Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? Questions & answers

This report by the International Institute for Sustainable Development (IISD) examines the role of investment treaties and Investor-State Dispute Settlement (ISDS) mechanisms in global governance. It argues that traditional investment treaties, which prioritize investor protection, often fail to attract foreign direct investment (FDI) and instead create significant financial and legal burdens for host states, potentially hindering sustainable development and climate action.

• There is a significant annual investment gap of approximately USD 4 trillion in developing countries to achieve the United Nations Sustainable Development Goals (SDGs), with half of that gap specifically in the clean energy sector.
• Traditional investment treaties have largely failed to meet their primary goal of attracting more foreign direct investment (FDI), and there is little to no evidence that they actually help attract such investment.
• The ISDS mechanism allows foreign investors to bypass domestic courts and sue host states before international tribunals, which can lead to 'regulatory chill' where governments are dissuaded from implementing public interest reforms due to the threat of high compensation awards.
• Compensation awards in ISDS are increasing in size and frequency; the average damages award rose from USD 98 million in the decade prior to 2014 to USD 256 million between 2014 and 2023.
• ISDS can increase the cost of the energy transition by protecting fossil fuel investments or penalizing the modification of renewable energy subsidies. For example, in Rockhopper v Italy, a British oil company was awarded over 240 million including interest after being denied an offshore oilfield licence.
• Current ISDS processes are criticized for being lengthy and costly, with an average case duration of 3.5 years and average legal costs of USD 4.7 million for states and USD 6.4 million for investors.
• Recent trends show a shift away from the traditional investment protection model, with some states terminating treaties or adopting new models focused on investment facilitation and cooperation, such as Brazil.
• The report advocates for an ambitious, holistic reform of investment law that moves beyond piecemeal ISDS changes to prioritize public interest, sustainability, and the dismantling of outdated legal instruments.

APA

International Institute for Sustainable Development (n.d.). Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? Questions & answers. https://www.iisd.org/system/files/2025-03/investment-treaty-and-isds-reform-questions-answers.pdf

Chicago

International Institute for Sustainable Development. Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? Questions & answers. n.d. https://www.iisd.org/system/files/2025-03/investment-treaty-and-isds-reform-questions-answers.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? Questions & answers |url=https://www.iisd.org/system/files/2025-03/investment-treaty-and-isds-reform-questions-answers.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopmentndwhy, author = {{International Institute for Sustainable Development}}, title = {{Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? Questions \& answers}}, institution = {International Institute for Sustainable Development}, url = {https://www.iisd.org/system/files/2025-03/investment-treaty-and-isds-reform-questions-answers.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }