European Union

Investment Treaty Arbitration and Climate Change

Introduction

Historically, there has been considerable ambiguity as to whether the EU allowed its investors to bring ITA claims against EU Member States under bilateral investment treaties (“BITs”) or multilateral investment treaties (“MITs”). The EU’s recent withdrawal from the Energy Charter Treaty (“ECT”), along with the Komstroy judgment, has now clarified the EU’s stance on this issue in respect of intra-EU disputes. These developments are closely tied to the EU’s evolving approach to climate change and its efforts to reconcile Investor-State Dispute Settlement (“ISDS”) mechanisms with environmental objectives. 

Climate change has created a dynamic legal environment where investment treaty standards do not always align with the regional and sovereign environmental commitments of the host states that give guarantees to investors. In recent years, this tension has been reflected in EU climate initiatives, such as the European Green Deal, the Paris Agreement, the REpowerEU plan intersecting with the ECT, which is climate neutral in that it does not espouse any policy direction / standards on climate change issues. This misalignment presented challenges as climate measures could be contested by investors under the ECT’s ITA framework, thereby exposing states to liability for actions taken in pursuit of environmental objectives. However, ITA also offers the EU a strategic opening to embed its climate objectives within the broader international realm; an effort the EU has been working towards.

Notable events that show how EU law has shaped Members states’ ISDS obligations under the ECT include:

• Launch of process of ECT Modernisation by the Energy Charter Conference (November 2017).  
• Slowakische Republik v. Achmea BV (Case C-741/19) (CJEU, 6 March 2018) (“Achmea”): Held that intra-EU BIT arbitration clauses are incompatible with EU law, reinforcing the primacy of EU judicial systems. This was followed in 2020 by a plurilateral agreement to terminate the nearly 130 intra-EU bilateral investment treaties (intra-EU BITs) in force between them.[1]
• République  de  Moldavie  v  Komstroy  LLC (Case C-284/16) (CJEU, 2 September 2021) (“Komstroy”): Extended Achmea’s reasoning to the multilateral ECT, hence invalidating intra-EU arbitration under the ECT. This was followed in 2024 by a declaration published in the Official Journal of the European Union that in line with the Komstroy judgement, ISDS provisions under the ECT cannot (and never could) serve as the legal basis for intra-EU arbitration. [2][3]
• EU Withdrawal from the ECT (27 June 2024): The EU and several Member States exited the ECT citing its incompatibility with EU climate goals and its protection of fossil fuel investments. [4]
• Energy Charter Conference approved amendments to the ECT (3 December 2024): This followed a modernisation process of several years largely led by the EU prior to its exit.[5]

How are climate change initiatives in the EU impacting ITA? 

In 2024, the UN Trade and Development (“UNCTAD”) reported that one third of all ISDS cases in 2023 were climate related.[6] ISDS is a legal mechanism allowing an investor from one contracting state to an international investment agreement to bring a claim against another contracting state in which it has made an investment. Two trends have emerged in these climate-related disputes. On the one hand, fossil fuel investors have predominantly alleged breaches of treaty obligations in response to regulatory changes affecting their investments and the revocation of state-issued permits. On the other, claims brought by renewable energy investors have largely centred on legislative amendments to feed-in tariff regimes. These disputes tend to be based on claims for breach of the “Fair and Equitable Treatment” provision and the “Non-expropriation” provision found in Investment Treaties. [7]  The first provision is wide-ranging and tribunals traditionally interpret it broadly to include a variety of requirements as to what constitutes a legitimate expectation for an investor from a host State. The second allows Investors to receive compensation for State actions involved in the nationalising or harming of an investment without defining what constitutes adequate compensation. The EU’s view has been that these provisions are too much in favour of investors and, hinders States from making climate-driven policies. The EU has therefore played a leading role in the reform of ISDS, particularly as an important player in the current UNICITRAL Working Group III sessions.[8]

The impact of EU’s exit from the ECT on ISDS generally is discussed below, followed by an analysis of how the EU’s relationship to ITA has been received by the wider legal order.

