Arbitration Nation: Where Polluters Win, the Planet Burns, and Lawyers Pop Champagne

Abstract

In Arbitration Nation, polluters win, the planet burns, and lawyers pop champagne—all thanks to a legal system that turns climate action into a financial liability. Investment law and ISDS have created a world where fossil fuel giants can sue governments for daring to regulate pollution, while hedge funds and litigation financiers turn lawsuits into profit-making ventures. Instead of holding polluters accountable, arbitration tribunals hand them billion-dollar payouts, forcing taxpayers to foot the bill for climate inaction. Meanwhile, as states hesitate to implement bold environmental policies for fear of legal retaliation, the legal industry thrives, making climate justice less about sustainability and more about settlement checks.

Palabras clave: Litigation Finance, Arbitration, Climate Justice, Investment Law

Lit de Justice”- (Lecho de Justicia) del rey Luis XV de Francia- Museo de Versalles.

I. When Law Becomes a Barrier to Sustainability

Global climate action is being obstructed not only by fossil fuel companies but also by legal and financial systems that prioritize corporate interests over environmental goals. While treaties like the Paris Agreement emphasize decarbonization, international investment law (IIL), investor-state dispute settlement (ISDS), and third-party litigation finance (TPF) create systemic barriers that penalize state-led climate policies and turn legal disputes into profit-making opportunities.

Governments attempting to regulate fossil fuels or promote renewables face crippling arbitration claims, often fuelled by speculative investors who treat lawsuits as financial assets. Meanwhile, arbitration tribunals—far from neutral—reinforce wealth-based access to justice, escalating the cost of climate action and undermining state sovereignty. This analysis highlights how ISDS, IIL, and litigation finance collectively function as a hidden handbrake on climate progress, entrenching structural inequalities while allowing financial speculation to dictate legal outcomes.

II. ISDS: A Legal Fortress for Polluters

One of the most insidious barriers to climate action is investor-state dispute settlement (ISDS), a mechanism that allows corporations to sue states for regulatory changes that allegedly harm their investments. Initially designed to prevent unfair treatment of investors, ISDS has evolved into a weapon for fossil fuel companies, making it prohibitively expensive for governments to phase out harmful industries.

The financial burden is staggering: fossil fuel firms have already secured at least $82.8 billion in ISDS claims, with billions more likely hidden due to lack of transparency. Many cases involve challenges to government-led climate initiatives—restricting oil and gas expansion, phasing out coal, or revoking environmentally harmful licenses. Instead of facilitating the transition to a sustainable economy, ISDS acts as a compensation machine for the world’s biggest polluters, diverting public funds away from climate mitigation and adaptation efforts.

Additionally, most investment treaties predate the Paris Agreement, meaning they were drafted in a pre-climate crisis reality where fossil fuel investments were seen as economic priorities rather than existential threats. These treaties lock states into outdated contractual obligations, reinforcing fossil fuel dominance and rendering climate-friendly policies financially punitive.

The neocolonial nature of ISDS further exacerbates global inequalities. While high-income countries (United States, United Kingdom, Netherlands) dominate the claimant side, low-income nations bear the brunt of compensation payments, often through contract-based disputes. This reinforces a double injustice, where developing countries finance climate damages while simultaneously compensating the very corporations responsible for environmental destruction.

To realign investment law with climate imperatives, investment treaties must be either terminated or significantly reformed to exclude fossil fuel-related claims, preventing corporations from using legal mechanisms to obstruct decarbonization efforts. Additionally, ISDS transparency must be increased to expose the true impact of compensation claims on climate policies, ensuring that arbitration settlements no longer operate in secrecy to the benefit of polluters. Furthermore, a new climate-focused dispute resolution system should be developed, one that prioritizes environmental justice over investor profits, safeguarding state-led sustainability initiatives from financial retaliation. As an additional safeguard, governments and international institutions should establish a climate litigation defense fund, enabling states—especially those in the Global South—to resist arbitration claims without diverting essential public funds from climate adaptation and mitigation efforts. These reforms are crucial to shifting the balance of power away from corporate interests and toward a legal framework that genuinely supports a just and sustainable transition.

