South Centre Informal Note, 5 June 2026

Addressing the Systemic Risks of Investor-State Dispute Settlement (ISDS) to Climate Action

Informal Note, 5 June 2026

By Daniel Uribe Terán, Lead Programme Officer,  Sustainable Development and Climate Change Programme,  South Centre

The current international investment agreement (IIA) framework, featuring over 2,200 treaties with Investor-State Dispute Settlement (ISDS) mechanisms, acts as a structural barrier to the implementation of key aspects of the Paris Agreement. By protecting fossil fuel investments, those treaties create significant financial risks that may induce “regulatory chill,” deterring states from implementing necessary climate mitigation measures. Recent rulings from the International Court of Justice, the Inter-American Court of Human Rights, and the European Court of Human Rights have affirmed states’ sovereign rights to regulate for climate action, providing new legal tools to challenge the ISDS status quo. However, these judicial developments do not eliminate litigation risks or guarantee favourable outcomes. Consequently, states must pursue systemic reform, including treaty modernisation, the termination of outdated IIAs, the implementation of comprehensive climate carve-outs, and restrictions on forward-looking damages. Addressing these legal barriers at upcoming forums like the 64th sessions of the United Nations Framework Convention on Climate Change (UNFCCC) Subsidiary Bodies (SB 64) is essential to align international investment law with the existential imperative of a low-emission transition.

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Addressing the Systemic Risks of Investor-State Dispute Settlement (ISDS) to Climate Action