BY AKHIL YADAV
International law over the last decade or so has been shaped resolutely by a conflict between two seemingly incompatible imperatives: the imperative of fast, transformative action on climate change and the deep-seated protection of foreign investors in international investment agreements (IIAs). Governments are adopting ambitious green regulations, fossil fuel phase-downs, more stringent impact assessments while foreign investors are invoking more and more investor-state arbitration (ISDS) mechanisms, arguing that these measures infringe the promises of fair and equitable treatment, legitimate expectation, and protection against indirect expropriation.
During 2022-2024, a string of arbitral awards has placed such tension in the limelight. To be specific, in Rockhopper v. Italy and Ascent Resources v. Slovenia, tribunals held states fiscally liable for enforcing environmental measures that impacted legitimate investments. Such cases have set the stage for hot controversy: are arbitral tribunals encroaching upon states’ regulatory space under the cover of investment protection? Or are they simply interpreting treaty provisions in a rational manner, irrespective of the evolving normative context?
This blog discusses recent ISDS awards on climate regulation, critically analyzes doctrinal rigidity with which arbitral tribunals approach environmental disputes, and analyzes how India’s 2016 Model BIT attempts to balance this trend towards regulation in the public interest.
Climate Policies Under Fire: Recent ISDS Awards
Amongst the more symbolic is Rockhopper Exploration v. Italy (2022), where the UK oil firm brought a claim for damages under the Energy Charter Treaty (ECT) when Italy refused a production concession for off-shore drilling. Italy did so after a 2015 law prohibiting oil exploration within 12 nautical miles of its coast, a step consistent with environmental caution. The ICSID tribunal held Italy responsible and ordered €185 million in compensation to Rockhopper because the sudden policy change violated the investor’s legitimate expectations.
In Ascent Resources v. Slovenia the following year, a British investor had objected to the Slovenian demand for an environmental impact assessment (EIA) of fracking operations. Ascent argued that this post-investment regulatory shift was inexplicit expropriation and discriminatory treatment. The tribunal reportedly upheld the claim, making even precautionary environmental policy more vulnerable to ISDS challenge.
These disputes have set off warnings of regulatory chill due to governments’ reluctance to enact aggressive climate bills for fear of being sued for expensive investor complaints. They pose uncomfortable questions of jurisprudence as well: to what extent should arbitral tribunals encroach on the sovereign right of a state to regulate? Is environmental protection a defence in law or at best a policy rationale?
Doctrinal Inflexibility and FET Puzzle
At the center of most such controversies remains the Fair and Equitable Treatment (FET) standard, a treaty clause which invariably encompasses protection of an investor’s legitimate expectations. The standard has been given expansive meaning as of ordinary practice. In Tecmed v. Mexico, the tribunal had ruled that denial of a foreseeable regulatory regime constituted a violation of FET, while the regulation was in the public interest. Such investor-centered practice is questionable, however, when applied to areas like environment and climate, where policymaking is inseparable and unavoidable. Such investor-centered practice is particularly questionable in environmental and climate contexts, where policymaking is unavoidable and forms an essential component of the State’s duty to protect public and ecological interests.
In Rockhopper, the tribunal’s application of the investor’s reasonable expectation of process against Italy’s clear legislative intent of preserving maritime biodiversity violates the doctrinal limits of traditional FET thinking. It overlooks the fact that expectations cannot be valid if they are based on outdated norms or incompatible with international environmental obligations. To authors like Kate Miles and Martti Koskenniemi, the decision between economic stability and ecological necessity betrays an asymmetry inherent in arbitral tribunals’ balancing act between rival public goods.
The Energy Charter Treaty: An Unsustainable Legacy
These developments also have to be set against the backdrop of the collapse of the Energy Charter Treaty (ECT). Initially conceived to protect cross-border investment in the energy industry, the ECT has increasingly been criticized for enabling the capacity of fossil fuel firms to insulate themselves from climate-led regulatory change. In reaction to rulings like Rockhopper, the larger EU states like France, Germany, the Netherlands, and Spain made withdrawal notices from the ECT between 2022 and 2023. The European Commission officially endorsed this move, stating that the treaty “is no longer in line with the EU’s climate goals.”
This wave of criticism is symptomatic of a wider awareness: international investment law is no longer bound by a pre-climate-crisis mentality. A treaty authorizing states to punish states for moving towards the very climate pledges they have made under the Paris Agreement is no longer sustainable. Yet most BITs are silent on exceptions to climate policy, and tribunals are left with meager interpretative tools to balance conflicting obligations.
India’s Treaty Practice: A Template for Regulatory Sovereignty
Of these transborder tensions, India presents a particularly good case. Having itself been the respondent in an ISDS claim, in White Industries v. India (2011), the Indian government fully overhauled its investment treaty regime. This led to the 2016 Model BIT, which rebalances state sovereignty and investor protection.
Article 10 of the Model BIT is noteworthy. It stipulates that regulatory action in the public interest for environmental, health, and safety purposes will not be regarded as being in violation of the treaty, provided that it is non-discriminatory and exercised in good faith. This is the sole article which does not articulate regulatory space for public interest law, a characteristic which is missing in previous BITs.
Besides this, the Model BIT requires the investors to approach domestic remedies first before approaching international arbitration and requires compliance with the laws of the host state, i.e., the environmental obligations. This shift in procedure is a manifestation of India’s desire for sovereignty-sensitive arbitration and climate-resilient governance. India’s reserved response to ISDS, i.e., not signing and not ratifying the ECT, also indicates its unwillingness to allow its climate ambitions to be undermined by outdated treaty frameworks.
Towards a Climate-Sensitive Arbitral Jurisprudence
The arbitral community must confront an immediate doctrinal dilemma: how to resolve investment claims for a state’s legitimate climate action without sacrificing environmental integrity. One response would be to adopt systemic integration, as proposed in the International Law Commission’s (ILC) 2006 ‘Report on Fragmentation of International Law’. Consistent with this maxim, tribunals adjudicating BITs have an obligation to reconcile their decisions with other relevant branches of international law, including multilateral environmental regimes like the Paris Agreement and the UNFCCC.
Courts may also apply a margin of appreciation approach and be respectful of a state’s regulatory freedom where climate action is taken autonomously and in accordance with scientific opinion. The approach is already firmly rooted in international human rights law and would be an excellent model to emulate in finding a balance between environmental needs and investor rights.
Moreover, the treaties themselves must be redesigned. Future BITs must have clear exceptions for climate policy, include investor due diligence clauses, and provide procedural transparency e.g., allow amicus curiae briefs by environmental actors. These are adjustments that must be made in order for ISDS to be an effective forum for resolving 21st-century cases.
Conclusion
The 2022-2024 era revealed yet another contradiction at the heart of investment arbitration: the system’s failure to adapt to shifting climate governance needs. Tribunals, hindered by textualist tendencies and antique treaty language, continue to sanction states for implementing the very green policies international public policy and international law increasingly dictate.
India’s strategy, as seen in its 2016 Model BIT, offers a new paradigm of balancing investment law and sustainable development. Through the institutionalization of the right to regulate and limiting investor protection, India has made it clear that it wants to safeguard public interest governance from foreign interference.
If investment arbitration is to remain legitimate in the age of climate, it must shift from being a regime fixated on stability at all costs to one that is at least as attracted to dynamism, risk, and responsibility. Action on climate is not outside international law; it is becoming its organizing principle.
AUTHOR’S BIO:
Akhil Yadav, a law student pursuing BBALLB (Hons.) from Gujarat National Law University
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