III. Litigation Finance: Turning Justice into a Financial Bet

The financialization of international arbitration has led to the rise of third-party funding (TPF), where hedge funds, private equity firms, and litigation financiers bankroll lawsuits in exchange for a share of potential payouts. Originally marketed as a tool to enhance access to justice, TPF has instead become a speculative investment vehicle, commodifying legal disputes and creating perverse incentives to prolong litigation against states.

In investment arbitration, TPF is no longer about helping under-resourced claimants—it has transformed lawsuits into tradeable assets, allowing investors to bet on the financial viability of suing governments. This privatization of justice exacerbates power imbalances, enabling well-funded claimants to secure massive backing, while states must rely on taxpayer money to defend themselves.

The Dark Side of Third-Party Funding

Third-party funding (TPF) has introduced a dangerous dynamic into investment arbitration, encouraging riskier and inflated claims that might not otherwise proceed. Funders, driven by the prospect of high returns, often push for litigation strategies that prioritize financial gains over legal merit, leading to cases that escalate rather than resolve disputes. This creates a legal environment where claims that would have been dismissed due to lack of merit are instead aggressively pursued, amplifying the burden on states. Additionally, TPF prolongs arbitration battles rather than fostering settlements, as funders maximize their financial returns by extending litigation rather than resolving disputes efficiently. The longer a case drags on, the higher the legal fees, the greater the damages sought, and the more lucrative the final payout—regardless of the social, economic, or environmental costs to the affected state. Instead of promoting fair outcomes, this approach turns arbitration into a strategic financial manoeuvre, where efficiency and justice take a backseat to profit-driven motives.

Another alarming consequence of TPF is its influence over arbitrator selection and case management, raising serious concerns about impartiality and fairness. Funders may seek to shape proceedings by financing cases they believe will succeed under specific legal interpretations or before certain arbitration panels. This compromises the integrity of arbitration, as cases are steered toward tribunals that favour investor claims, further stacking the odds against sovereign states defending public interest policies. Rather than ensuring a fair and balanced arbitration process, TPF has transformed international disputes into high-stakes financial games, where the real winners are financiers—and the real losers are governments and taxpayers forced to foot the bill.

What Needs to Change?

To mitigate the risks posed by third-party funding, what I always tell the students of the LLM International Business Law at the University Externado of Colombia is that mandatory disclosure rules must be introduced in arbitration cases. Transparency is essential to reveal the extent of funders’ influence, ensuring that litigation is not manipulated for private financial gain at the expense of public policy. Without such disclosure, states and tribunals remain unaware of the true forces driving arbitration claims, leaving the process vulnerable to conflicts of interest and financial speculation.

Additionally, stricter regulation of litigation finance is necessary to prevent speculative investments in lawsuits against sovereign states. Governments and international institutions should set clear guidelines that restrict funders from exploiting arbitration as a high-yield investment strategy. This would help curtail predatory practices that encourage excessive litigation and artificially inflate compensation claims.

Finally, the scope of arbitrable claims must be limited, particularly by excluding climate-related public interest policies from TPF-backed disputes. Climate action should not be subject to the profit motives of litigation financiers, as this further delays and complicates the transition to a sustainable economy. By restricting TPF’s reach in disputes concerning environmental and public welfare regulations, states can regain their ability to implement necessary policies without fear of endless legal battles orchestrated for financial gain.

Beyond regulatory reforms, the arbitration community itself must foster more honest and critical debates on the ethical implications of third-party funding. Many arbitration practitioners, academics and evangelists continue to defend the system uncritically, treating it as an apolitical legal mechanism rather than acknowledging its role in amplifying financial inequalities and obstructing public interest policies. More transparent and candid discussions are needed, particularly from arbitrators, legal scholars, and policymakers, to address whether arbitration is truly serving its original purpose or simply becoming another avenue for financial speculation. Without this shift in discourse, reforms will remain superficial, and arbitration risks further losing legitimacy as a tool for fair and just dispute resolution.

