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:

• bans on chemicals/products⁶ and mining techniques;⁷
• denial/revocation/suspension of permits/authorizations for mining,⁸ waste landfills⁹ and projects on cultural/natural heritage sites;¹⁰
• oil contamination;¹¹
• expropriation for reserves;¹²
• cost increases following environment impact assessments;¹³
• among others.¹⁴

Over the past few years, environment-related disputes have surged as Western States engaged in energy transition – with the:

• revocation/alteration of incentives/tariff regimes for renewable energies;¹⁵ 
• the phasing-out of nuclear and coal-fired power plants;¹⁶ and
• bans on oil, gas and shale-gas projects.¹⁷ 

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

In parallel, a notable number of ISDS cases have arisen out of local communities’ environmental concerns.²⁶ 

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

The vast majority of ISDS cases, however, are still being brought on the basis of “old-generation” IIAs entered into in the 1980s to early 2000s (with no, or limited, environmental language).³⁰ 

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

As per treaty practice, preambles of IIA increasingly tend to mention, as general goals shared by the contracting parties, “sustainable development”/“environmental protection”³⁴ as well as the strengthening and enforcement of environmental law.³⁵

Additional clauses in the NAFTA³⁶ and “new generation” IIAs³⁷ underline (or purport to clarify) the relationship between their provisions on trade and/or investment and the contracting parties' obligations under environmental multilateral instruments.

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.

Under the “classical” standards of investment protection, arbitral tribunals have upheld both claims⁴³ and defenses pertaining to environmental measures taken, or withdrawn, by States.

Notwithstanding alleged or legitimate environmental objectives, tribunals have upheld investors’ claims with regards to:

1. The unlawful expropriation of rights without compensation;⁴⁴ and expropriation due to the permanent and full destruction of the investor’s investment;⁴⁵
2. Breaches of the national treatment standard that could have been addressed through other means;⁴⁶
3. Breaches of the minimum standard of treatment due to the violation of the investor’s legitimate expectations⁴⁷ - including where the host State breached its own environmental regulations;⁴⁸
4. Breaches of the fair and equitable treatment standard due to:
   • the measures’ arbitrariness or lack of transparency;⁴⁹
   • the violation of the investor’s legitimate expectations;⁵⁰
   • the disproportionate nature of the State's measure;⁵¹
   • the lack of stability of its legal framework;⁵² and
5. Breaches of the full protection and security standard.⁵³

Tribunals have also accepted respondent States’ defenses based on:

1. The valid exercise of its regulatory powers in the context of expropriation (police powers),⁵⁴ fair and equitable treatment,⁵⁵ minimum standard of treatment,⁵⁶ and most favoured nation treatment.⁵⁷
2. Reasonable, proportional, transparent and/or non-discriminatory policies;⁵⁸
3. The investor’s lack of due diligence;⁵⁹
4. Sufficient due diligence conducted by States in the context of its obligation to provide full protection and security;⁶⁰
5. The absence of specific commitments or assurances given to investors;⁶¹
6. The principle of necessity;⁶² and
7. The absence of causation between the alleged breaches and the State’s actions.⁶³ 

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:

1. Explicit acknowledgements of the State’s right to regulate and to enforce environmental measures, as well as general exclusions for environmental measures (“GATT-like exceptions”).⁶⁴ These provisions have informed the arbitral tribunals’ interpretations of treaty standards of protection,⁶⁵ and have been construed, in at least one instance, as being capable of imposing (treaty) obligations upon investors.⁶⁶ Tribunals have also considered that such clauses do not automatically override substantive protections, and are to be interpreted on a case by case basis.⁶⁷ See further State regulatory power.
2. Carve-outs from substantive treaty protections – mostly performance requirements, (indirect) expropriation, most favored nation and national treatment clauses – unless the State measures are unjustified, arbitrary and/or discriminatory;⁶⁸ and/or
3. Clauses discouraging the lowering of standards in order to attract investment (“anti-race-to-the-bottom” clauses).⁶⁹

Over 40 “new generation” IIAs⁷⁰ include provisions encouraging the adoption and strengthening of corporate social responsibility standards.⁷¹

The Respondent States’ can bring independent heads of counterclaims based on environmental law, in accordance with the relevant instrument of consent.⁷² See also Human rights counterclaims.

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.

Environment-related disputes have acted as a trigger for the intervention of non-disputing parties/amicus curiae⁸⁰ and for enhanced transparency in ISDS since the early 2000s. 

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.

International Chamber of Commerce, Resolving Climate Change Related Disputes through Arbitration and ADR, ICC Commission Report, 2019.

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.

UNCTAD, International Investment Agreements - Issues Notes (2009-2020).

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.

Le Bars, B., International arbitration and the protection of the environment: Should the existing legal instruments evolve?, Papers for Congress – UNCITRAL, 2017.

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.

Beharry, C.L. and Kuritzky, M.E., Going Green: Managing the Environment Through International Investment Arbitration, American University International Law Review, Vol. 3, Issue 3, 2015, pp. 384-386.

International Bar Association, Report on Achieving Justice and Human Rights in an Era of Climate Disruption, Climate Change Justice and Human Rights Task Force Report, 2014.

Dupuy, P.M. and Viñuales, J.E. (eds.), Harnessing Foreign Investment to Promote Environmental Protection, Incentives and Safeguards, Cambridge University Press, 2013.

Vinuales, J.E., The Environment Breaks into Investment Disputes, in Bungenberg, M., Griebel, J., Hobe, S. and Reinisch, A. (eds.), International Investment Law, Beck/Hart/Nomos, 2012.

Gordon, K. and Pohl, J., Environmental Concerns in International Investment Agreements: A Survey, OECD Working Papers on International Investment, 2011/01, OECD Publishing, 2011.

Sands, P., Litigating Environmental Disputes: Courts, Tribunals and the Progressive Development of International Environmental Law, 37 Environmental Policy and Law, 2007.

Boisson de Chazournes, L., Environmental Protection and Investment Arbitration: Yin and Yang?, Anuario Colombiano de Derecho Internacional, Vol. 10, 2017.

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.