With a steep increase in the number of environment-related investment disputes, collaboration and compromise play a major role in finding long-lasting solutions. Resorting to mediation instead of adversarial mechanisms would ensure a transparent, compromise-oriented and fair system for the resolution of investor disputes.
In 2015, the Paris Agreement was adopted by 196 countries, marking a historic shift in the global fight against climate change. The Paris Agreement sets a long-term goal to hold increases in global average temperatures to well below 2oC above pre-industrial levels and to pursue efforts to limit the increase to 1.5oC.
The Paris Agreement has sent a clear signal to energy producers and consumers about the need to decarbonise the energy sector in order to achieve its overarching goal. In addition, several factors have caused the energy transition to gain momentum and accelerate, including: the declining costs of electricity from renewable sources; pressure from corporates and investors to reduce carbon footprints; and public pressure on governments and the private sector to mitigate the dangerous effects of climate change. It is clear that the energy transition cannot be achieved without adversely affecting directly or indirectly many existing commercial actors and legal relationships.
Already in the last decade, the number of investment disputes with environmental components has increased steeply, and it is anticipated that there will be many more arising out of policies enacted to align domestic law with international commitments under the Paris Agreement. Disputes arising due to this transformation will detract from the ultimate objective to meet emissions reduction goals in the very short time frame left.
It is trite to say that traditional mechanisms of dispute resolution are costly, time consuming, destructive to relationships and do not ultimately provide an adequate remedy for the environmental issues at hand. While such methods might clarify legal rights between specific parties, this is not the solution to the broader issue of meeting climate goals. To make real progress, we require collaboration and compromise to find lasting solutions. The achievement of the environmental sustainability goals in the short timeframe left therefore requires innovation in the approach to international dispute resolution.
There are also many stakeholders involved in the process and each has a voice and a need to participate to ensure social adhesion, which simply is not provided by traditional dispute resolution mechanisms. Just as we will have to be innovative in rethinking the way we approach our environment, energy consumption and lifestyles to meet the needed drastic reduction in emissions, traditional methods of dispute resolution will have to be recalibrated to meet the challenges of creating a green economy.
Governments in particular, will be instrumental in meeting the challenges not only of the transition, but also in dealing with the impact that changes to domestic environmental and energy regimes will have on both domestic players and foreign investors. Here the very concept of Investor State Dispute Resolution (ISDS) as it developed in the post war era, will also have to be analyzed to ensure that the appropriate balance between a States’ right to regulate in the public interest and investment protection can be met in a context never contemplated when this system was established 60 years ago. While arbitration has played a crucial role in ISDS, for these particular disputes arising from challenges to energy transition and climate change policy, the potential use of mediation as a more effective resolution mechanism must now be considered.
Benefits of Mediation in Investor State Disputes arising out of the Energy Transition
Given the development of a dispute resolution process within ISDS that contemplates the use of mediation, this mechanism will be particularly well suited to assisting in the resolution of disputes arising out of the energy transition. Mediation being a process whereby a neutral third party (or parties where co-mediation is used) works with the disputing parties to facilitate an amicable resolution to the dispute has many advantages over an adjudicative approach to dispute resolution where a court or tribunal renders a decision. The key benefits for climate-related investor states conflicts include the following:
- helps preserve relationships and potentially permits the investment to continue or be restructured over a transition period, which will be critical for the phase out of GHG emissions. This simply cannot be achieved through litigation;
- can be attempted at an early stage in a conflict, which will permit for an organised and most cost-effective transition to take place;
- is relatively inexpensive and quick, which is critical given the 2030/2050 emissions reduction/elimination timeframe;
- saves lost opportunity costs spent in years of litigation;
- allows for solutions that go beyond the remedies available to a court or arbitral tribunal, which will be needed for heavy emitting entities to effectively transition without massive social and economic upheaval;
- allows for a range of stakeholders to take part (not solely the disputing parties) so that a more robust and inclusive settlement can be reached, which will be essential to obtaining social by-in to energy transition agreements;
- allows for face-to-face contact between the Government, investor and other stakeholders, so that they retain the ability to structure an agreement, rather than having it imposed by a tribunal;
- provides route to a win-win solution and allows a party to save face; (important for politically sensitive situations), which will permit solutions that include scheduled phase out, financial aid for exiting fossil fuel industries, carbon credits, investment opportunities in new sustainable energy projects (the list of possible solutions through mediation are endless, while remedies available in litigation and arbitration are largely financial);
- takes into account cultural norms and concerns which a Court or Tribunal cannot consider;
- few enforcement issues as the parties have themselves agreed the settlement and will therefore be committed to it, which is not the case if a judgement is imposed on a reluctant party (also the Singapore Mediation Convention now provides a mechanism for enforcement of mediated settlement agreements where signatory States are involved);
- the process is as confidential or transparent as the parties wish it to be, so great flexibility in public announcements and press releases;
- the parties can choose the mediator or co-mediators best qualified to assist with the dispute at hand, which will be critical for climate-related disputes, this process is simply not available when a court is involved;
- does not disrupt budgets the way a judgement/award would be as payments can be planned over time, rather than imposed.
