The Investor-State Dispute Settlement (ISDS) clause is present today in over 3,000 trade agreements and bilateral treaties. It helps to support the development of nations by providing a guarantee against threats to investment projects. At the time of its establishment, this was especially important. States newly independent from colonialism faced instabilities such as a fluctuating economy or volatile political climate, but they needed to attract foreign investment for growth.
The ISDS proved effective. In fact, since its inception, foreign investment flows have accounted for as much as 92% of a country’s GDP .
But there’s a dangerous loophole. Within the definition of the clause, there is no outline as to what constitutes a legitimate threat to investment. As such, there is no limit to the ISDS and its application.
Investors have realized this, and it has led to the concerning trend of investors invoking the clause when the passing of environmental or social regulations foresees a profit loss.
Foreign companies are able to sue governments for mandating policies intended to protect the public’s health and the health of the environment, simply because they threaten company profits.
In 1997 the Canadian government moved to pass a ban on the gasoline additive MMT after concerns about its impact on car emissions and health. One of the additive’s main manufacturers, the Ethyl Corporation, subsequently sued the Canadian government under the ISDS and launched a legal battle.
About a year later they won their case. The Canadian government pulled the ban and compensated the Ethyl Corporation $19.5 million. The government also released a statement claiming that MMT did not pose a risk to health or the environment despite studies proving otherwise.
The award mandated, in this case, was small. Sums granted can be upwards of $120 million; the highest ever awarded to a foreign company was $50 billion. But still the award given to the Ethyl Corporation was higher than the budget given to Environment Canada, which oversees environmental policy and development programs.
Considerable monetary sanctions coupled with drawn-out legal proceedings are enough to cause regulatory chill. Regulatory chill is the idea that needing to pay compensation for regulatory changes makes it difficult for states to regulate in socially desirable areas.
The Canadian government in this instance was facing two separate lawsuits and had to decide between going forward with the ban or incurring substantial legal costs. Overall, 20% of ISDS cases are related to environmental policies or sectors and a quarter of those have seen the reversal of action or the investor compensated.
Countries must pursue a development path that is both resilient and sustainable. But the ISDS remains an intimidating obstacle, targeting two of the most vital tools against climate change: funds and legislation.