In the delicate balance between progress and preservation, foreign direct investment (FDI) can be both a harbinger of hope and an agent of destruction with regard to climate change. Governments shoulder a solemn duty to craft policies that mitigate the adverse effects of FDI while respecting the legitimate rights of investors who are inherently intertwined in this complex equation.

As environmental protection measures emerge, and potentially hinder a foreign company’s operations, investors may resort to the Investor-State Dispute Settlement (ISDS) mechanism — a testament to the perpetual tension between safeguarding the environment and nurturing the global economy. 

The UN Conference on Trade and Development (Unctad) recently observed a significant surge in the number of ISDS cases raised by both fossil fuel and renewable energy inverters. Two notable examples of climate change-related investment disputes are Eco Oro v Colombia and RWE v Netherlands. These cases not only highlight the growing friction between the investment regime and climate change mitigation, but also underscore the complexities at the intersection of these two domains.

The RWE case involves a German company challenging the Netherlands’ decision to prohibit coal-fired power generation without offering financial compensation, despite fundamentally altering the legal framework for such power generation. The most advanced and efficient power plants were granted a mere 10-year transitional period, which was deemed insufficient to compensate for the claimants’ loss of at least 35 years of remaining lifespan. 

The Eco Oro case centred on an open-pit gold and silver mining project in an area governed by Colombia’s environmental regulation. Struggling to balance investment and environmental protection, Colombia lost this case because of a series of inconsistent actions. Consequently, the state’s authority to regulate environmental protection and climate adaptation has been scrutinised.

To prevent investment treaties and associated investor–state disputes from obstructing sovereign governments’ efforts to address climate change, urgent reforms are crucial. These modifications should minimise the possibility of states facing ISDS claims from investors with high-carbon investments, or those alleging that a state has breached its rights concerning climate policies.

Although post-2010 investment treaties offer somewhat better protection for states’ regulatory rights and include specific environmental provisions, they still lack proactive measures designed to promote climate action effectively. In reality, increased regulatory adaptability is a pressing reform needed in investment treaties, to mitigate such risks and grant states the necessary latitude to take decisive climate action.

In crafting investment agreements that cater exclusively to sustainable ventures and safeguard nations’ authority to legislate for the greater good, each treaty has the potential to become a climate-conscious accord. Such treaties can further incorporate provisions to stimulate and streamline sustainable investment practices. The implementation of these reforms is both feasible and imperative, and their adoption should be expedited with unwavering resolve.

Julien Chaisse is professor of law at City University of Hong Kong and president of the Asia Pacific FDI Network. Twitter: @JChaisse

This article first appeared in the April/May 2023 print edition of fDi Intelligence.