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

The document examines the failures of traditional investment treaties and the ISDS system, which it argues prioritize investor protection over public interest and sustainable development. It highlights the high financial costs of ISDS awards, the phenomenon of 'regulatory chill' where states avoid necessary environmental or social reforms to avoid litigation, and the lack of investor obligations. The report advocates for a shift toward treaties focused on investment facilitation and cooperation, the termination of outdated agreements, and a coordinated global effort to modernize investment governance.

• Investment treaties have largely failed to meet their primary goal of attracting more foreign direct investment (FDI), with little evidence supporting the claim that they increase investment inflows.
• The ISDS mechanism creates a 'regulatory chill' by dissuading governments from implementing necessary public interest reforms, such as environmental or labor standards, due to the threat of costly legal proceedings and high compensation awards.
• ISDS compensation awards are increasing in scale and frequency, with the average damages award rising from USD 98 million in the 2004–2013 decade to USD 256 million in the 2014–2023 decade.
• The current ISDS system is criticized for its lack of balance, as it allows investors to sue states while providing no corresponding obligations for investors toward the host state, particularly in older treaties.
• Investment treaties can hinder the energy transition by protecting fossil fuel investments that need to be phased out or by making the regulation of renewables more expensive through disputes over modified subsidies.
• There is a growing trend of states terminating outdated investment treaties or adopting new models focused on facilitation and cooperation rather than protection and dispute settlement, as seen in the approaches of Brazil and India.
• The ISDS process has fostered a specialized 'arbitration industry'—including lawyers, arbitrators, and litigation funders—that has a vested economic interest in maintaining the current system and opposing reform.

APA

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

Chicago

Ostřanský, Josef, Florencia Sarmiento, and Suzy Nikiema. Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? International Institute for Sustainable Development, 2025. https://www.iisd.org/system/files/2025-03/investment-treaty-and-isds-reform-questions-answers.pdf.

Wikipedia

{{cite report |last1=Ostřanský |first1=Josef |last2=Sarmiento |first2=Florencia |last3=Nikiema |first3=Suzy |title=Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed? |publisher=International Institute for Sustainable Development |date=March 2025 |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{ostansk2025why, author = {Ostřanský, Josef and Sarmiento, Florencia and Nikiema, Suzy}, title = {{Why Is Investment Treaty and Investor–State Dispute Settlement Reform Needed?}}, institution = {International Institute for Sustainable Development}, year = {2025}, month = mar, 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} }