A Secret System Costs Billions, Threatens Climate Action
An obscure international system, known as investor-state dispute settlement (ISDS), is enabling foreign companies to demand massive taxpayer-funded payouts from governments. This process allows businesses to challenge new policies, even those vital for environmental protection and public health, if their profits are affected. The "Cashing Out" investigation reveals how these secretive arbitrations, often lacking transparency and appeal options, are costing nations billions and actively hindering urgent climate action. This hidden mechanism creates a worrying disincentive for governments to advance sustainable solutions and protect the planet.
Imagine a system where companies can sue governments for billions just because new environmental rules affect their profits. That’s exactly what the investor-state dispute settlement (ISDS) system does. Tucked into thousands of international agreements, ISDS allows foreign businesses to claim "lost future profits" if government policies, even those protecting the environment or public health, impact their investments. These cases are largely decided behind closed doors by private arbitrators, with few checks and balances and almost no chance for appeal. Governments cannot sue corporations back through this system.
This has led to enormous, taxpayer-funded payouts. Fossil fuel companies alone have won at least $82.8 billion from governments through ISDS, and this is considered an underestimate. Countries like Ecuador, already facing economic challenges, have been forced to pay billions to oil and gas companies, pushing them further into debt or deeper reliance on fossil fuels.
Worryingly, ISDS is becoming a new frontier for climate litigation, but in reverse. While governments are pressured to act on climate change, some law firms actively advise fossil fuel clients to use ISDS as an "opportunity" when policies like shutting down an oil pipeline are implemented. Lower-income nations, with relatively young coal power plants, face staggering potential claims if they try to transition to cleaner energy. A recent study found that Guyana and Mozambique could face up to $21 billion and $31 billion in claims, respectively, from multinational oil companies.
The system deters governments from putting public interests first. The mere threat of an expensive ISDS lawsuit can stop crucial environmental protections from being enacted. For example, New Zealand's climate minister stated that the country limited its progressive climate policies to avoid such claims. This means instead of rapidly embracing electrification and sustainable solutions, countries are often forced to move slowly or not at all, locking in fossil fuel reliance and delaying urgent climate action.
Shockingly, companies have won awards even after polluting the environment or violating national laws. In one case in Peru, a mining firm was awarded $18 million despite clear evidence that it ignored international standards for consulting Indigenous communities. Meanwhile, communities directly impacted by these companies typically have no voice in ISDS proceedings.
Adding to the problem, Wall Street firms are now funding some of these ISDS cases, buying into claims for a share of the awards. Experts describe this as "pouring kerosene into a fire" and a "wealth extraction mechanism," often from developing nations to wealthier corporations. This secretive financial backing further incentivizes claims, making it even harder for governments to prioritize environmental health and climate action without facing massive financial penalties.