IV. Can Investment Law Support a Just Green Transition?

International investment law (IIL) fundamentally conflicts with a just green transition, as its framework disproportionately protects investor interests at the expense of climate policies. While some claim that investment treaties promote green finance, research indicates that their costs—particularly the financial burden imposed on states—far outweigh any potential benefits. IIL significantly delays and increases the cost of decarbonization by granting excessive legal protections to investors. Fossil fuel companies frequently use these mechanisms to challenge phase-out policies, forcing governments to pay massive compensation for unrealized future profits. This results in billion-dollar settlements that drain public resources, undermining efforts to transition away from high-emission industries.

Ironically, even renewable energy investments have become tools for financial exploitation through ISDS. Investors leverage arbitration not to support sustainability but to secure inflated compensation, creating a system where both fossil fuel and renewable energy firms extract significant payouts from states. This dynamic effectively privatizes the financial gains of the green transition while leaving governments—and ultimately taxpayers—to bear the costs.

Despite claims that modern investment treaties with “right to regulate” clauses and sustainability exceptions can resolve these contradictions, legal precedents suggest otherwise. Cases like Eco Oro v. Colombia and Bear Creek v. Peru demonstrate that arbitration tribunals continue to prioritize investor protections over environmental and human rights considerations. Even with updated treaty provisions, arbitrators maintain broad discretion, ensuring that corporate interests remain dominant.

To realign investment law with climate imperatives, ISDS must be abolished for climate-related disputes, preventing corporations from using legal mechanisms to obstruct environmental policies. Investment treaties should be restructured to impose binding environmental and human rights obligations on investors, ensuring that corporate activity aligns with sustainability goals rather than undermining them. Additionally, climate-centered legal frameworks should be adopted to shift the focus away from investor compensation and toward equitable burden-sharing of climate transition costs. Without these structural changes, investment law will continue to function as a financial barrier rather than a facilitator of climate action.

To sum up: Will Arbitration and Investment Law Continue to Reward Polluters or Finally Serve Climate Justice?

The legal and financial systems that govern international investment are not neutral. They are deeply embedded in a power structure that privileges investor rights over state sovereignty, corporate profits over climate justice, and financial speculation over genuine accountability. ISDS, litigation finance, and IIL collectively act as legalized barriers to climate action, ensuring that those most responsible for the climate crisis continue to be rewarded, while those seeking to address it are financially penalized.

A just green transition requires dismantling this legal-industrial complex. Without fundamental reforms—or outright rejection of investor-centric legal structures—climate goals will remain hostage to corporate interests. The real challenge ahead is not just legal or economic—it is a question of power and political will. Will global policymakers continue to defend a system that rewards polluters and punishes progress? Or will they finally realign investment law and arbitration with the imperatives of climate justice and sustainable development?

The time for incremental reforms is over. The world cannot afford to let investment law dictate the pace of climate action.

*Perfil de la autora: Dra. Ligia Catherine Arias-Barrera es Profesora de Derecho Financiero en la Universidad Externado de Colombia y Ph.D. en Derecho Financiero por la University of Warwick (Reino Unido), como becaria del Banco de la República. Cuenta con un Máster en Derecho Comercial y Corporativo de Queen Mary University of London y es autora de referencia en regulación financiera, con publicaciones destacadas como Regulation and Supervision of the OTC Derivatives Market (Routledge, 2018) y The Law of ESG Derivatives: Risk, Uncertainty and Sustainable Finance (Routledge, 2024).

Actualmente, es CEO de Financial Services Consulting LLP (Reino Unido) y miembro del equipo de Financiación Sostenible de la Cámara de Comercio Internacional (ICC). Desde 2023, es Experta Independiente en Regulación Financiera de la Comisión de la Unión Europea e Investigadora Senior en la Cámara de los Comunes del Parlamento Británico. También asesora a organismos como la Corporación Financiera Internacional, la Autoridad Monetaria de Singapur y la Autoridad Albana de Supervisión Financiera.