The link between ITA and climate change

International investment is a crucial driver of, and solution to, climate change. Many industries which contribute to global greenhouse gas emissions rely on foreign investment. This includes fossil fuel production and use, but also other extractive industries such as mining, which may increase demand for fossil fuels or contribute to land use emissions, as well as manufacturing which can require significant energy use. At the same time, foreign investment is also necessary to facilitate the net zero transition. Renewable energy deployment is driven by investment, and climate finance is a crucial lever for meeting global climate mitigation and adaptation targets.

By governing these finance flows, international investment treaties therefore also govern significant aspects of the climate transition. Consequently, the way these treaties are designed and enforced has come under scrutiny as public awareness of and legislative attention to climate change has increased. On the one hand, there is concern that certain treaties, in particular the ECT, are not aligned with states’ climate targets or ambitions. On the other hand, there is some enthusiasm that international investment law could be an important lever for channeling finance into activities which support these goals. This may have implication for states’ international legal obligations.

In a 2025 advisory opinion, the Inter-American Court of Human Rights suggested that investment treaties which are not explicitly aligned with climate change may not align with climate-related obligations.[9] While the ICJ’s Advisory Opinion on the Obligations of States in Respect of Climate Change did not address this issue directly, a separate opinion issued by Judge Cleveland suggested that investment treaties must be interpret in line with states’ international climate obligations.[10] More broadly, climate litigation, for example at the European Court of Human Rights, may impact the way in which governments engage with ITA.[11]

In this context, the EU has sought to engage with ITA in a way which aligns with the union’s climate goals and related legal obligations, while remaining conscious of the broader social and economic context in which treaties such as the ECT operate.

EU’s exit from the ECT and its relationship to ITA

The EU’s position in respect of ITAs and climate change is reflected in their treatment of the ECT, the world’s largest existing agreement to provide investment protection and access to ISDS mechanisms. The ECT was signed in 1994 at a time where there was no global commitment to shift away from coal and reduce emissions. At that time, the ECT was created to protect all forms of foreign investments in energy markets to promote open access to such markets and ensure investment security. The political reality today is very different and the EU’s environmental agenda has been a focus of EU politics, particularly with the European Green Deal goals and Paris Agreement. After the EU’s unsuccessful attempts to modernise the ECT and bring it in line with the EU’s climate and energy goals, the EU formally exited the ECT in June 2024.

Under Article 26 of the ECT, disputes arising under the ECT could be resolved with (i) ICSID (International Centre for Settlement of Investment Disputes), (ii) ad hoc arbitrations under UNCITRAL, or (iii) arbitrations under the Rules of Stockholm Chamber of Commerce. In communications related to its exit, the EU explained that it had joined the ECT as part of its external energy policy and emphasised that the offer to arbitrate disputes contained in the ECT was never intended to overcast the system of judicial protection set up under the EU Treaties.[12]

The case of Komstroy in 2021 helped clarify the EU’s stance on ECT and climate related ITAs by extending the Court of Justice of the European Union (“CJEU”) Achmea judgment to ECT related disputes. Achmea’s ban over intra-EU investor state disputes had been limited to intra-EU BITs and did not cover MITs. Komstroy confirmed that, due to the primacy of EU law, all forms of ITA including those involving BITs are incompatible with EU law. Article 267 of the Treaty on the Functioning of the European Union (“TFEU”), commonly referred to as a cornerstone of uniformity and effectiveness of EU law, allows EU Member-State courts to make preliminary references to the CJEU. Intra-EU ISDS tribunals, and therefore ITA, were seen as removing disputes from the jurisdiction of EU Member State courts and consequently bypassing the CJEU. Later, following the EU’s notification of its ECT exit, an agreement based on Komstroy was made between 26 EU Member-States and the EU intending to put an end to the continuation of intra-EU arbitration proceedings under the ECT and clarifying, for the benefit of courts and arbitral tribunals, that Article 26 of the ECT does not apply and never did in relations between an EU investor and an EU country. Notably, the agreement refrains from intervening with arbitrations which have already concluded.[13] This underscores the EU‘s disjointed approach towards ISDS and its engagement with international law – an inconsistency further exacerbated by the existence of the “Sunset clause” under the ECT’s Article 47.

