Investor–state dispute settlement (ISDS) provisions are creating growing tensions between investors’ rights and governments’ ability to act in the public interest. Increasingly they are being used in ways that could constrain governments’ ability to pursue industrial policy, strengthen national security and support domestic economic priorities during the clean energy transition.
With claims related to fossil fuel projects rising, and priorities across a range of climate-related policy areas under threat, countries should take the opportunity at COP31 to build the foundations for coordinated investment treaty reform.
How ISDS challenges climate and fossil fuel transition policies
ISDS provisions, included in most investment treaties, allow companies to challenge domestic policy and regulatory decisions. Mining, oil and gas companies are prominent users of ISDS. The proportion of claims coming from this sector has increased three years in a row, reaching nearly half of claims in 2025.
Recent claims have targeted decisions relating to fossil fuel projects refused on climate and environmental grounds. For example, Singapore-based investors launched a challenge after the UK High Court quashed the Cumbria coalmine’s approval. The case remains pending, with the potential cost to the UK government some £300 million. Similarly, an Australian billionaire is suing the Canadian government in relation to a coalmine project refusal, despite Canada’s domestic courts upholding local authorities’ decision.
The Irish government is also facing a claim under the Energy Charter Treaty (ECT) for refusal to issue a lease undertaking for an oil and gas field in the North Celtic Sea. The decision was based on financial capacity of British company Lansdowne, who has now found third-party finance to fund their claim. Notably, Lansdowne initiated arbitration just weeks after the Irish government notified its withdrawal from the ECT.
ISDS threatens industrial policy and national security
Beyond individual projects, ISDS exposes climate-related industrial policy to legal challenges too. This fundamentally interferes with government autonomy in policymaking.
For example, ExxonMobil recently filed a notice of dispute under the ECT, challenging the EU’s Net Zero Industry Act. The act obliges certain oil and gas producers to contribute to CO₂ storage capacity, a technology which Exxon has previously been publicly supportive of. This illustrates the threat to government deployment of targeted regulation aimed at stimulating specific sectors.
Other recent claims show how ISDS can frustrate states’ ability to respond to perceived economic and national security risks. In June 2026, Chinese company Jingye Group began the process to seek compensation from the UK government in response to the nationalisation of British Steel. The nationalisation was intended to strengthen national security and infrastructure by protecting the future of steel production in the UK – including thousands of jobs.
Similarly, Wingtech – the partially state-owned Chinese parent company of Dutch semiconductor manufacturer Nexperia – is pursuing up to $8 billion in damages after the Dutch government took control of Nexperia due to national security concerns.
As governments increasingly adopt proactive climate and industrial policies, and as precarious economic conditions necessitate strategic interventions, the chilling effect of ISDS risks undermining policy ambition.
Building political momentum for investment treaty reform
The growing interest in ISDS reform was reflected in its position on the official agenda at this year’s First International Conference on Transitioning Away from Fossil Fuels (TAFF). Several government participants raised concerns about ISDS, and the issue will be taken forward by an informal ISDS Working Group joined by Colombia, Ghana, Tanzania and Vanuatu.
At the UN intersessional meetings in Bonn this year (SB64), the need to address ISDS was also raised repeatedly across several discussions, including the TAFF Roadmap Session, the Trade & Climate Dialogue, and the Veredas Dialogue on climate finance. However, the concerns raised came primarily from civil society organisations and experts. Governments are yet to fully recognise ISDS as a legal and financial barrier to ambitious climate action.
Opportunities at COP31
There is fertile ground at COP31 to nourish this momentum: green industrialisation a key part of Türkiye’s COP31 Action Agenda, and Australia is at the forefront of investment treaty reform. Proper recognition of ISDS as a barrier to ambitious climate action – from fossil fuel phase-out and strategic state intervention to industrial policy – would look like including ISDS in the COP31 cover decision, and establishing investment treaty reform as a key component of TAFF roadmaps.
Pursuing investment treaty reform through UNFCCC processes is important for building coordinated action among states, given concerns that unilateral action against ISDS could undermine investor confidence. The discussions at COP can also play a role in catalysing the technical reform discussions at the national, plurilateral, and multilateral levels needed to address the inherently international nature of investment treaties.
