ISDS clauses were first introduced into international trade agreements in the post-colonial period. Most of these treaties were between a developed and a developing country and give investors the ability to take a state to arbitration if a policy decision affects their investment.

“It was really intended in the first instance to protect the interests of multinational companies from the global north when they were operating in these newly decolonised parts of the world,” explains Kyla Tienhaara, an expert in ISDS and environmental governance at Queen’s University in Ontario, Canada.

Yet Tienhaara says the use of ISDS has “morphed beyond all recognition” of the treaties’ original intentions, due to what she calls “creative lawyering” and the fact the system is stacked in favour of investors and against governments.

A looming concern is the chilling effect these clauses could have on countries’ decisions to phase out fossil fuels or take other action to protect the environment if investors decide to sue for compensation. In a recent study, Tienhaara and her colleagues estimated that countries could face up to US$340 billion (£264 billion) in financial and legal risk from cancelling fossil fuel projects covered by ISDS clauses.

When we first spoke to Tienhaara for The Conversation Weekly podcast in 2022, she was a little despondent. A British company called Rockhopper was awarded €190m (£210m) after suing the Italian government over its decision to ban all oil drilling 12 nautical miles off the coast. This shuttered the company’s planned oil investment in a field called Ombrina Mare. That case was brought under the Energy Charter Treaty (ECT), an international investment treaty covering the energy  industry. Italy actually withdrew from the treaty in 2016, but was still bound by a 20-year sunset clause in the Rockhopper case. Italy’s appeal to annul ruling is ongoing.

Energy Charter Treaty withdrawal

But when Tienhaara came back on The Conversation Weekly podcast recently, she was excited. A number of countries, including the UK, France, Spain and the Netherlands have withdrawn from the ECT, followed in May 2024 by the European Union.

It is a huge deal. Even though it’s only one treaty, the ECT has a lot of members. So this development is actually equivalent to quite a large number of bilateral investment treaties being terminated. It’s also significant because the treaty is protecting a lot of fossil fuel investments.

However, Tienhaara says big questions still remain about the future of the ECT, and whether countries that withdraw will still be bound by the sunset clauses.

We’ve got a lot of existing investment where disputes could potentially arise. So that sunset clause is a tricky issue, and I do hope that the countries look at ways to try to nullify it.

In another prominent ISDS case related to climate change, a Canadian company, TC Energy, recently lost a bid to sue the US government over President Joe Biden’s decision to cancel the Keystone XL oil pipeline. However, the Canadian province of Alberta is also suing the US government over the decision in an ongoing case.

Other efforts to push back against ISDS clauses more generally are also bearing fruit too. In Ecuador, the new government used a referendum to try to overturn a clause in its constitution which banned ISDS clauses. It lost, with 63% of Ecuadorans voting to keep the clause in the constitution. And in February, the Honduras government decided to quit the World Banks’ International Centre for Settlement of Investment Disputes, which is the most used global forum for this type of dispute settlement.

The full interview with Kyla Tienhaara is available on The Conversation Weekly podcast. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.