Environmental issues primarily have a bearing on biodiversity and ecosystem protection, treatment of waste and chemicals/hazardous substances, pollution and disaster prevention/remediation, management and efficient use of resources (energy, water and others), the protection of the atmosphere and reduction of greenhouse gas emissions.1
An evolving notion, the term “environment” is most commonly intertwined with the concept of "sustainable development".2 As such, environmental issues touch as well upon matters such as health,3 food and water,4 local/global governance, cultural heritage, involuntary displacements, and indigenous peoples’ rights.5
For decades, investment arbitration has regularly dealt with environmental issues including:
Over the past few years, environment-related disputes have surged as Western States engaged in energy transition – with the:
As a result, at the time of writing, Spain is only second to Argentina and Venezuela18 as the most frequent Respondent State, with 53 total Investor State Dispute Settlement (ISDS) cases out of which 48 have a bearing on renewable energy projects.19 Similar claims have been submitted against Italy (13),20 the Czech Republic (7),21 Bulgaria (4),22 Canada (4),23 Romania (4),24 and Germany (3).25
ISDS is seen as an essential tool to attract the substantial amount of investment required in order to transition towards sustainable economies,27 as much as a risk for the environment. Foreign Direct Investment (FDI) and ISDS are depicted as being capable of furthering the so-called “pollution havens”, the “regulatory chilling effect” or the lower end of the “environmental Kuznets curve”.28
The Backlash in Investment Arbitration has spurred since 2012 a thorough reform of International Investment Agreements (IIA) under the auspices of the United Nations Commission on International Trade Law (UNCITRAL). According to the United Nations Conference on Trade and Development (UNCTAD) about 220 IIAs include references to the environment/sustainability in their preambles, and additional 208 in other treaty provisions.29
Principles and rules of domestic and international environmental law (the legal corpus of which comprises about 500 multilateral agreements and continues to expand)31 are taken into account in ISDS cases, either as part of the Applicable law(s) to a given dispute,32 or as part of its factual background.33
Like any other investment, environmental projects (for example, renewable energy plants) are obliged to meet the “classical” requirements under the relevant definition of Investment in order to qualify for treaty protection as covered investments.38
Whether they were made in environmental projects or other projects, investments may also be required to contribute to sustainable development and the protection of the environment in order to qualify for treaty protection. For example, at least one recent Bilateral Investment Treaty (BIT) expressly sets forth in its definition of investment that it shall contribute to sustainable development.39
A number of IIAs expressly shield their environmental provisions from ISDS mechanisms.40 As a result, investors may be impeded from bringing claims where their investments have impacted by environmental policies and regulations. See also Consent to arbitration, Section IX.
Investments made unlawfully in breach of the host state's environmental laws – such as the regulations of (rain)forests and nature reserves, or laws on energy transition – could be denied treaty protection at the jurisdictional stage41 (or at the merits stage.42) See also Legality of investment.
Notwithstanding alleged or legitimate environmental objectives, tribunals have upheld investors’ claims with regards to:
Tribunals have also accepted respondent States’ defenses based on:
In order to reduce the tribunals’ discretion, and secure the States’ regulatory space (see also Police powers, State regulatory powers and Public interest) on environmental matters, at time of writing over 320 IIAs expressly provide:
States have brought environmental counterclaims against investors on the basis of contracts,73 domestic laws74 as well as international law.75 See also Counterclaims, Section V.
When analyzing the merits of counterclaims, tribunals have taken into consideration the investor’s lack of diligence with respect to environmental laws.76 See also due diligence.
Arbitral tribunals can take into consideration environmental concerns when assessing compensation, for instance by mitigating the amount of damages where it finds that the investor committed a contributory fault (See also Investor’s conduct).77 Tribunals may also deduct/set off environmental counterclaims as well.78
As per the preferred Valuation methods for damages in environmental projects: In renewable energy cases, tribunals often employ the discounted cash flow (DCF) method to calculate the amount of damages due, given the predictability of their future performance.79 See further Discounted cash flow, Section III.
Environmental matters have also led to the adoption of specialized procedural rules in IIAs and arbitral institutions81 (e.g., allowing interim measures to prevent “serious harm to the environment” or considering specialized arbitrators or experts).82 Reportedly, only a handful of cases have been filed to this date under arbitration rules specialized in environmental matters.
Levine, J. and Peart, N., Chapter 9: Procedural Issues and Innovations in Environment-Related Investor-State Disputes, in Miles, K. (ed.), Research Handbook on Environment and Investment Law, Edward Elgar Publishing, 2019.
Lahlou, Y., Willard, R., Craven, M. and Chaffetz, L., The Rise of Environmental Counterclaims in Mining Arbitration, in Fry, J. and Bret, L.A (eds.), The Guide to Mining Arbitrations - First Edition, Global Arbitration Review, 2019.
Viñuales, J.E., Foreign Investment and the Environment in International Law: The Current State of Play 2015, in Kate Miles, K. (ed.), Research Handbook on Environment and Investment Law, Cheltenham: Edward Elgar, 2016.
Olivia Danic, O., Chapitre 14 : Droits de l'homme, droit de l'environnement, in Leben, C. (ed.), Droit international des investissements et de l’arbitrage transnational, Pedone, 2015, pp. 531-577.
Dupuy, P.M. and Viñuales, J.E. (eds.), Harnessing Foreign Investment to Promote Environmental Protection, Incentives and Safeguards, Cambridge University Press, 2013.
Mbengue, M.M. and Raju, D., The Environment and Investment Arbitration, in Schultz, T. and Ortino, F. (eds.), The Oxford Handbook of International Arbitration, Oxford University Press, 2020.
Scherer, M., Bruce, S. and Reschke, J., Environmental Counterclaims in Investment Treaty Arbitration, ICSID Review – Foreign Investment Law Journal, 2021.
Martini, C., Balancing Investors’ Rights with Environmental Protection in International Investment Arbitration: An Assessment of Recent Trends in Investment Treaty Drafting, the International Lawyer, Vol. 50, No. 3, 2017.
Ishikawa, T., The Role of International Environmental Principles in Investment Treaty Arbitration: Precautionary and Polluter Pays Principles and Partial Compensation, in Jacur, F.R., Bonfanti, A. and Seatzu, F. (eds.), Natural Resources Grabbing: An International Law Perspective, 2015.
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