Article 47(3) of the ECT provides that its provisions will continue to apply for 20 years following a State’s withdrawal. However, this sunset clause was not directly addressed in the CJEU’s Komstroy judgment. The European Parliament has since clarified that Article 47(3) cannot produce legal effects in intra-EU disputes, reaffirming that there is no valid legal basis for intra-EU arbitration under Article 26 of the ECT.[14] This position is grounded in the primacy of EU law and the exclusive jurisdiction of the CJEU on matters relating to EU law. The EU’s approach stands in contrast with the United Kingdom’s withdrawal from the ECT, which took effect on 26 April 2025. Under Article 47(3), investments made in the UK by investors from other ECT Contracting Parties prior to that date will continue to be protected until 26 April 2045.[15]

These findings are not meant to affect investor–state disputes involving non-EU parties, although this position has been shown as problematic for EU law.[16] In a formal communication, the European Union clarified that its participation in the ECT “has only created rights and obligations between the EU and third countries and has not affected the relations between EU Member States.” [17]  This distinction reinforces the EU’s position that intra-EU disputes fall outside the scope of the ECT, while disputes involving third countries remain unaffected.

The varied reception of CJEU’s attitudes towards intra-EU disputes

Despite the CJEU’s conclusions in Achmea and Komstroy, the attitude of international tribunals and courts in various jurisdictions towards intra-EU ITA disputes has been varied.

European Courts have generally abided by the guidance of the ECT. For example, the Swedish courts have invalidated intra-EU awards involving renewable energy investors, relying on the reasoning in Komstroy. Moreover, investment tribunals have, in the two recent cases European Solar Farms A/S v. Kingdom of Spain (ICSID Case No. ARB/18/45) and Sapec v. Kingdom of Spain (ICSID Case No. ARB/19/23), upheld Spain’s intra-EU objection on the same basis. Both cases concerned reforms to feed-in tariffs for renewable energy plants, which had previously guaranteed high tariffs for the entire operational life of the installations. Despite the investors’ claims, the tribunals declined jurisdiction, aligning with the Komstroy decision and reinforcing the growing trend of rejecting intra-EU arbitration under the ECT. 

Outside of the EU, however, the US Court of Appeals for the District of Columbia in NextEra Energy Glob. Holdings B.V. v. Kingdom of Spain, 2024 WL 3837484 (D.C. Cir. Aug. 16, 2024) upheld the jurisdiction of the federal district court to hear applications to enforce intra-EU investment treaty awards.[18]

Moreover, there has also been a disagreement surrounding the Komstroy case and, in particular, the sunset clause between the EU and Hungary. Hungary (in a unilateral declaration) stated that the Komstroy judgment will only commence once the ECT has been amended and apply to future ECT disputes. The European Commission has responded by initiating infringement proceedings against Hungary before the CJEU.[19]

These differing approaches towards ISDS in respect of the Komstroy judgment has created an uncertain framework for both Member States and investors. While it is often asserted that what led to the EU’s exit of the ECT was the power given to fossil-industries to dispute new environmentally-friendly policies, it appears that a majority of current disputes revolve around changes to renewable policies from environmentally-friendly investors.

Recently, the international landscape for climate-change arbitration has also been marked by an advisory opinion delivered by the International Court of Justice (“ICJ”): a landmark in the relationship between international law and climate change. This opinion affirms that States have binding obligations to protect the climate system from human-induced greenhouse gas emissions. Drawing on treaty law (including the Paris Agreement), customary international law, the UN Charter, the Law of the Sea, and international human rights law, the ICJ outlined a unified legal framework for climate protection that applies universally not only to treaty signatories.[20] This is likely to affect the way tribunals will approach climate related disputes.

How can developments in EU law and/or ITA drive climate action?

