Few issues in global economic governance have sparked more controversy or public backlash than the system of investor–state dispute settlement (ISDS), which allows foreign investors to sue sovereign governments through international arbitration. Investors have filed more than 1,000 ISDS claims based on the global network of 3,000 investment treaties. More than half of all claims are from the past decade alone, and a growing number of awards involve compensation of hundreds of millions of dollars or more. In 2019, for instance, Pakistan was ordered to pay $6 billion in compensation to a single foreign investor, a sum equal to the total amount the country had received in an IMF bailout that same year.
Reasonable observers disagree about the value and fairness of ISDS. Regardless of where one stands on this debate, however, the mechanism has become politically toxic, as even many capital-exporting states now agree. Reform has become a prominent political agenda. The EU is proposing a revised form of ISDS after investment protection provisions helped torpedo prospects for a Transatlantic Trade and Investment Partnership (TTIP) and sparked a political crisis in the final stages of ratifying the Canada–EU Comprehensive Economic and Trade Agreement (CETA). Meanwhile, the EU’s efforts to reform the multilateral Energy Charter Treaty (ECT) have intensified after foreign investors used the treaty to target climate change policies, including Germany’s regulation of a coal-fired power plant and the Dutch decision to phase out coal power. In North America, as well, a rise of ISDS claims under the old North American Free Trade Agreement (NAFTA) attracted widespread condemnation, and the relevant mechanism is now removed from the US–Canada investment relationship in the United States–Mexico–Canada Agreement (USMCA).
With the notable exceptions of the ECT and NAFTA, however, senior policymakers and elected officials are mostly focused on how to constrain or replace ISDS in future treaties. This is misguided. Forward-looking reform proposals can help address some of the public backlash surrounding new agreements. But even if all newly negotiated treaties were improved, or a government decided to stop negotiating agreements with ISDS provisions in them altogether, the existing stock of investment treaties continues to provide access to ISDS on the same terms as before.
Indeed, most new ISDS cases derive from treaties signed at least 15 to 20 years ago, rather than from those ratified in recent years. Unless policymakers revisit existing investment treaties, the current treaty network will continue to expose host states based on outdated terms. And keeping outdated treaties in place makes home states complicit in facilitating investor claims that are sometimes misaligned with domestic and foreign policy agendas, for instance in the area of energy transition.
Keeping outdated treaties in place makes home states complicit in facilitating investor claims that are sometimes misaligned with domestic and foreign policy agendas.
In this briefing paper, we outline a flexible and low-cost option for catalysing reform of the existing stock of 3,000 investment treaties: a plurilateral mechanism for ‘interpretative statements’ by states, which in turn could provide a stepping-stone for amending or replacing provisions. The mechanism could, but does not have to, be linked to ongoing reform efforts at the United Nations Commission on International Trade Law (UNCITRAL).
