Across the world, secretive courts are lowering environmental standards and awarding polluting companies billions of dollars of compensation taken out of the taxpayer’s pocket. Matt Grady from fairtrade campaigners Traidcraft explains how Brexit could be an opportunity to break the cycle.

Readers of a certain age will recognise this quote: “You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes.”

This is the mysterious choice facing Neo in the movie The Matrix. Many people get through life metaphorically taking the blue pill, burying their head in the sand and avoiding the big challenges of society. Others opt for the red pill, actively trying to understand and tackle the barriers to a better world.

Regardless of whether you’re a blue or red pill kind of person, if I was to tell you that efforts to tackle climate change and protect the environment were undermined by secret courts it might pique your interest a little. If I told you that wealthy multinational corporations were able to challenge democratically elected government policies, even when implemented in the public interest, you might be lured a little deeper into the Matrix to find out more.

What if you discovered that not only could they have the policies overturned but that they might also successfully secure billions from public coffers in compensation? You might begin to wonder if I was making it up.

Unfortunately I’m not. There really are exclusive, secret tribunals where investors can sue if they think government policies might impact on their profits.

These Investor to State Dispute (ISDS) mechanisms include tribunals which are arbitrated by for-profit lawyers who one week could be advising a claimant and the next expected to give an unbiased verdict in a claim. A cynical mind might suggest there’s a connection between the facts that only investors, not states, can raise claims; that arbitrators are paid significant sums of money to sit on tribunal panels and that the majority of tribunals result in an award for the claimant or an early settlement.

Exposure to ISDS claims is an expensive business — even when a government successfully defends a case it is estimated to cost around $8m to defend. Where the government in question is a developing country with relatively small public budgets it’s easy to see how just the threat of a claim can stop a policy dead in its tracks.

As well as attacking government policies implementing minimum wages, protecting the right to water, and reducing smoking, companies have used this mechanism to challenge environmental protection standards.

After introducing strict regulations to limit the impact of industrial factories on the Elbe river, the Hamburg government was sued by Swedish company Vattenfall. It subsequently lowered environmental standards, despite the stricter requirements being in line with EU regulations to protect fish.

Vattenfall and Germany is a familiar theme.

When the German government decided, in response to the Fukushima disaster, to phase out nuclear power it found itself being sued by the Swedish company for over $5bn dollars. This tribunal case hasn’t been concluded yet but a bit like a Matrix glitch, the same story plays over time and again; governments are sued for initiatives aiming to protect the natural environment.

The Tanzanian government is being sued for refusing a permit for a sugar plantation that could have damaged the Saadani National Park. Lone Pine Resources is seeking damages of over $100m from the Canadian government as a result of a moratorium on fracking. TransCanda Corporation raised a multibillion dollar claim against the USA as a result of President Obama’s decision to deny a permit for the Keystone XL pipeline. Ecuador was ordered to pay Occidental Petroleum over $2bn by a tribunal following a dispute.

And the UK is a leading player when it comes to ISDS. It has over 100 bilateral investment treaties in place, most of those are with vulnerable developing countries and contain ISDS clauses.

The inclusion of investor protections within these treaties was originally intended as a reassurance to investors in the period following World War II when they faced a real risk of a rogue government expropriating their assets. But a study by the UN Conference on Trade and Development (UNCTAD) revealed that these treaties appear to have no effect on attracting investment into developing countries.

In recent years the number of frivolous claims has surged as increasingly creative interpretations of treaty provisions are used to argue for compensation. Until 2000, the total of known ISDS cases was around 50. Fast forward to this year and that number is now over 800 with close to 100 new cases registered in each year since 2015.

Investment treaties do not meet their primary objective of attracting investment yet they expose governments to significant risk. It’s little wonder that the OECD, UNCTAD, the EU and a host of countries have acknowledged that ISDS has no legitimacy and is no longer fit for purpose.

Initial proposals by the European Commission have begun tinkering around the edges of the problem but to date have not addressed the substantive issues inherent in allowing selected sections of society the ability to challenge government policies.

Decades of intergovernmental negotiations have resulted in the adoption of the Paris Climate Agreement and significant steps by governments to protect the environment and reduce climate change. There is overwhelming scientific consensus and wide public understanding of the importance of these issues, yet through tribunal mechanisms it is possible for wealthy investors to challenge government initiatives enacted in the public interest.

As the UK government continues down the path of pulling the UK out of the EU it faces its own blue pill, red pill moment.

Brexit necessitates the government defining a new trade policy — this should include whether it supports the inclusion of ISDS within treaties. The government could opt for the blue pill, carry on and pretend there’s no problem. Or it can take the red pill, it can join the wider international community, and seek a new way forward that better balances the interests of society and protections for investors. 

Matt Grady is Policy and Advocacy Adviser for Traidcraft. Find him on twitter at @MattGradyTwit and follow Traidcraft at @TraidcraftDepth.

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