Climate and Environmental Governance: International investment rules can undermine environmental and climate protection

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.

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