In August, a Singapore-based investor filed a case against the UK government after the High Court in London quashed a proposal for a new coal mine on climate grounds.

This is the first time the UK has been sued by a fossil fuel company as a result of climate policy under the investor-state dispute settlement (ISDS) – a mechanism that allows corporations to sue governments over regulatory decisions they argue will decrease the value of their investment and harm their profits.

The claim – brought under the 1975 UK–Singapore Bilateral Investment Treaty – leaves the UK government and taxpayers exposed to paying millions of pounds in compensation to the investor. Held behind closed doors, ISDS cases are long and expensive. ‘I would say the UK is looking at five plus years and at least £5m in legal fees,’ says Anke Meier, Co-Chair of the ESG Arbitration Subcommittee of the IBA Arbitration Committee.

This is one of a growing number of cases being brought by fossil fuel companies against states adopting climate and environmental regulations that threaten their business. Critics say that ISDS provisions are blocking climate action. As of June 2024, $113.87bn had been awarded to investors through the mechanism, according to the Global ISDS Tracker. Fossil fuel companies have been a major beneficiary, receiving over $80bn of taxpayer money since 1998, according to research from the International Institute for Environment and Development and the Columbia Center on Sustainable Investment.

But the mechanism has become a significant headache for countries taking measures to shut down large polluting infrastructure such as coal, oil and gas operations. ‘This is a very big dilemma that governments find themselves in: they take measures to support climate legislation and the consequences are that they subject themselves to damages claims for expropriation or unfair treatment,’ says Meier, who’s a partner in the Frankfurt office of law firm Noerr.

The case at hand follows a ruling by the UK’s High Court in autumn 2024. The Court ruled that the decision of the then-Secretary of State in allowing the coal mine to proceed was unlawful, including because emissions from burning the coal should have been taken into account. The planning application was later withdrawn.

The investors claimed they were denied fair and equitable treatment, suffered indirect expropriation and faced discrimination. A spokesperson for the UK government, meanwhile, told Global Insight that it doesn’t comment on ongoing cases.

Court precedent doesn’t apply in investment arbitration. ‘But tribunals very much pay attention to other cases and would assess whether or not to distinguish their case from other cases,’ says Meier. If the UK wins, it could send ‘a strong signal’ that governments are able to defend their climate policies against investor backlash, she adds. If the UK loses, however, some fear the result could have a chilling effect on the government taking further measures to phase out fossil fuels.

The implications of ISDS on climate policy are extremely contentious. In 2023, the former UN Special Rapporteur on human rights and the environment, David Boyd, warned that the system had become ‘a major obstacle to the urgent actions needed to address the planetary environmental and human rights crises.’ Campaign groups such as Global Justice Now have called on the UK to remove ISDS provisions from all of its trade and investment treaties. The UK government declined to comment when this point was put to it by Global Insight.

ICSID data shows that companies in the oil, gas and mining sectors filed almost half of new ICSID cases in the 2025 financial year.

Cases that specifically relate to states being sued after taking action to phase out fossil fuels amount to a small proportion of the ICSID’s caseload. Such cases include a situation where the Italian government was successfully sued after it banned oil drilling within 12 miles of the shoreline.

In the summer of 2024, EU Member States announced their exit from the Energy Charter Treaty – one of the main sources of ISDS claims – citing its incompatibility with the bloc’s climate goals. Earlier in 2024, the UK also exited the Treaty on similar grounds.

‘ISDS makes climate action more expensive,’ says Thomas Schultz, Associate Director of the Centre for International Governance and Dispute Resolution. ‘Every time such action is considered, the government has reason to check whether it could be sued by a foreign investor.’

Others argue that investor compensation will be an unavoidable part of the costs of the energy transition, when states decide that their climate obligations should be put before their commitments to private investors. The ISDS mechanism is also needed to protect climate investments, they say.

For Schultz, ISDS has made the world both richer and more difficult to govern. If societies want to continue to spur economic growth while protecting public goods, then ISDS provisions should be ‘carefully calibrated’ with environmental and climate considerations – although that could take decades to achieve, he says.

Meier’s view is that the ISDS system is not only needed to protect the rights of investors but is also functioning. But she agrees that reform is desirable. As countries continue to include investment protection in international treaties, the rights of investors relating to the protection of the environment could be more narrowly defined and restricted, she explains. Arbitration could be made more climate conscious. ‘It is very well established in international law that sovereign states do have a right to regulate. The question is how […] tribunals interpret that in these cases,’ says Meier.

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