source: Reuters