At the international level, treaties and conventionsare pushing States to implement domestic legal frameworks to meet climate-related commitments, with notable examples including the United Nations Framework Convention on Climate Change (“UNFCCC”) and the Paris Agreement championed by the EU. These commitments include reducing greenhouse gas emissions, transitioning to low-carbon energy systems, and enhancing climate resilience. In parallel, investment treaty reforms have gained momentum, focusing on preserving States’ regulatory autonomy, supporting sustainability goals, and, therefore, altering the scope for potential disputes. A key development in this area is the emergence of “new generation” international investment agreements. These new generation treaties strive for sustainability and the protection of environmentally friendly policies. In this section, the EU’s involvement in the modernisation of the ECT will be briefly discussed, before turning to legal mechanisms included in the new generation ECT and BITs aimed to protect climate friendly policies.

The modernisation of the ECT

As discussed above, the EU has been actively engaged in negotiations to modernise the ECT and align it with its climate and energy objectives. These negotiations began prior to the EU’s formal decision to exit the ECT and were driven by concerns that the ECT’s existing provisions disproportionately protected fossil fuel investments, thereby undermining the EU’s climate commitments under the European Green Deal and the Paris Agreement. [21]

Following several years of negotiations, amendments to the ECT were officially approved on 3 December 2024. ECT members voted to adopt the revised treaty, which includes updated provisions on investment protection and sustainable development. Notably, the modernised ECT now contains Article 24(3) which excludes the application of the Treaty’s Investor-State dispute settlement mechanism between parties that are members of the same Regional Economic Integration Organisation (“REIO”), such as the EU.[22]

The new generation ECT also introduces a dedicated dispute resolution mechanism for sustainability-related provisions, offering expert input from organisations such as the International Labour Organisation (“ILO”) in a first instance referral procedure before moving to ISDS mechanisms. While fossil fuel investments are becoming phased out, the treaty allows Contracting Parties to opt out of such protections for certain investments. In contrast, carbon capture, utilization and storage investments (“CCUs”) are expressly protected. It also incorporates the 2014 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration into its Article 26.[23]

Prior to its exit, the EU indicated that it remains open to rejoining a modernised, new generation ECT, provided such a version fully reflects the EU’s climate and energy transition goals.[24] The EU has not yet commented on the modernisation of the ECT, despite having led efforts to reform it. The motivation behind those efforts reflects the EU’s belief in the broader potential of International Investment Agreements to support sustainable development and climate-positive policies. It remains to be seen whether the new generation ECT is satisfactory to the EU.

Features of some “New Generation” Treaties

The ISDS system as whole, which includes ITA, has often been criticised for being asymmetrical, offering protection primarily to investors whilst providing limited avenues for States.[25]  However, there is a burgeoning trend of allowing States to bring counterclaims against investors for violating environmental standards. Though this has not yet been used in EU BITs / MITs yet, the Nigeria-Morocco BIT (signed on 3 December 2016) provides a good example of a BIT imposing environmental obligations on investors. This BIT is considered the first of its kind to include binding pro-environmental and sustainability obligations (as set out in Article 18 of the BIT).[26]

While the  modernised ECT does not employ the same binding language, Article 19 of the draft modernised ECT signals a shift in approach by settingout the States’ right to regulate in support of environmental protection and recognising the UNFCCC and the Paris Agreement.[27]

Apart from binding environmental obligations on investors and/or preserving States’ right to regulate environmental policy, the OECD has recently considered a new reform initiative which carves out climate change related issues from the scope of ISDS.[28] Such carveouts make climate change mitigation measures immune to challenges through the ISDS mechanism and are considered at the outset of a dispute. The modernised version of the ECT includes a carveout in respect of fossil fuel such as hydrogen or synthetic fuels which signifies that these investments cannot be disputed under ITA.

Conclusion

These climate-driven developments in international law are poised to reshape the landscape of Investment Treaty Agreements and ITA. The EU’s decision on whether to rejoin the modernised ECT will be pivotal, not only for disputes involving the EU and third parties, but also for ensuring certainty that intra-EU disputes are outside ITA. This is due to the provision in the modernised ECT that excludes ITA jurisdiction over intra-EU climate-related disputes, which can be expected to be recognised and enforced by ITA tribunals. The EU’s recent stance reflects a broader shift away from ISDS and, by extension ITA, as a mechanism for resolving intra-EU disputes, in favour of its own legal order. This shift, which has also been publicly framed as a response to the EU’s longstanding concerns about ISDS being insufficiently aligned with environmental protection goals, underscores the negative perception of the relationship between ITA and climate change within the EU. It remains to be seen how this perception evolves over the next few years.

