What do you get if you cross the planet’s richest 1%, a global legal system adapted to their investment whims, and the chance to squeeze billions from governments? The answer is “Investor-State Dispute Settlements”, or ISDS, alternatively dubbed “litigation terrorism” by Joseph Stiglitz, the Nobel prize-winning economist. ISDS is a corporate tribunal system, where a panel of unelected lawyers decides whether a company is owed compensation if the actions of national governments leave its assets “stranded”.
In hearings, which are often held behind closed doors, ISDS documents, claims, awards, settlements – even the content of cases – need not be made public, regardless of any public-interest considerations.
Last week the Guardian revealed how Odyssey Marine Exploration, a US-based subsea mineral extraction company, was using an ISDS panel to sue Mexico for $2.36bn (£1.87bn) after the government moved to prevent it dredging off the Pacific coast.
The company had obtained a 50-year concession over an area of sea floor off Baja California Sur, and sought a permit to mine phosphate in it. The area is a pristine breeding ground for giant grey whales and is also home to endangered sea turtles, octopus and the abalone mollusc. Odyssey said that its dredging would take place in a small area, with protection for sea creatures and measures to help “regenerate” the sea floor afterwards. But deep-sea phosphate mining entails risks of pollution, radiation and biodiversity loss, as well as damage to coastal livelihoods and communities.
When Mexico turned down the permit – once in 2016, and again, definitively, in 2018, saying Odyssey “sought to uninterruptedly dredge the sea floor” of a place “that constitutes a natural treasure and of utmost importance for Mexico and the world” – the company took it to an ISDS arbitration tribunal, arguing it was owed compensation for lost revenue.
According to the Transnational Institute, there have been 1,383 known ISDS cases to date. These courts dish out the highest average claims for damages and the highest average awards of any legal system in the world.
The panels are composed of three lawyers – one appointed by the investor, one by the state, and a president agreed by both. They are mostly white, male, business-friendly investment lawyers from the global north.
And so far it is mostly investors who have been the system’s beneficiaries, winning 61% of ISDS case decisions between 1987 and 2017, with an average award of $504m each. Fossil fuel magnates won 72% of their cases, shaking down governments for more than $77bn, according to the Transnational Institute.
The three panellists often play more than one role within the ISDS system. So-called “revolving door” and “double-hatting” practices allow lawyers to work as arbitrators, presidents or experts for both investors and states – sometimes at the same time.
This can create boundary issues when, for example, a lawyer acts as counsel for a fossil fuel investor in one ISDS case and, at the same time or thereabouts, “double hats” as the arbitrator (or president) in another ISDS case.
Allowing foreign investors to help shape these panels creates “obvious risks of bias, conflicts of interest, potential misconduct and other abuses of power”, warned the UN special rapporteur on human rights and the environment, David Boyd, in a report in October last year.
Indeed, oil companies helped to mould the ISDS system, which began in the 1960s as a way of protecting wealthy investors from the expropriation of their assets without compensation by newly independent ex-colonies.
Investors argue that ISDS protects them from arbitrary, discriminatory or unpredictable treatment in countries that might lack independent or competent judiciaries. It safeguards their “legitimate expectation” of regulatory certainty, proportionality and profit.
But investors and tribunals have also used this idea to preclude states “from taking action to address climate change, despite these actions being necessary and foreseeable for decades”, the UN report said.
The sums involved have mushroomed and can be jaw-dropping. One Singapore-based company, Zeph Investments, is suing Australia for A$300bn (£155bn) because its government turned down a proposed mining project; the company argues Australia breached free-trade treaty obligations that it relied on. In another case, Avima Iron Ore is seeking $27bn from the Democratic Republic of the Congo.
Faced with such claims, often “governments just capitulate,” Boyd said. The result is a regulatory chill, in which fossil fuel companies may “block national legislation aimed at phasing out the use of their assets”, as the UN’s Intergovernmental Panel on Climate Change (IPCC) noted.
New Zealand backed off cancelling existing offshore oil permits due to ISDS fears in 2018. Denmark chose 2050 rather than an earlier date for its oil and gas production phase out deadline due to fears of “incredibly expensive” ISDS claims. In 2017, France diluted plans to phase out fossil fuel extraction by 2040 after threats of ISDS litigation from Vermilion, a Canadian multinational, according to the UN report. There are many other examples.
The “fundamental incompatibility” between ISDS and climate imperatives poses a “daunting obstacle” to effective and timely climate action, the UN report said.
And therein lies the rub. We simply cannot extract any more fossil fuel and still prevent catastrophic global heating. Our remaining carbon budget will not allow it. Yet, by design, ISDS empowers oil, coal and gas barons to barricade progress until they have been paid off. Estimates of the eventual bill payable to hyperwealthy are as high as €1.3tn (£1.1tn), but no one really knows.
In the Mexican case, a court ruling could come later this year, but ISDS watchdogs are not optimistic about the result. Manuel Pérez-Rocha, an associate fellow at the Institute of Policy Studies in Washington, said that panel decisions until now had been “so far, leaning in favour of the company”. Helionor De Anzizu, a lawyer at the Center for International Environmental Law, also in the US capital, added that a court finding for Odyssey could trigger a free-for-all from other deep-sea investors looking to cash in with ISDS claims. Given that Mexico has already paid out $296m in ISDS suits, with 27 cases still pending according to the Transnational Institute, any associated regulatory chill could be severe.
What is clear is that ISDS is a colonial zombie apparatus whose useful time, if it had one, has passed. It grew up riding legal shotgun against bids to suborn fossil fuel capitalism to social, national, environmental or human rights concerns. Now its legal guns are turned on any government seeking to meet the Paris climate agreement’s 1.5C target without first paying a multibillion-dollar ransom.
The thing is, we don’t have the time or resources for this any longer. We can maintain a livable planet, or we can continue to allow the wealthiest, most antisocial financiers to hold the world to ransom. We cannot do both.
Arthur Neslen is a freelance journalist who writes about the environment for the Guardian