A partir de 2024, dicta clases sobre derivados de crédito y regulación en Reino Unido y EE.UU. en Queen Mary University of London, dentro de los programas de LLM en Banca y Finanzas, Derecho Comercial y Cumplimiento Normativo, docente en la Maestría en Derecho Internacional de los Negocios de la Universidad Externado de Colombia, en la asignatura Derecho Financiero Internacional. Además, es Experta Independiente del Departamento Jurídico del FMI y consultora en Regulación Financiera, Mercado de Capitales y Reformas Regulatorias, con experiencia en servicios de compensación central, mercados emergentes y regulación post-Brexit en el Reino Unido. También ha asesorado al Banco Central de Emiratos Árabes Unidos y al Banco de Inglaterra en reformas regulatorias en temas FinTech.

References

Arcuri, A., Tienhaara, K., & Pellegrini, L. (2024). Investment law vs. supply-side climate policies: Insights from Rockhopper v Italy and Lone Pine v Canada. International Environmental Agreements: Politics, Law and Economics, 24, 193-216. https://link.springer.com/article/10.1007/s10784-023-09622-w

Boute, A. (2012). Combating climate change through investment arbitration. Fordham International Law Journal, 36, 613-664. https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=2439&context=ilj

Cotula, L. (2023). International Investment Law and Climate Change: Reframing the ISDS Reform Agenda. Journal of World Investment and Trade, 24(4-5), 766-791. https://brill.com/view/journals/jwit/24/4-5/article-p766_9.xml?language=en

International Institute for Sustainable Development (IISD). (2021). Investor-State Disputes in the Fossil Fuel Industry: Trends and Implications for Climate Action. IISD Report. https://www.iisd.org/system/files/2022-01/investor–state-disputes-fossil-fuel-industry.pdf

Miles, K. (2010). Arbitrating climate change: Regulatory regimes and investor-state disputes. Climate Law, 1, 63-91. https://brill.com/previewpdf/view/journals/clla/1/1/article-p63_4.xml

Tienhaara, K. (2018). Regulatory Chill in a Warming World: The Threat to Climate Change Policy Posed by Investor-State Dispute Settlement. Transnational Environmental Law, 7(2), 229-250. https://www.cambridge.org/core/journals/transnational-environmental-law/article/regulatory-chill-in-a-warming-world-the-threat-to-climate-policy-posed-by-investorstate-dispute-settlement/C1103F92D8A9386D33679A649FEF7C84

Vastardis, A. Y. (2024). The Inherent Incompatibility of International Investment Law with a Just Green Transition. Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4958858

Cases:

Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Award (2017). https://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C3745/DS10808_En.pdf

Eco Oro Minerals Corp. v. Republic of Colombia, ICSID Case No. ARB/16/41, Award (2021). https://climatecasechart.com/non-us-case/eco-oro-minerals-corp-v-republic-of-colombia/

Rockhopper Exploration Plc v. Italy, ICSID Case No. ARB/17/14, Award (2022). https://climatecasechart.com/non-us-case/rockhopper-v-italy/

Vattenfall AB and Others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Award (2018). http://dev.energychartertreaty.org/details/article/vattenfall-ab-and-others-v-germany-icsid-case-no-arb1212/

Referencias de las imágenes utilizadas:

Imagen destacada: Wie procedeert, moet schaamteloos, geduldig en rijk zijn- “Quien litiga, debe ser desvergonzado, paciente y rico” – Rijksmuseum, Amsterdam. CCO https://commons.wikimedia.org/w/index.php?curid=85309285 

Segunda Imagen: Lit de Justice”- (Lecho de Justicia) del rey Luis XV de Francia- Museo de Versalles. CCO https://commons.wikimedia.org/w/index.php?curid=145920697