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 gases 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 – bans on chemicals/products⁶ and mining techniques,⁷ denial/revocation of permits/authorizations for waste landfills⁸ and projects on cultural/natural heritage sites,⁹ oil contamination,¹⁰ expropriation for reserves,¹¹ cost increases following environment impact assessments,¹² and many others.¹³

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,¹⁴ the phasing-out of nuclear and coal-fired power plants,¹⁵ and bans on oil, gas and shale-gas projects.¹⁶ As a result, at the time of writing Spain is only second to Argentina as the most frequent Respondent State, with 47 (out of total 52) Investor State Dispute Settlement (ISDS) cases on renewable energy projects.¹⁷ Similar claims have been submitted against Italy (9),¹⁸ the Czech Republic (7), Bulgaria (3), Canada (4),¹⁹ Romania (1), and Germany (1).²⁰ In parallel, a notable number of ISDS cases have arisen out of local communities’ environmental concerns.²¹

In this context, ISDS is seen as an essential tool to attract the substantial amount of investment required in order to transition towards sustainable economies,²² 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”.²³

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.²⁴ 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).²⁵

Principles and rules of domestic and international environmental law (the legal corpus of which comprises about 500 multilateral agreements and continues to expand)²⁶ are taken into account in ISDS cases, either as part of the Applicable Law(s) to a given dispute,²⁷ or as part of its factual background.²⁸ As per treaty practice, preambles of IIA increasingly tend to mention, as general goals shared by the contracting parties, “sustainable development”/“environmental protection”²⁹ as well as the strengthening and enforcement of environmental law.³⁰ Additional clauses in the NAFTA³¹ and “new generation” IIAs³² 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 are obliged to meet the “classical” requirements under the relevant definition of Investment in order to qualify for treaty protection as covered investments.³³

In turn, investments made in breach of environmental laws may be denied treaty protection at the jurisdictional stage³⁴ (or at the merits stage).³⁵ Taking a further step, one recent Bilateral Investment Treaty (BIT) expressly sets forth in its definition of investment that it shall contribute to sustainable development.³⁶

In addition, the Respondent States’ ability to bring independent heads of counterclaims based on environmental law, will greatly depend on the relevant instrument of consent (see also Consent to Arbitration).³⁷ In this regard, a number of IIAs expressly shield their pro-environmental provisions from ISDS.³⁸

Under the “classical” standards of investment protection, arbitral tribunals have upheld both claims³⁹ and defenses⁴⁰ pertaining to environmental measures taken, or withdrawn, by States.

In order to reduce the tribunals’ discretion, and secure the States’ regulatory space (see also Police Powers; State Regulatory Powers; Right to Regulate in the Public Interest) on such 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”).⁴¹ These provisions have informed the arbitral tribunals' interpretations of treaty standards of protection,⁴² and have been construed, in at least one instance, as being capable of imposing (treaty) obligations upon investors.⁴³ (See also, in the same vein, the ECOWAS Supplementary Act on Investments);⁴⁴
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;⁴⁵ and/or
3. Clauses discouraging the lowering of standards in order to attract investment (“anti-race-to-the-bottom” clauses).⁴⁶

Over 40 “new generation” IIAs⁴⁷ also include provisions encouraging the adoption and strengthening of corporate social responsibility standards.⁴⁸

Arbitral tribunals can take into consideration environmental concerns when assessing compensation,⁴⁹ and deduct/set off environmental counterclaims.⁵⁰

Environment-related disputes have acted as a trigger for the intervention of non-disputing parties/amicus curiae⁵¹ 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 institutions⁵² (e.g., allowing interim measures to prevent “serious harm to the environment” or considering specialized arbitrators or experts). 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 environ: 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.