The Edge Malaysia | 31 October 2025
Climate and Environmental Governance: International investment rules can undermine environmental and climate protection
By Elizabeth Wu
This article first appeared in Forum, The Edge Malaysia Weekly on October 27, 2025 - November 2, 2025
“The investor-state dispute settlement system, with its roots in colonialism and extractivism, is not fit for purpose in the 21st century because it prioritises the interests of foreign investors over the rights of states, human rights and the environment.”
— David Boyd, 2nd UN special rapporteur on human rights and the environment
“Investor-state dispute settlement mechanisms are used to protect investors’ interests when affected by state decisions, even when those decisions aim to protect humanity and the planet ... such agreements have a chilling effect regarding measures to protect the environment and climate action.” — Astrid Puentes Riaño, 3rd UN special rapporteur on human rights and the environment
International investment law is a system of international law that governs the relationship between a state (“the host state”) and foreign investors from other states, and is underpinned by international investment agreements (IIAs) between these states. IIAs protect foreign investments in the host state by requiring it to ensure a regulatory environment that protects those foreign investments — for instance against losses due to regulatory changes, discriminatory treatment or expropriation.
Unfortunately, this system of law has historically not developed in alignment with international environmental and climate law, and many IIAs do not advance sustainable development goals and environmental justice. IIAs typically contain investor-state dispute settlement (ISDS) mechanisms that permit foreign investors to sue the host state for regulatory or other acts that affect their investments, even if such state action is meant to protect the environment, protect biodiversity loss and human rights, or to advance a state’s commitments under the Paris Agreement or other international legal instruments.
This misalignment has been highlighted in recent reports by David Boyd and Astrid Puentes Riaño, the 2nd and 3rd UN special rapporteurs on human rights and the environment, and by Elisa Morgera, UN special rapporteur on the promotion and protection of human rights in the context of climate change. Fossil fuel investors in particular have used ISDS lawsuits against states to protect their investments and seek exorbitant compensation, reportedly obtaining at least US$77 billion (RM327 billion) to date in damages. Seven of the top 10 largest ISDS awards — all exceeding US$1 billion — have reportedly involved fossil fuel investments, and the average claim in arbitrations concerning fossil fuels is US$1.4 billion.
Foreign investors have sued states for refusing to grant oil and gas exploration permits, for phasing out coal-fired power plants, for denying permits for large mines, introducing fracking bans and strengthening laws to protect water supplies. A significant proportion of IIAs continue to extend investment protection to high-carbon-emitting investments, often contain no reference to sustainable development or environmental justice, and “almost completely ignore” human rights.
The flaws in the IIA and ISDS regime are compounded by inherent concerns on the transparency, inclusiveness and efficacy of the ISDS process. ISDS proceedings are adjudicated by private arbitration tribunals that are not subject to the review of domestic courts, and do not typically allow meaningful participation by affected local communities. Further, as “old-generation” IIAs often impose obligations on states in respect of foreign investment, but typically do not impose corporate social responsibility or other obligations on investors, ISDS is often asymmetrical in nature, as it can be challenging for states to bring counterclaims in ISDS proceedings for pollutive acts of investors.
Amid growing concerns that ISDS obstructs climate and environmental action, international bodies such as United Nations Conference on Trade and Development, United Nations Commission on International Trade Law and the Organisation for Economic Co-operation and Development are undertaking efforts to modernise the ISDS regime. These include expanding the space for governments to regulate in the public interest, introducing sustainability-linked treaty provisions and proposals on removing protections for fossil fuel investments in modernised treaties. Countries such as Italy, France, Germany and Poland have also withdrawn from the Energy Charter Treaty, a multilateral IIA that has been heavily criticised as being a key driver of fossil fuel-related ISDS cases.
However, the urgency of the planetary crisis requires a more rapid pace of IIA and ISDS reform, as well as broader support from the corporate community. This is particularly the case in Asean, where the systemic problems of the IIA and ISDS regime remain. Over 85% of IIAs that have been concluded by Asean states are “old-generation” treaties that typically lack sustainable development provisions and are inadequate to address the challenges of the net zero transition and climate change. There is little awareness among the public and private sectors and civil society of the manner in which the IIA and ISDS regime can impede a just transition and environmental protection in the region.
This lack of awareness and engagement on IIA and ISDS reform stands in marked contrast to more ubiquitous corporate and regulatory efforts on climate change and sustainability. This is striking given that the concerns raised by non-aligned IIA and ISDS provisions, as well as the business opportunities that could be generated by such reform, are typically cross-cutting across all industries and sectors. For instance, reform of IIAs that facilitate “green” investments can unlock opportunities for market-leading businesses that champion sustainability.
Conversely, it would be mis-aligned for corporations and investors (and their directors) to purport to support sustainable development goals but use the ISDS system to protect carbon-intensive/ pollutive investments or stymie regulatory action to protect the environment. Similarly, public sector officials and regulators that champion net zero and energy transition efforts should act urgently to review their IIAs and ISDS commitments to ensure alignment of their state’s international legal obligations. Ultimately, IIA and ISDS reform is not just a legal or policy issue — it has practical business consequences. Defending ISDS lawsuits consumes public resources that could otherwise support the corporate sector in meeting net zero targets, and impedes the development of governance structures that are needed for a just and equitable transition and a stable investment ecosystem. For instance, companies making genuine efforts to comply with climate regulations and keep abreast of state policies on net zero transition could find themselves disadvantaged when ISDS lawsuits are brought by other investors to challenge such state action. In this circumstance, market leaders in the net zero transition who have invested in business transformation are effectively penalised by corporate climate laggards.
As modern IIAs are now shifting towards facilitating sustainable investment by incorporating corporate social responsibility principles and limiting protections for non-sustainable projects, corporations are encouraged to look beyond short-term legal risk and to support broader legal system changes that enable sustainable investment. This includes endorsing treaty provisions that facilitate just and clean energy transitions, supporting corporate social responsibility commitments and supporting the enhancing of legal coherence between domestic and international climate and environmental laws. Corporations should also consider utilising other forms of investment protection, such as political risk insurance, co-investing with local partners and/or using project-specific protections and bespoke dispute resolution procedures instead of relying on broad ISDS coverage.
Finally, lawyers and legal counsel could also play a more strategic role in shaping treaty frameworks — helping companies navigate and influence the evolving legal landscape in ways that align with climate and environmental governance goals and a just transition. Reforming the legal foundations of international investment protection is essential to ensure that investments are both protected and sustainable for a climate-resilient and environmentally sound future.
Elizabeth Wu is a lawyer working on environmental justice and transnational governance. This column is part of a series coordinated by Climate Governance Malaysia, the national chapter of the World Economic Forum’s Climate Governance Initiative. The CGI is an effort to support boards of directors in discharging their duty of care as long-term stewards of the companies they oversee, specifically to ensure that climate risks and opportunities are adequately addressed.