Current International Investment Agreements (IIA) and the Investor-to-State Dispute Settlement (ISDS) mechanism represent a major obstacle to climate mitigation and adaptation as well as to the adoption of ambitious social and environmental policies.

In this regard, the EU’s withdrawal from the Energy Charter Treaty (ECT), announced on 26 June 2024 and due to take effect on 26 June 2025, certainly represents a major step forward (but investments made before the effective exit will remain protected for 20 years, due to a sunset clause).

In any case, aligning investment protection agreements with the EU’s international commitments regarding the environment, climate and human rights goes beyond the issue of the ECT. The EU must stop promoting investment treaties (or investment chapters in trade agreements) which have the same shortcomings as the ECT and contradict its international environmental and human rights commitments (as this is the case with CETA, modernized agreements with Chile and Mexico and investment protection agreements with Vietnam and Singapore). 

This policy brief by Veblen Institute and CNCD 11.11.11 examines the compatibility of the Commission’s positionregarding investment protection with that of the European Parliament enshrined in its resolution on the future of the EU international investment policy adopted in June 2022. The EP’s resolution urges “the Commission and the Member States to ensure consistency between IIAs and the European Green Deal, environmental policies, labour rights and human rights".

In this regard, the EC “model clauses for the negotiation of BITs between EU Member States and third countries” published in September 2023 fall far short of the EP’s resolution. The model clauses are still underpinned by a strong investment protection rationale. They align with “new generation” treaty practice which has already proven limitations in effectively preserving policy space, especially for States wishing to advance the energy transition or otherwise pursue climate change mitigation and adaptation policies.

1/ The EC model clauses do not provide for any limitations as to the scope of investments covered by the treaty. In particular, while sectoral exclusion - for fossil fuels or even energy and extractive industries - and a climate carve out are under discussion, for instance at the OECD, there is no trace of such approaches in the Commission’s position. It follows that should the model clauses be reflected in upcoming treaty practice (both at the Member States and EU level), investments in emissions-intensive industries, including fossil fuels, will continue to benefit from extensive treaty protection. 

2/ The model clauses contain welcome improvements regarding most-favoured treatment, but specifications for the main investment protection standards are modelled on recent EU investment treaties. For instance : 

• The FET standard is expressly limited to the protection against denial of justice, fundamental breach of due process, manifest arbitrariness, targeted discrimination on manifestly wrongful grounds, and abusive treatment. Those specifications may not be sufficient to adequately prevent investment tribunals from engaging in far-reaching unintended interpretations as illustrated by the Eco Oro award.
• Indirect expropriation is defined and complemented with several specifications, but the scope of assets from those listed in the treaty’s definition of "investment" that can be expropriated is not further specified. Here, it applies broadly to all "covered investments". 
• The model clauses include a so-called "umbrella" provision that further increases investor protection.

3/ No “CSR” provisions. The model clauses include specific provisions on climate change, environment, and labour, but do not contain any provisions specifically directed at addressing investor conduct.

4/ The model clauses do not contain any specifications to guide the investment tribunals’ assessment of the amount of compensation in the event of a treaty breach. They only refer to the classic “fair market value” standard for expropriation. Options for reform include inter alia :

• introduce balancing rules for compensation to be determined according to a range of contextual factors, rather than solely based on the fair market value of the investment.
• capping damages at the amount actually invested by the investor.
• requiring tribunals to determine the amount of compensation in accordance with domestic law or in a way that is consistent with other international courts or tribunals (e.g. the ECHR).
• addressing the issue of exaggerated claims by making the investor liable for a fraction of the difference between the amount of compensation sought and the amount of compensation awarded in certain circumstances, or to prevent the inappropriate use of the certain calculation methods to value early-stage investments

5/ The model clauses suggest the inclusion of a sunset provision without any specification as to the recommended length of the sunset period. At the very least, the model clauses could have suggested that a short period is best compared to treaties freezing investor protection for 10, 15, 20, or even 25 years after withdrawal.