[1] European Union. Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union. Official Journal of the European Union L 169, May 29, 2020. https://eur-lex.europa.eu/eli/agree_internation/2020/529/oj/eng.

[2] José Ángel Rueda García, “The EU Declaration on the Legal Consequences of the Komstroy Judgment on Intra-EU Arbitration under the Energy Charter Treaty,” Cuadernos de Derecho Transnacional 17, no. 1 (2025): 7082, https://e-revistas.uc3m.es/index.php/CDT/article/view/9376/7082.

[3] European Union.Declaration on the Legal Consequences of the Komstroy Judgment on Intra-EU Arbitration under the Energy Charter Treaty. Official Journal of the European Union L 2121, August 6, 2024.https://eur-lex.europa.eu/eli/declar/2024/2121/oj.

[4] Council of the European Union, “Energy Charter Treaty: EU Notifies Its Withdrawal,” Press Release, June 27, 2024, https://www.consilium.europa.eu/en/press/press-releases/2024/06/27/energy-charter-treaty-eu-notifies-its-withdrawal/.

[5] Debevoise & Plimpton LLP, “Modernised ECT: Narrower Protection, Greater Transparency, Fewer Parties,  Insights & Publications, January 24, 2025,  Modernised ECT: Narrower Protection, Greater Transparency, Fewer Parties | 01 | 2025 | Publications | Insights & Publications | Debevoise & Plimpton LLP (accessed September 8, 2025).

[6] UNCTAD, “Facts and Figures on Investor–State Dispute Settlement Cases,” IIA Issues Note, No. 3, 2024,Facts and figures on investor–State dispute settlement cases | UN Trade and Development (UNCTAD).

[7] UNCTAD, Fair and Equitable Treatment, UNCTAD Series on Issues in International Investment Agreements II, UNCTAD/DIAE/IA/2011/5 (United Nations, 2012), FAIR AND EQUITABLE TREATMENT – UNCTAD Series on Issues in International Investment.

[8] United Nations Commission on International Trade Law (UNCITRAL), “Working Group III: Investor-State Dispute Settlement Reform,” https://uncitral.un.org/en/working_groups/3/investor-state (accessed September 8, 2025).

[9] Inter-American Court of Human Rights, ‘Advisory Opinion on the Climate Emergency and Human Rights’, 3 July 2025, OC/32.

[10] International Court of Justice, Declaration of Judge Cleveland, Advisory Opinion on the Obligations of States in Respect of Climate Change, delivered at the Peace Palace, The Hague, July 23, 2025, <https://www.icj-cij.org/case/187/advisory-opinions>.

[11] Elise Edson and Sandrina Antohi, ‘Climate Litigation and Investor-State Arbitration: Implications of the European Court of Human Rights’ Historic Ruling in KlimaSeniorinnen’, Kluwer Arbitration Blog, 30 April 2024. <https://legalblogs.wolterskluwer.com/arbitration-blog/climate-litigation-and-investor-state-arbitration-implications-of-the-european-court-of-human-rights-historic-ruling-in-klimaseniorinnen/>.

[12] Council of the European Union, “Energy Charter Treaty: EU Notifies Its Withdrawal,” Press Release, June 28, 2024, https://www.consilium.europa.eu/en/press/press-releases/2024/06/27/energy-charter-treaty-eu-notifies-its-withdrawal/.

[13] Practical Law, “Judgment Dismissing Appeals Against European Commission Decision Finding That Compensation Paid by Romania Following Arbitral Award Constituted Unlawful State Aid (General Court),” Thomson Reuters Practical Law, https://uk.practicallaw.thomsonreuters.com/w-044-5947.( accessed September 8, 2025).

[14] European Commission, “EU Notifies Exit from Energy Charter Treaty and Puts an End to Intra-EU Arbitration Proceedings,” Press Release, June 28, 2024, https://ec.europa.eu/commission/presscorner/detail/.

