FTI Consulting UK Public Affairs Snapshot: Withdrawal from the Energy Charter Treaty: Turbulent times ahead for Britain’s investment policy?

Unlike World Trade Organisation (WTO) rules or free trade agreements (FTAs), which focus primarily on liberalising trade in goods and services, bilateral investment treaties (BITs) and investment chapters in FTAs seek to promote investment.

They do this by providing a set of legal guarantees from the government of one party to the investors of the other, enforced through an investor state dispute settlement (ISDS) mechanism which gives foreign investors the right to sue the host state if obligations are breached. These usually include:

• Guarantees that foreign firms will be treated the same as local competitors.
• Protection from the illegal seizure of assets.
• A commitment to fair treatment.
• Prohibition of requiring incentives or conditions for investment.

Evidence suggests BITs promote investment by creating legal certainty. Analysis published earlier this year by the Department for Business and Trade concluded BITs contribute to a 14% rise in outbound investment on average.

The UK is party to over 90 investment agreements, and investors are known to have used these to bring 104 cases against other states. Until withdrawal from the Energy Charter Treaty (ECT), it has never terminated its membership of an agreement.

The presence of ISDS gives investment agreements real teeth, as aggrieved businesses do not have to rely on their home government to seek compensation – which often amounts from tens of millions to billions of pounds. According to the UN Conference on Trade and Development (UNCTAD), as of 31 December 2023, at least 1,303 ISDS arbitrations were brought against countries for alleged breaches of investment rules. 35 new ISDS cases were launched in 2023 alone, demonstrating the continued willingness of investors to use them to assert their rights.

Yet ISDS is uniquely controversial. Critics argue it delivers excessive awards for corporates at the expense of states, lacks transparency in proceedings, and creates rights enjoyed exclusively by foreign nationals. The inclusion of ISDS posed challenges for the negotiation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and was a major factor in the collapse of talks on an EU-US FTA.

Some countries have abandoned ISDS in response to stakeholder pressure. Under its previous government, New Zealand refused to negotiate ISDS mechanisms in new FTAs. Others, including South Africa and India, have sought to terminate their BITs. The EU now refuses to sign up to the traditional model of ISDS, instead pushing for the creation of a permanent global investment court.

Last week, the UK announced its withdrawal from the ECT, a multilateral treaty for investments in the energy sector. For the first time ever, the UK is exiting an investment treaty, which will result in a loss of protection for new investments in the energy sector from next year.

In recent years, Spain has faced more than 50 claims under the ECT in response to changes to incentives for investors in its renewable energy sector. It has lost approximately half of these cases and owes investors billions of euros in compensation.

Spain’s response to this was to lead an effort within the EU to pull other EU member states out of the ECT. Nine have jointed Spain in announcing they are leaving the agreement, including France, Germany, and the Netherlands.

This has put the future of this decades-old treaty in jeopardy and, despite playing a leading effort in the much-needed modernisation of the agreement, the UK is now also withdrawing.

It has been argued the ECT is contrary to the UK’s climate objectives. Former Energy Minister and Chair of the UK’s Net Zero Review Chris Skidmore MP wrote an article in the Financial Times in March 2023 calling for the country to leave a treaty “not suited for 21^st-century challenges”, adding: “It is driving up the cost of energy transition, while slowing it down.”

While major oil and gas producers have been awarded substantial sums by ECT tribunals, so too have investors in renewable energy generation – the very same investors who brought the successful cases against the Spanish government. As well as shifting European political opinion against the treaty, so far none have received any compensation awarded.

UK withdrawal from the ECT therefore means investors in renewables will lose out alongside oil and gas producers. Amid a global race to attract and promote clean energy, such investors face specific risks, including rapidly emerging and changing regulation, and fluid incentives offered by governments, such as generous subsidy regimes or tax breaks.

Such investors at home or abroad will therefore lose an additional layer of legal protection as a result of UK withdrawal.

The UK arguably has a strong interest in supporting ISDS. UK investors have brought at least 104 cases against other states, while the Government has never faced a case which has proceeded to arbitration. Yet, despite this strong track record, ISDS has not been included in any of the UK’s post-Brexit bilateral FTAs.

This hesitation may be an indication that the UK does not think its strong track record of avoiding ISDS will continue in a faster-moving regulatory environment, and even potentially where national security concerns are driving more government intervention in private sector investments.  

Last year the UK was put on notice of a new investment treaty claim under the UK-China BIT by Huawei, understood to be in response to the Government banning the corporation from the telecommunications sector on national security grounds.

While it is impossible to tell how the case might play out, states – even major capital-exporters – can lose support for investment treaties, and particularly ISDS, when they are on the receiving end of claims.

A lack of ISDS in new bilateral FTAs, UK withdrawal from the ECT, and a potential treaty claim may be a sign that the UK is looking to depart from its established pro-investor approach to investment agreements. As such, the renegotiation of the UK-Singapore BIT is likely to be a significant litmus test.

Both the UK and Singapore welcome foreign investment, support the global rules-based trading system, and have strong legal systems which reflect principles of due process and proportionality. As such, a high standard of protection for investors should be readily achievable.

While ISDS is already provided for between the UK and Singapore in the CPTPP, the renegotiation of the fifty-year-old UK-Singapore BIT was framed as an opportunity to “modernise”. This provides an opportunity for innovation, on both legal obligations and the dispute settlement mechanism.

Several criticisms of the investment treaty regime are valid, including poorly defined legal obligations or slow, opaque, and excessively costly proceedings. In their new BIT, the UK and Singapore can offer an answer to a systemic question by updating treaty rules or designing an ISDS mechanism which responds to such criticisms.

The challenge for the UK government will be achieving this when there is more scrutiny than ever of its investment policy.

Although Labour’s Shadow Secretary of State for Business and Trade, Jonathan Reynolds MP, has committed to developing a trade white paper should the Opposition win the 2024 General Election, he has not yet given an indication of where his party stands on investment treaties and ISDS.

In 2021, Labour’s then-Shadow Secretary of State for International Trade, Emily Thornberry MP, published a trade policy paper stating that the party would reject ISDS in any new trade agreements.

There is little doubt that Labour’s trade policy has moved on to more clasically liberal ground since Thornberry left the post. However, it is unclear whether Labour will follow the path trodden by other left-of-centre Western governments in recent years, such as those in New Zealand and Canada, by eschewing ISDS as a feature of its trade and investment policies.

Nevertheless, a trade white paper will provide a valuable opportunity for critics of ISDS to seek to shift a new administration’s policy in such a direction.

Despite recent challenges, the case is clear that the UK and its investors have historically been a beneficiary of the investment treaty regime. Evidence suggests that its treaty regime has boosted outward investment, and previous cases show that the presence of ISDS has enabled UK investors to assert their rights and, in some cases, win compensation.

With UK withdrawal from the ECT publicly welcomed, there is a risk that pressure shifts to the stock of 90-plus investment agreements. Amid these headwinds, those who rely on, or support, investment protection and the international rules-based trading system can no longer take the UK’s historic support for the investment treaty regime for granted.