(BIT)s of Change: An Analysis of the Interaction Between the Climate and International Investment Regimes and Potentials for the Future (Part 2)

By: Tarusi Jain

(This post is the second of a two part series on the topic – ‘(BIT)s of Change: An Analysis of The Interaction Between the Climate and International Investment Regimes and Potentials for the Future’)


Fair and Equitable Treatment and Legitimate Expectations

The application of the standards of FET and legitimate expectations has not been uniform. The tribunal in AES Summit had established the standard as when “a State’s acts or procedural omissions are, on the facts and in the context before the adjudicator, manifestly unfair or unreasonable (such as would shock, or at least surprise a sense of juridical propriety), then FET will be breached.” However, in AES Corp v. Kazakhstan (2013), the tribunal found, “restrictions concerning the level of returns to be earned or to be repatriated may be justified in circumstances where investment in electricity generating infrastructure appears indispensable to prevent a collapse of the electricity distribution system. The restrictions imposed by respondent would only be justified if the threat of collapse was real and imminent and the measures necessary to prevent the collapse could not be implemented by means that involved a lesser intrusion upon the claimants’ rights.” This threshold raises questions of whether the threat of climate change would be considered “real and imminent” and whether complete fossil fuel phase outs by states, which are necessary to meet obligations under climate law (making it ‘indispensable’), could be treated as an exception to exploring alternatives that are less intrusive in the investors’ rights.

Post 2015, with the increase in investments in the renewable energy sector and the use of renewable energy incentive schemes, the FET standard was mainly used to answer whether the states’ actions had created legitimate expectations of regulatory stability for investors. Some tribunals have held that foreign investors can base their legitimate expectations on the legal framework present at the time the investment was approved. In Antin v. Spain, the tribunal held that states’ right to regulate won’t be affected as long as “the fundamental stability in the essential characteristics of the legal regime relied upon by the investors in making long-term investments.” This standard could imply that climate-related regulation is acceptable as long as it is subservient to investment protection provisions.

Other tribunals have held that investors should instead base their expectations on specific commitments made to them by the host states. In Hydro Energy v. Spain, the tribunal also considered the public interest of the restrictions and balanced it against the interests of the investor. It remains to be seen which of these thresholds the tribunals use in phase out cases; however, public policy concerns need to be considered. In Foresight v. Spain, the tribunal explained, “[it can be] reasonably expected that [the incentive scheme] could be modified, ‘but within foreseeable limits’.” Would climate-related regulation, including fossil fuel phase out policies, be considered “within foreseeable limits” given that the discourse surrounding energy transition and the efforts to translate it into action has been around since decades?

How tribunals will navigate through the different thresholds used previously in order to decide on cases involving fossil fuel phase out laws is yet to be seen. At the moment, tribunals can use existing standards and their interpretive discretion to opt for a more climate-friendly reading of current IIAs; this would reduce the risks of creating a regulatory chill, which would discourage states from implementing climate-friendly regulation due to investor disputes. The tribunals have upheld the high threshold for bringing in claims of indirect expropriation. The FET standard, however, could be reinterpreted to provide investors protection only against bad faith or malafide conduct and not against legitimate and genuine regulatory change introduced to mitigate climate change. A similar approach was taken by the tribunal in Electrabel v. Hungary, wherein the tribunal looked at whether Hungary had acted “reasonably, in good faith, and without improper motives toward [the investor].” The tribunals could also consider how transparent the host state has been; whether the host state has publicly provided information about future laws and regulations, or if the host state has considered how the regulation would impact the investors, in its decision-making process, etc.


Reading International Law Principles into IIAs

International customary law can be used to resolve conflicts between treaties; this could be useful in the conflict between climate treaties and investment law. This reading is usually done through the principle of systemic integration. Article 31 of the Vienna Convention on the Law of Treaties (hereinafter, ‘VCLT’) states , ‘[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’ This is followed by article 31 (3) of VCLT which states ‘any relevant rules of international law applicable in the relations between the parties.’  Article 26 (6) of the ECT too provides, “shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.” Hence, climate laws like the Paris Agreement and the Glasgow Climate Pact can give ‘interpretative context’ to the investment treaties; investor protection provisions’ interpretation could be informed by such laws. Since precedents don’t bind arbitral tribunals, the tribunals could also leave behind previous interpretations and opt to integrate climate law in their future reasoning.

Reforming Future IIAs

IIAs that are currently being negotiated can explicitly include clauses pertaining to social and environment related goals (including sustainability development goals) that states have made commitments to. These agreements could explicitly provide for the exclusion of good faith regulation from attracting liability under indirect expropriation. Several countries have come up with model BITs that include provisions addressing climate measures, social responsibilities of investors and the developmental interests of the states. The Norwegian model BIT for example, balances out the investors’ interests and the states’ right to regulate. The Dutch model BIT too requires investors to conduct environmental impact assessments for their projects. The IIAs could explicitly provide for the Paris agreement to be a part of the applicable law that would override other laws in case of a conflict. IIAs could also provide for baselines for expropriation claims that could be updated regularly.


With the issuance of ‘code red for humanity’ by IPCC’s 2021 report on the scientific understanding of climate change and the resultant influence of climate change in the investment treaty landscape, climate related investment treaty arbitrations will inevitably increase. A well-documented concern of investment investor-state arbitration is that it has perpetuated neo-colonialism. Although investment arbitration has become more oriented to serve the international rule of law, it does so to a limited extent; it continues to allow the international investment regime (hereinafter ‘IIR’) to disempower poorer countries, as the richer ones are almost twice as strong in comparison, in the present arbitration regime. Hence, in countries with domestically lower budgets, arbitral awards worth extremely high dollars in favour of investors, owing to investor protection provisions, would leave a disproportionate impact. Not only could this be seen as a form of climate-colonialism, but this could also lead to a regulatory chill; for example, states would be hesitant to introduce coal phase out policies in fear of attracting liability. Therefore, it is necessary for arbitral tribunals to not just promote multinational corporate activity but also look at the larger environmental, social and political impact of their decisions. The IIR, if reformed, could support climate and sustainability goals. Until then, IIAs need to be renegotiated to provide for such environmental, social, and political goals.

(Tarusi is a law undergraduates at Jindal Global Law School, Sonipat. The author may be contacted via email at tarusijain2704@gmail.com)

Cite as: Tarusi Jain, ‘(BIT)s of Change: An Analysis of The Interaction Between the Climate and International Investment Regimes and Potentials for the Future (Part 2)’ (The RMLNLU Law Review Blog, 11 June 2022) <https://rmlnlulawreview.com/2022/06/11/bits-of-change-an-analysis-of-the-interaction-between-the-climate-and-international-investment-regimes-and-potentials-for-the-future-part-2/>   date of access

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