This article was published by the Thomson Reuters Foundation on April 20, 2022.
By Beatrice Tridimas
LONDON, April 20 (Thomson Reuters Foundation) – As many publicly traded companies around the world hold their annual general meetings, climate-conscious shareholders are upping pressure on financial giants to slash their investments in coal, oil and gas – fast.
According to a recent report from green groups, fossil fuel financing from the world’s 60 largest banks reached $4.6 trillion in the six years since the Paris Agreement on climate change was adopted, including $742 billion in 2021 alone.
But after a resolution filed by a coalition of investors, HSBC in March agreed to reduce its financing of fossil fuels in line with limiting global warming to 1.5 degrees Celsius, the most ambitious goal of the Paris pact.
Credit Suisse, Bank of America and Goldman Sachs, among others, are also facing similar demands from major shareholders, further turning up the heat on fossil-fuel producing companies.
At November’s COP26 U.N. climate summit, meanwhile, many governments made landmark pledges to phase out coal power, including a commitment not to fund new plants overseas.
Yet the companies that mine, sell, use and invest in fossil fuels are not powerless in response to such existential threats to their business. They have a little-known but potentially powerful tool with which they can fight back.
Since 1998, the Energy Charter Treaty (ECT), an international accord designed to protect the interests of investors in all types of energy, has allowed companies and their backers to challenge national policies that could hurt their bottom line.
As legal claims from the fossil fuel industry rise, some governments and environmental groups want the treaty reformed.
This week, ECT member states are meeting in ongoing talks to modernize the treaty, a process launched in 2017 to bring the pact in line with developing climate policies and which is due to conclude in June.
Here’s some background on the treaty and how it is being used by corporations to undermine climate action.
What is the Energy Charter Treaty, and why was it created?
The ECT is a legally binding agreement signed by 52 countries – mainly in Europe, Central Asia and the Middle East – and the European Union.
It was drawn up at the fall of the Soviet Union to protect European energy firms with fossil-fuel assets in ex-Soviet states.
“There was a big fear that (former Soviet Union) countries could fall back into communism and that investors would be expropriated,” said Cornelia Maarfield, senior trade and investment policy coordinator at Climate Action Network Europe.
The ECT aims to promote energy security by protecting energy firms against risks to their investments and trade, such as having their assets seized or contracts breached.
It grants the right to challenge governments over policies that could harm investments – not just in fossil fuels but also in hydro-power, solar, wind and other renewable energy sources.
Signatories are also obliged to facilitate cross-border energy flows and minimize the environmental impact of energy use, although the treaty has no binding climate targets.
What threat does the ECT pose to climate action?
Research from the International Institute for Sustainable Development (IISD) shows that legal claims made by fossil fuel companies challenging environmental measures are on the rise.
Most are based on contracts, but investors making claims based on international law most frequently bring them under the ECT.
Under the treaty, claims can be pursued through national courts or international arbitration channels called investor-state dispute settlement (ISDS).
The IISD has warned that putting climate pledges made at COP26 into practice could lead to a slew of lawsuits that would add to the cost of climate action and hinder its implementation.
“You know that these cases will take a long time and that there is a lot of money at stake… So some governments might delay the fossil fuel phase-out decision or not take (it) at all,” said Maarfield.
Five multinational companies are suing governments for loss of earnings over green action for a total of $18 billion, with four of those lawsuits in ECT investor-state tribunals.
German energy companies Uniper and RWE have brought claims against the Netherlands following its decision to phase out coal, and British firm Rockhopper is challenging Italy over its ban on oil and gas exploration around the coastline.
Slovenia is also facing a claim from British company Ascent Resources over a new regulation requiring the company to undergo an environmental impact assessment before it can extract gas.
ECT officials note that about 60 per cent of disputes under the treaty concern renewable power generation, involving things like changes to incentive schemes and regulation.
IISD researchers are concerned that future measures to stop leaks of the greenhouse gas methane from gas and oil pipelines and wells could also spark new disputes.
Most investor-state cases concerning fossil fuels have been decided in favour of the private sector.
“The way the damages are calculated leads to huge awards, which have never been seen at the national level,” said Nathalie Bernasconi-Osterwalder, executive director of IISD Europe, noting damages could stretch to billions of dollars, calculated on real losses and anticipated future losses.
Rockhopper, for example, is claiming compensation of up to $350 million for both funds spent and expected profits in its case against Italy.
The ECT’s terms have also been interpreted widely, Maarfield said, so that “almost any state measure that costs the investors some profits can be challenged”.
She is concerned a push for new members could increase the risk of countries being sued over their climate policies.
How could the treaty be reformed?
As part of the ECT modernization process, signatories agreed on 25 areas for reform, but those do not include ISDS nor a sunset clause that allows countries to be sued for up to 20 years after withdrawing from the treaty.
“There is one big barrier to changing anything in this agreement – which is that all parties have to agree unanimously,” said Maarfield, adding that some ECT members “are very reluctant”.
The European Commission has proposed amendments that would exclude all future investments in fossil fuels from ECT protection but would allow existing investors to sue countries for up to 10 years after amendments are agreed.
France, Spain and Poland favour withdrawal and have expressed concern over the modernization process, while Italy quit the ECT in 2015, citing budget restrictions.
During modernization talks in March, several European Parliament members expressed doubts about the reform process and urged the European Commission to withdraw from the treaty.
If the EU does leave, member states should first agree to change the 20-year investment protection clause, said Bernasconi-Osterwalder.