It is also not on the radar of many institutional investors, meaning companies are often wielding a powerful legal mechanism without adequate oversight.

ISDS is an international legal regime that lets companies sue governments for compensation over policy measures that adversely impact their expected profits. Fossil fuel companies such as Shell, bp, Exxon, Glencore, Chevron, Total, ConocoPhillips and Eni have all used ISDS to claim hundreds of millions, and sometimes billions of dollars, in taxpayer-funded compensation. ^[1][2]

Awareness and understanding of the risks associated with the use of ISDS will help investors drive improvements in transparency and governance, and set expectations for the use of ISDS by companies in their portfolio.

Key Findings

• The use of ISDS poses significant portfolio-level governance and reputational risks for investors, who own the companies which use this politically influential legal mechanism.
• ISDS not only blocks existing policy settings which promote the global energy transition, but the threat of its financial costs “chills” the ambition of  governments that wish to develop more positive climate policy measures.
• The ISDS regime is intransparent – Some claims are never made public, and in other cases, the existence of the claim may be made known, but none of its key details. This means investors often have little oversight or influence over the use of ISDS, and may not be aware a company has brought, or threatened to bring, an ISDS claim against a climate policy measure.
• Despite obvious overlaps, existing frameworks for corporate climate lobbying, such as the Global Standard on Responsible Climate Lobbying, do not explicitly address ISDS, limiting the ability of investors to understand and assess how companies perform against this risk.
• Public scrutiny of the role ISDS plays in blocking positive climate policy, and the threat it poses to sustainable development in emerging markets, could pose a reputational risk to institutional investors.

Key stewardship considerations for investors

Investors concerned by the chilling effect of their companies’ use of ISDS on government climate policy can:

• set clear expectations around when they would not consider it appropriate for a company to use or threaten an ISDS claim i.e. in response to a non-discriminatory, public interest policy measure designed to pursue the goals of the Paris Agreement.

• encourage companies to increase transparency and implement robust governance procedures for any use of ISDS, to ensure consistency with the company’s public policy positions and the goals of the Paris Agreement.

• leverage the thematic overlaps of ISDS and lobbying into their existing work by integrating ISDS into:

  • ongoing engagement activities around lobbying
  • existing normative frameworks such as the Global Standard on Responsible Climate Lobbying.

Questions to guide company engagement

Investors can also use the following questions to help guide discussions with companies about their usage of ISDS claims:

The alignment of ISDS claims with company climate policy and the Paris goals

• Does the company ensure the lodgement of any ISDS claim is aligned with its policies on climate change, human rights, political influence and lobbying, and other related topics?
• Does the company ensure that all assumptions (for example, asset life, production forecasts, commodity price, etc) and financial modelling underpinning compensation claims are aligned with the goals of the Paris Agreement and the company’s climate commitments?

Company guidance and oversight of the use of ISDS

• Does the HSEC/ECC committee (or equivalent) play a role in the decision to initiate an ISDS claim, and in the supervision of an ongoing claim?
• Does the company have a policy on the use of ISDS, or other guidance on circumstances in which the use or threatened use of ISDS is not appropriate?

Questions in respect of specific ISDS claims ^[3]

Where the existence of the dispute is known, but no further details are disclosed:

• What is the government policy, law or judicial/administrative decision that is the subject of the claim? How does the company allege this policy, decision etc. violated its rights?
• How much is the company seeking in financial compensation?
• On what grounds are the particulars of the claim being kept confidential? ^[4]

Where there is some information on the claim available: ^[5]

• How much has the company spent on this claim, including tribunal fees, arbitrator fees, external counsel, expert witnesses, and litigation funding arrangements?
• What is the expected spend on the claim until completion, including enforcement costs?
• What assumptions underpin the alleged lost income for which compensation is being sought? E.g. asset valuation techniques and related assumptions and projections as to commodity prices, asset operating periods, political risk discounts etc.
• How are these assumptions aligned or otherwise with the company’s stated goals regarding the Paris Agreement?
• What alternative dispute resolution processes and/or domestic legal remedies did the company pursue before initiating ISDS proceedings?

Download Investor Bulletin: Chill factor – How does investor-state dispute settlement affect climate policy? | 1/10/2024

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