Leonor Díaz-Córdova, James Manning and Josh Cameron (FTI Consulting) analyzes whether the announcement of the UK’s exit from the Energy Charter Treaty (ECT) indicates a fundamentally rethink your investment policies.

The UK has signed more than 90 investment treaties, creating a global safety net for overseas investors that is trusted to ensure fair treatment and protect capital. The latest analysis published by the UK Department for Business and Trade (Department of Business and Commerce) even suggested it This agreement encouraged investment, increasing foreign direct investment abroad by an average of 14.4%.. Despite this, the UK Government has just announced its withdrawal from the ECT after 30 years of being a signatory.

In contrast to World Trade Organization (WTO) rules or free trade agreements (FTAs), which focus primarily on liberalizing trade in goods and services, bilateral investment agreements (BITs) and investment chapters of FTAs ​​seek to encourage investment.

They do this by providing a set legal guarantee from the government of one party to investors of another party, carried out through the investor-state dispute settlement (ISDS) mechanism which gives foreign investors the right to sue the host country if they fail to fulfill their obligations. This usually includes:

• Guarantee that foreign companies will be treated the same as local competitors.
• Protection against illegal asset confiscation.
• Commitment to providing fair treatment.
• Prohibitions require incentives or conditions for investment.

It can be said that BIT encourages investment by creating legal security. Analysis published earlier this year by the UK Department for Business and Trade found that BITs contributed to a 14% increase in average outbound investment.

The UK is party to more than 90 investment treaties and investors are known to have asked for them to be present 104 cases were against other states. Until its withdrawal from the ECT, the country had never ended its membership of any multilateral treaty or investment treaty.

Until its withdrawal from the ECT, the country had never ended its membership in any multilateral treaty or investment treaty.

The presence of ISDS gives real power to investment deals, as injured companies do not have to rely on local governments for compensation, which often amounts to tens of millions or billions of pounds. According to the United Nations Conference on Trade and Development (UNCTAD), by December 31, 2023, at least 1,303 ISDS arbitrations against countries for alleged violations of investment rules. In 2023 alone, 35 new ISDS cases were initiated, demonstrating investors’ willingness to continue using such cases to enforce their rights.

However, the ISDS system is controversial. Critics argue, among other things, that:

(i) providing excessive compensation to the plaintiff company, at the expense of the defendant state,

(ii) lack of transparency in procedures and

(iii) creates rights enjoyed exclusively by foreign nationals.

The inclusion of ISDS poses challenges to negotiations on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and was a major factor in the breakdown of free trade agreement negotiations between the EU and the United States.

Several countries have abandoned the ISDS system in response to pressure from interest groups. Under the previous government, New Zealand refused to negotiate ISDS mechanisms in the new FTA. South Africa and India, among others, have tried to cancel their BIT. That EU Now they are refusing to follow the traditional ISDS model and are instead pushing for the creation of a permanent global investment court.

On February 22, the UK announced its withdrawal from the ECT, a multilateral agreement for investment in the energy sector. This is the first time the UK has abandoned the investment treaty, which will result in the loss of protections for new investment in the energy sector from next year.

In recent years, Spanish has faced more than 50 lawsuits under the ECT in response to changes in incentives for investors in the renewable energy sector. The government has lost about half of these cases and owes investors billions of euros in compensation.

Spain’s response to this was to lead efforts within the EU to exclude other EU member states from the ECT. Nine countries have joined Spain in announcing they are leaving the treaty, incl France, Germany and the Netherlands.

This has jeopardized the future of the decades-old treaty and, although the UK played a leading role in the treaty’s much-needed modernization, it has now also withdrawn from it.

One of the arguments in favor of the withdrawal is that the ECT goes against the UK’s climate goals.

One of the arguments in favor of the withdrawal is that the ECT goes against the UK’s climate goals. Former Energy Minister and Chair of the UK’s Net Zero Review, Chris Skidmore, wrote an article in the Financial Times in March 2023 (“The UK must leave the Energy Charter Treaty“) called on the country to abandon agreements that are “not up to the challenges of the 21st century” and added: “This increases the costs of the energy transition, while slowing it down.”

This argument can be rebutted by stating that although the courts interpreting the ECT have awarded large sums of money to major oil and gas producers, so too have investors in the field of renewable energy generation, namely investors who have successfully brought cases against the Spanish government. Apart from a shift in European political opinion against the treaty, no one has received any compensation so far.

The UK’s withdrawal from the ECT means just that Renewable energy investors will suffer along with oil and gas producers. Amid the global race to attract and promote green energy, these investors face particular risks, including rapidly emerging and changing regulations, as well as volatile incentives offered by governments, such as large subsidy regimes or tax breaks.

Therefore, these domestic and foreign investors will lose an additional layer of legal protection as a result of the UK’s exit.

ISDS is not yet included in the UK’s post-Brexit bilateral FTAs

The UK could be said to have a strong interest in supporting ISDS. UK investors, as we have said before, have initiated at least 104 cases against other countries, while the Government has never had a case taken to arbitration. However, despite its strong track record, ISDS has not been included in the UK’s post-Brexit bilateral FTAs.

This omission may be an indication that the UK does not believe that its strong record of avoiding awards under ISDS will continue in a rapidly changing regulatory environment, and perhaps even as national security concerns push the government to undertake greater intervention in private sector investment.

Last year, the UK was alerted to claims of a new investment agreement under a BIT with China by Huawei, understood to be in response to the Government’s ban on the company entering its telecommunications sector on national security grounds.

While it is impossible to say how this will play out, countries – even large capital exporting countries – may lose support for investment treaties, and ISDS in particular, when they are the recipients of claims.

Despite recent challenges, it is clear that the UK and its investors have historically been the beneficiaries of the investment treaty regime. Evidence shows that the treaty regime has increased overseas investment, and previous cases show that the presence of ISDS has enabled UK investors to assert their rights and, in some cases, obtain compensation.

With public opinion favoring the UK’s exit from the ECT, there is a risk that pressure and focus will shift to the more than 90 investment treaties in force. In the midst of these challenges, parties who rely on or support foreign investment protection are already experiencing these obstacles They will not be able to take UK support for the investment treaty regime for granted.