In the mountains of Transylvania, a Canadian company makes plans for a vast gold and silver mine. The proposal – which involves razing four mountain tops – sparks a national outcry, and the Romanian government pulls its support.
After protests from local communities, the Italian government bans drilling for oil within 12 miles of its shoreline. A UK fossil fuel firm has to dismantle its oilfield.
Beneath the grey whales and sea turtles of Mexico’s gulf, an underwater exploration company gets a permit to explore a huge phosphate deposit. Before it can begin, Mexico withdraws the permit, saying the ecosystem is “a natural treasure” that could be threatened by mining.
Such cases appear to be part of the bread and butter of governments – updating environmental laws or responding to voter pressure. But every time, the company involved sued the government for lost profits and often, they won (Romania prevailed in its case, Italy and Mexico were forced to pay out).
They are among more than 1,400 cases analysed by the Guardian from within the investor-state dispute settlement (ISDS) system, a set of private courts in which companies can sue countries for billions. There have been long-held concerns about ISDS creating “regulatory chill” – where governments are scared off action on nature loss and the climate crisis by legal risks. Now, government ministers from a range of countries have confirmed to the Guardian that this “chilling” is already in effect – and that fear of ISDS suits is actively shaping environmental laws and regulations.
Quick Guide
What is ISDS and how does it work?
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What is it?
Investor-state dispute settlement (ISDS) was created to help companies protect investments abroad. It allows companies to sue countries for lost profits caused by government action including corruption, seizure of assets or the introduction of health and environmental policies.
The system was created in the 1960s by the World Bank. It was intended to give companies confidence to invest in poorer countries with weak political systems where they might not get a fair hearing in domestic courts.
How does it work?
The foreign company must put forward a case showing that the state has damaged its profits. Most international investment treaties and free-trade deals include ISDS clauses. Cases are heard by a private arbitration tribunal, and typically decided by a panel of three arbitrators – one chosen by the company, one chosen by the state and the third selected jointly.
How much are the cases worth?
Awards regularly amount to hundreds of millions of dollars, and some are in the billions. In 2024 the average amount awarded was $385m (£304m). The average sum awarded is increasing and these payouts can make up a sizeable chunk of poorer countries’ annual budgets.
Who is involved?
The fossil fuel and mining industries are the most litigious in the ISDS system, accounting for more than 30% of known cases.
Most claims are brought by companies based in rich countries against the governments of developing countries. Companies registered in developed countries file 81% of ISDS lawsuits, according to UN data, while developing countries have faced 62% of cases.
How common is it?
ISDS began as an obscure legal mechanism, averaging about one case a year for its first decade. Now, dozens are brought every year, with Guardian analysis finding more than 900 since 2013.
In April 2018, New Zealand banned new offshore oil exploration projects, but stopped short of an outright ban or revoking existing concession. James Shaw, who was climate minister at the time, said it was because of the risk of being sued by foreign oil and gas companies. “When we implemented the ban on offshore oil and gas exploration, we had to construct that incredibly carefully in order to avoid the risk of litigation. The way that we did that was to leave existing permits in place,” he said. As a result, New Zealand was unable to be a full member of the Beyond Oil & Gas Alliance.
Shaw said the implications of ISDS were discussed around the cabinet table, with the ministry of foreign affairs and Trade pushing back on environment policies and “frequently talking about the risk that we would end up in litigation”, although ISDS was rarely explicitly cited.
“We could see what was happening around the world”, he said. “We’d keep track of the number of ISDS cases that were being taken and what percentage of those were essentially hostile to environmental regulation.”
Toby Landau, who has been a leading arbitration lawyer for 30 years, said acting in accordance with the Paris agreement could result in “very significant claims” for countries. He said: “It matters hugely because of the climate emergency that we are in – we’ve got an imperative under the Paris agreement to act quickly and decisively.”
The idea that this does not create a chilling effect is an “outdated and inaccurate view”. He says: “My impression from working closely with governments is that ISDS is now increasingly on their radar, that is it’s increasingly an issue for them to consider: whether implementing a particular policy might give rise to claims.
“We’re left with two regimes that conflict: the Paris agreement requires (broadly) that fossil fuels be phased out, and the ISDS regime provides guarantees for investors that protect their investment – even if it is a fossil fuel investment. That’s the conflict – it’s as simple as that.”
“International arbitration costs a lot of money,” says Manuel Díaz-Galeas, attorney general of Honduras, which is fighting cases claiming $18bn (£14bn) – greater than the country’s annual budget. “The thousands of millions of dollars claimed in compensation is simply absurd,” he says.
Díaz-Galeas adds that the effects of ISDS claims are particularly significant for countries such as Honduras with high poverty rates and limited budgets.
Rob Davies, who was minister of trade and industry of South Africa from 2009 to 2019, withdrew the country from a number of treaties with ISDS clauses from 2013 onwards. He says ISDS posed “significant risk” to the government’s legislation.
“Companies have got the right to challenge any policy … that will impact their expectation of profitability in the future, no matter what the regulation is, no matter what its motivation is, no matter how well designed it is or anything,” he says. Davies believes more recently fossil fuel companies are using the ISDS provisions to “thwart regulations on green transition”. He says: “It has a chilling effect, particularly on developing countries.”
In 2021, the International Energy Agency released a report saying the 1.5C pathway requires no new oil, gas or coal. But the issue of regulatory chill has been acknowledged by a number of international bodies, including the 2022 IPPC report on climate change. “Numerous scholars have pointed to ISDS being able to be used by fossil fuel companies to block national legislation aimed at phasing out the use of their assets,” the authors wrote. The UN, Council of Europe and European parliament have all raised similar concerns about climate action being delayed or watered down by ISDS.
“There can be astronomical costs associated with these cases,” says Kyla Tienhaara, an associate professor at the School of Environmental Studies at Queen’s University in Canada. Countries are afraid of implementing environmentally friendly policies because they can’t afford the cost of ISDS, says Tienhaara. “Governments don’t even have the funding to deal with the case in the first place.”
The Guardian investigation into ISDS reveals $84bn in payouts from governments to fossil fuel companies. More than $120bn of public money has been awarded to private investors across all industries since 1976. The average payout for a fossil fuel claim was $1.2bn.
Some cases can cost countries a significant portion of their total annual budget. For example, in 2015 Occidental Petroleum received a $1.1bn payout from the Ecuadorian government. The country’s budget was $29.8bn in 2016. Honduras faces 11 claims, with one seeking damages equal to 30% of the country’s GDP.
The problem is increasingly being discussed by climate ministers and heads of state. On the campaign trail in 2020, US presidential candidate Joe Biden said he opposed ISDS clauses in trade agreements because they allow “private corporations to attack labour, health and environmental policies”.
Last March, Ireland’s former president Mary Robinson said there was a “growing number of claims brought by fossil fuel companies against governments wanting to take action to tackle the climate emergency”, claiming fossil fuel companies were seeking financial compensation from states that decided to tackle the nature and climate crisis. “I cannot overstate just how perverse this is,” she said.
The Danish government set a deadline to stop fossil fuel exploration by 2050 as opposed to 2030 or 2040 because it would have had to pay “incredibly expensive” compensation to companies, on top of lost revenue for the Treasury, then-climate minister Dan Jørgensen said.
A 2023 UN report by David Boyd, the special rapporteur on human rights and the environment, found Denmark, New Zealand and France had limited their climate policies because of the threat of ISDS, with the Spanish government saying it has slowed its transition away from fossil fuels over “fear of being sued by a foreign investor”. The report stated that this threat has become a “major obstacle” for countries addressing the climate crisis.
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