Mediation as a Tool for Climate Change Related Disputes
States must do what is possible to create an amicable framework for resolution of climate change related disputes with their investors. One key element is having a perceived transparent and fair system for resolving investor issues. Clearly, early dispute resolution will play a role in this. Some States have already implemented ombudsperson programs and in addition, have a stated policy of mediating disputes as a prerequisite to arbitration. In essence, this is much in line with the premise that disputes must be regulated, meaning that there is a process in place that gives scope for resolution through various steps along the way. Several States have adopted the ECT Model Instrument providing a proactive framework to utilize mediation at an early stage of disagreements with investors.
COVID-19 has created a situation in which many investment agreements cannot be performed strictly in accordance with their terms. This could be on the investor’s part, but also on the part of the State, which may suddenly have seen its circumstances, policy priorities and budgetary commitments dramatically altered. Investments impacted by the energy transition are likely to suffer the same fate, but perhaps on even a larger scale. The range of climate change related measures that will impact the energy sector is extremely wide and includes: the removal of fossil fuel subsidies, the introduction of carbon taxes, stricter emissions standards and electric vehicle mandates, denial of permits for exploration and development, transport or use of coal, gas or petroleum resources, and planned phase-out of certain energy sources. These measures when implemented will undoubtedly have direct impacts on specific investments in the energy sector, including leaving investors and States with the problem of stranded assets. These regulatory and investment policy changes therefore pose a significant litigation risk for States as market actors in the fossil fuel industry invoke investment protections under BITs (Bilateral Investment Treaties) to challenge measures taken in furtherance of the Paris Agreement. States will struggle to realign many types of policy and regulatory initiatives due to energy transition demands and the need to drastically reduce carbon emissions in the coming decade. This is precisely where mediation can play a vital role, in helping the investor and the State to restructure their respective legal commitments and in some cases permit the investment to continue for a transitional period or in a different form or, alternatively, to bring it to an end on agreed terms. Neither Courts, nor arbitration can provide these remedies and, in any event, enforcing an arbitral award against a State that cannot or seeks to avoid payment because of environmental public policy concerns, hardly makes good business sense.
Funders of energy transition initiatives will also play an important role in encouraging the use of mediation in potential disputes, including by encouraging the use of mediation in disputes clauses. This will be particularly important in projects where States are a party. Funders will be at the heart of phasing out old fossil fuel energy providers and industries and in their place funding new sustainable energy projects. They will want to ensure that this process is not interrupted and delayed by expensive, inefficient disputes. Funders can therefore mandate in their lending criteria the use of mediation.
CEDR has worked with several ISDS focused global Law Firms to develop a helpful investor State Mediation Guide, which can be found at: https://www.cedr.com/commercial/mediationschemes/investorstate/
In addition to the Guide, CEDR and ADGM have established a specialized IS mediation panel at the ADGM in Abu Dhabi, which will further assist in the use of mediation in these disputes.
The narrative is clear. States now must do all that is possible to create a climate of investment facilitation and compromise with investors who in good faith made investments based on energy policies that were acceptable in the past, but now no longer sustainable. One key element is the perception of a transparent, compromise oriented, and fair system for resolving investor tensions and disputes. Clearly, early dispute avoidance and regulation, rather than adversarial engagement will play a role in this. The time for mediation to become an integral tool of investor State dispute resolution as part of a State’s energy transition plans is, therefore, now.