[15] Hogan Lovells, “EU Member States Reach Agreement on ECT Arbitration Clause,” Insights & Publications, July 1, 2024, https://www.hoganlovells.com/en/publications/eu-member-states-reach-agreement-on-ect-arbitration-clause.

[16] See pg17. Christina Eckes and Laurens Ankersmit, The Compatibility of the Energy Charter Treaty with EU Law, commissioned by ClientEarth, April 21, 2022,https://www.clientearth.org/media/2n2po04j/report-on-ect-compatibility-with-eu-law.pdf.

[17]European Commission, Communication from the Commission to the European Parliament and the Council: Protection of Intra-EU Investment, COM(2018) 547 final, July 19, 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018DC0547.

[18] Practical Law, “Judgment Dismissing Appeals Against European Commission Decision Finding That Compensation Paid by Romania Following Arbitral Award Constituted Unlawful State Aid (General Court),” Thomson Reuters Practical Law, Intra-EU investment disputes: tracker | Practical Law (accessed September 5, 2025).

[19] Tom Jones, “European Commission Takes Hungary to CJEU Over Stance on ECT,” Global Arbitration Review, July 18, 2025, https://globalarbitrationreview.com/article/european-commission-takes-hungary-cjeu-over-stance-ect (accessed September 3, 2025). European Commission takes Hungary to CJEU over stance on ECT – Global Arbitration Review.

[20] International Court of Justice, Advisory Opinion on the Obligations of States in Respect of Climate Change, delivered at the Peace Palace, The Hague, July 23, 2025,  https://webtv.un.org/en/asset/k1c/k1cg72yf19.

[21]European Commission, “Agreement in Principle Reached on Modernised Energy Charter Treaty,” Directorate-General for Trade and Economic Security, June 24, 2022, https://policy.trade.ec.europa.eu/news/agreement-principle-reached-modernised-energy-charter-treaty-2022-06-24_en.

[22] Susannah Moody, “ECT Members Vote to Adopt Modernised Treaty,” Global Arbitration Review, December 4, 2024, ECT members vote to adopt modernised treaty – Global Arbitration Review (accessed September 8, 2025).

[23] Debevoise & Plimpton LLP, “Modernised ECT: Narrower Protection, Greater Transparency, Fewer Parties,” Insights & Publications, January 24, 2025,Modernised ECT: Narrower Protection, Greater Transparency, Fewer Parties | 01 | 2025 | Publications | Insights & Publications | Debevoise & Plimpton LLP ((accessed September 8, 2025).

[24] United Nations Conference on Trade and Development (UNCTAD), The International Investment Treaty Regime and Climate Action, IIA Issues Note No. 3 (Geneva: UNCTAD, September 2022), The International Investment Treaty Regime and Climate Action | Publications | UNCTAD Investment Policy Hub”.

[25] Flora Jones, “Trick and Treaty: The ECT’s Role in Climate Change,” Practical Law Arbitration Blog, April 28,2022, http://arbitrationblog.practicallaw.com/trick-and-treaty-the-ects-role-in-climate-change/(accessed September 8, 2025).

[26] Gazzini, Tarcisio. “The 2016 Morocco–Nigeria BIT: An Important Contribution to the Reform of Investment Treaties.” Investment Treaty News, September 26, 2017. International Institute for Sustainable Development. https://www.iisd.org/itn/2017/09/26/the-2016-morocco-nigeria-bit-an-important-contribution-to-the-reform-of-investment-treaties-tarcisio-gazzini.

[27] Energy Charter Secretariat. Modernisation of the Treaty. Energy Charter Treaty.https://www.energychartertreaty.org/modernisation-of-the-treaty/ (Accessed September 8, 2025).

[28]Schaugg, Lukas, Suzy H. Nikièma, and Nathalie Bernasconi-Osterwalder. Investor–State Dispute Settlement and Fossil Fuels: What Role for a Carveout? International Institute for Sustainable Development, March 8, 2024. https://www.iisd.org/articles/policy-analysis/investor-state-dispute-settlement-fossil-fuels-carveoutInvestor–State Dispute Settlement and Fossil Fuels: What role for a carveout? | International Institute for Sustainable Development.