Investment treaty arbitration cases such as Methanex, Metalclad, Azurix, Tecmed, Ethyl and SD Myers indicate that investment arbitration has become an important forum in which environmental issues are discussed. It is argued in this short paper that the inherent public interest involved in environmental disputes is incompatible with the investment arbitration system as it stands. Arbitration is by its nature private, with no third party involvement and a lack of transparency, which can hinder environmental and sustainable development, as well as prevent future efforts to redress climate change and global warming at an international level. We make the case for the right and necessity of third party participation in environmental investment arbitrations.

Firstly, the relevance of environmental cases in investment arbitrations comes from the industry sector of investors. Large oil companies or other natural resource extraction companies such as mining are amongst the largest investors implemented in resource-rich countries. The first general question is therefore where the natural resources of a country are being exploited, should third parties such as citizen groups or environmental groups have a say in resulting arbitrations? The issue turns first of all around the protection of the natural resources and natural environment of the host state to limit abuse (environmental and human) from investors, and also around the fact that these investors, because of the nature of their business, are more prone to doing environmental damage. For example, oil spills by oil extraction companies, the pollution of groundwater resulting to the extraction of natural gas, etc. It can be argued that not only do third parties have a stake in arbitrations concerning investors in such industries, but also the nature of the business and its potential environmental and health consequences may justify a tighter scrutiny and control on such investors through the participation of third parties in arbitration proceedings. Investments in these industries affect the public service sectors such as water, oil and gas or waste disposal.

Secondly, environmental laws and regulations are often the subject-matter of the dispute in environmental arbitration cases. The notion of expropriation has moved from the physical taking of property from investors by the host state towards the reduction in the value of the investment or the deprivation of the investor of some part of control over the investment as a result of the adoption of laws and regulations by the host state. In other words, new laws and regulations have an effect on businesses which must comply with them, potentially restricting practices, reducing production or sales or increasing costs, which reduces the overall value of the investment. Generally, the adoption of such laws or regulations do not constitute expropriation even if they result in the decrease of the value of investments if they are non-discriminatory and are for a public benefit or purpose. Therefore, general environmental rules are typically the sort of regulations or laws that a host state may pass, as was held in a number of cases. At the same time, these are the types of new regulations which are likely to be challenged by investors in environmentally sensitive industries (as described above), but also by any investor whose investment will be reduced in value due to compliance costs and litigation costs if the new rules are breached. Environmental protection is therefore a major and common issue discussed in investment arbitrations.

It is also important to note that environmental cases are particularly sensitive to the “chilling effect”. States may be discouraged to pass regulations to further environmental protection because of the arbitral tribunal’s power to actually strike down legislation, to impose considerable compensation or damages payments on the state for the economic impact of the regulation on investors, the cost of defending claims as well as the effect on the attraction of investment. Following regulatory challenges, investors may leave the host state or the state may become less attractive for investors. The “chilling effect” in environmental cases operates in two ways: first, hosts states which are obliged or encouraged to pass environmental laws by international agreements may pass those regulations, but fail to enforce them in any meaningful way on investors. Secondly, while states may enact the minimum standards imposed by international agreements, they may be discouraged from voluntarily implementing higher environmental standards. Another factor which contributes to the “chilling effect” is the fact that tribunals’ approach to challenged environmental regulations is uncertain and difficult to predict. In the case of Methanex, the tribunal found that the adoption of the non-discriminatory regulation for a public purpose did not constitute expropriation. Strong consideration was given to the fact that the ban on MTBE was due to its adverse environmental and health effects. However, tribunals have also more systematically taken a different approach. In the case of Azurix which was decided about a year after Methanex, the American-owned company (Azurix) operated water facilities in Argentina under a concession agreement. Water became contaminated by a bacteria which rendered it undrinkable. Local authorities imposed a fine on Azurix for failing to comply with water quality standards and obligations under the concession agreement as well as prohibiting the investor from selling its water services and charging people for it while the water was contaminated. Azurix was awarded over $165 million for breach of the fair and equitable standard on the part of the host state. In assessing which criteria to use to find expropriation, the court looked at the effect of the regulation on investment, rather than the effect and the purpose of the regulation. The Azurix case followed the reasoning of the tribunal in Tecmed, where the tribunal stated:

“…we find no principle stating that regulatory administrative actions are per se excluded from the scope of the Agreement, even if they are beneficial to society as a whole — such as environmental protection —, particularly if the negative or economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever.”

The dismissive approach of tribunals in Tecmed and Azurix to environmental norms implemented by host states may go as far as to argue that a primacy is given to investor protection rules at the expense of host state public interest such as environmental protection and sustainable development. Critics of the Metalclad case even charged the case of being “demonstrative of a trend in the utilization of Chapter Eleven favouring the protection of the profits of multinational corporations over legitimate exercises of sovereignty by local governments”. Furthermore, bearing in mind that there is no real appellate system, the uncertainty will not soon be repaired.
With the growing awareness of climate change and environmental degradation, states are under international pressure to pass laws on energy regulation and greenhouse gas emissions as well as environmental protection. Environmental issues and sustainable development therefore constitute some of the most important reforms and developments in States’ regulatory agendas. Consequently, this gives rise to challenges of these regulatory developments by investors. At the same time, there is a strong public interest in climate change and environmental issues. Investment-environment disputes therefore spurred the general debate on the extent of the right of third party participation in investment arbitration. More generally, it can be said that the rise of investor-state disputes in recent years, which can notably be explained by the re-conception of “expropriation” and rise in enactment of environmental legislation, has led to a corresponding increase in the level of public interest in these disputes and in the functioning of arbitral tribunals. Principles and arguments developed in this debate apply to third party involvement generally and in other related areas such as human rights, health and safety, transportation or telecommunications.