Fossil fuel companies sue governments over climate action

Investor-State Dispute Settlement

Threatened by decolonisation, in the 1950s, Shell and other oil companies looked for ways to maintain control over the Global South’s natural resources.

Spearheaded by a director and chief counsel of Royal Dutch Shell, this gave rise to the legal regime known as Investor-State Dispute Settlement, or ISDS. ISDS allows countries to be sued outside of their court system by foreign investors for state actions affecting foreign direct investment.

Fellow foreign investors soon joined to form the International Association for the Promotion and Protection of Private Foreign Investments. Members of its directing committee included executives from Rio Tinto, Standard Oil of New Jersey (now ExxonMobil), and Compagnie Française des Pétroles (now Total).

Signed by 53 countries, the Energy Charter Treaty (ECT) establishes a framework for international cooperation in the energy industry. The ECT includes ISDS meaning energy companies can sue any of the signatories if they take action that could hinder said companies’ future earnings.

Unfortunately, these actions are often necessary to address climate change and avoid ecological harm.

What ISDS means for the climate

ISDS and the resulting billions in lawsuits have influenced climate-related decision-making in several countries as governments fear the possibility of being sued.

Senior advisor to the campaign group Trade Justice Movement, Ruth Bergan, tells The Guardian, “People are watching these cases and there is evidence that they look at what is happening elsewhere and it puts the brakes on their own policies. It also just adds a huge price tag to climate action and we can’t afford it.”

Following COP26 in late 2021, the climate ministers of Denmark and New Zealand admitted that the threat of said lawsuits had thwarted their governments’ climate policy ambitions, according to Capital Monitor.

In the last few years, criticism of ISDS has increased with the urgency of addressing climate change.

Countries such as France and Spain have advocated for a coordinated withdrawal from the ECT, but as it stands, doing so would not protect governments from suits related to past investments. The ECT’s “sunset clause” means former members are still subject to the treaty 20 years after leaving.

Others have called for the modernisation of the ECT to make the treaty in line with the Paris Agreement. The EU has developed a proposal for such that would exclude all future fossil fuel investments from investment protection and oblige signatories to cooperate on climate mitigation and adaptation.

The phase-out of the ISDS is imperative to the clean energy transition.

Allowing governments to be exposed to such lawsuits further perpetuates climate delay, a no longer affordable reality in the time of rapid climate change. Just as it is critical to move away from fossil fuels, it is essential to examine the legal frameworks that have enabled the industry’s dominance and work to reassess and dismantle them in parallel to the transition.