The Conflict Between Sustainability and Investors’ Rights
Imagine a foreign company investing several billion forints in building a solar park in a host state. It decides to make the investment because the state promises a favourable long-term purchase price and a predictable regulatory environment. A few years later, however, the government significantly reduces the support, citing declining technology costs and the increasing burden of the support scheme.
According to the state, it has merely amended the rules in accordance with the public interest. The investor, however, argues that the change has disrupted the economic and legal environment on which the investment was based. Who should bear the costs of the green transition in such a situation?
A similar dilemma arises in relation to fossil fuel investments. What happens when a state closes a coal-fired power plant, revokes an extraction licence or terminates fossil fuel subsidies in order to meet its climate targets? How far does the state’s regulatory freedom extend, and at what point does a measure become an infringement of a foreign investor’s rights?
This issue concerns more than states and lawyers. Regulatory risk directly affects investment decisions, the bankability of projects and the returns expected by companies. For states, the question is what budgetary and legal risks may arise from climate protection measures. Ultimately, an uncertain regulatory environment may also affect energy prices, the use of public funds and the pace of green investment.
How Much Stability May an Investor Expect?
One of the fundamental questions of investment protection law is the extent to which a host state is required to provide foreign investors with a stable legal and regulatory environment.
Naturally, it is important for an investor that the rules underlying its investment should not be changed overnight, unpredictably or arbitrarily. An energy project may take several decades to generate a return, and financing decisions are therefore based to a significant extent on expected regulatory conditions.
The investor’s position may be particularly strong where the state has expressly undertaken not to amend certain conditions for a specified period. Such undertakings are known as stabilisation clauses. Their breach may give rise not only to contractual claims but, in certain circumstances, to investment protection claims as well.
More frequently, however, no such explicit state promise exists. In such cases, the investor may argue that an unexpected regulatory reversal by the state violates the requirement of fair and equitable treatment under the applicable investment treaty. This requirement is commonly referred to as the fair and equitable treatment, or FET, standard.
Regulatory stability, however, cannot mean the complete freezing of the legal system. No investor may reasonably expect a state to refrain from amending its energy, tax or environmental regulations under all circumstances for several decades. This is particularly true in the field of climate policy, where technological developments, changes in energy markets and international obligations require continuous adaptation.
The decisive question is therefore generally not whether the state amended the regulatory framework, but how predictably, consistently and proportionately it did so.
What Can We Learn from the Reform of Renewable Energy Support Schemes?
During the initial expansion of solar and wind energy, numerous states encouraged investment through long-term support schemes. One of the best-known forms of support was the feed-in tariff, under which the state guaranteed a fixed price for electricity generated from renewable energy sources for a specified period.
These support schemes played an important role in the growth of the renewable energy sector. Over time, however, technology costs declined, while some support schemes placed an increasing burden on state budgets or energy consumers. Several countries therefore reduced subsidies, introduced special taxes, changed the method used to calculate tariffs or completely restructured the previous system.
These measures directly affected investors’ expected revenues. As a result, investment protection proceedings were initiated against several states. Between 2016 and 2024, for example, 52 publicly known claims were brought against Spain in connection with changes to its renewable energy incentive scheme. Similar disputes also affected, among others, the Czech Republic, Romania, Italy and Bulgaria.
These cases provide an important warning for both sides. The state must retain the ability to adapt its support policy to changing economic and technological circumstances. At the same time, the more specific and long-term the promises made to induce investment, the more difficult it is to amend them abruptly without appropriate transitional arrangements.
The green transition is therefore not only about reducing reliance on fossil energy. Reforming regulations that support renewable energy may also create serious investment protection risks.
When Legal Risk Discourages Climate Policy
The other side of the conflict concerns the gradual phase-out of fossil fuels. In order to meet climate targets, states must restrict investments in coal, oil and natural gas, revoke certain licences, introduce stricter emissions rules and gradually eliminate fossil fuel subsidies.
These measures may, however, affect assets of considerable economic value. Some fossil fuel assets falling within the scope of investment treaties may prematurely lose their economic value as a result of the green transition. In such cases, investors may claim compensation from the state.
The Intergovernmental Panel on Climate Change (IPCC) also warned in its 2022 report that the investor–state dispute settlement system may pose a risk to the implementation of state measures intended to mitigate climate change.
The problem is not limited to the possibility that a state may ultimately be ordered to pay compensation. The mere possibility of proceedings may entail considerable costs, several years of litigation and political uncertainty. As a result, states may postpone, weaken or completely abandon otherwise justified climate protection measures.
This phenomenon is known in the literature as regulatory chill. The risk is particularly significant where an investment treaty grants broad rights to investors while failing to define clearly the degree of regulatory space available to the state when adopting climate policy decisions in the public interest.
Excessive legal risk may therefore not only make the green transition more expensive but also slow it down.
How Can the Conflict Be Reduced?
States may seek to reconcile investment protection with climate policy objectives in several ways.
The most radical solution is withdrawal from investment treaties. In 2024, the European Union notified its withdrawal from the Energy Charter Treaty, which took effect on 27 June 2025. Several Member States had already decided to withdraw because they considered that the Treaty in its previous form did not provide sufficient regulatory space for urgent climate policy measures.
A less radical option is to define investment protection obligations more precisely. Treaties may specify more clearly, for example, when a state measure violates the requirement of fair and equitable treatment and when it may constitute indirect expropriation. This may reduce the risk that a bona fide and non-discriminatory climate protection measure will automatically be regarded as a breach of the treaty.
Treaties may also contain general public-interest exceptions. These may allow a state to justify a measure by invoking the protection of human health, the environment or natural resources. Such exceptions, however, do not always clearly exclude an obligation to pay compensation. In Eco Oro v Colombia, for example, the majority of the arbitral tribunal interpreted the applicable treaty as meaning that the public-interest exception could permit the measure to remain in force but would not necessarily exclude the payment of compensation to the investor.
This points to a more targeted solution: the climate carve-out.
The Climate Carve-Out as a Targeted Solution
A carve-out removes specified measures or sectors from the scope of an investment treaty from the outset or precludes the initiation of investor–state dispute settlement proceedings in relation to them.
This represents an important difference from general exceptions. A general exception ordinarily operates as a defence: the state argues that although its measure may prima facie affect or infringe one of the investor’s rights, it is justified by an important public interest. A carve-out, by contrast, identifies in advance the areas to which investment protection obligations, or the arbitral proceedings associated with them, do not apply.
The principal advantage of a climate carve-out is predictability. If a treaty clearly provides, for example, that investment protection proceedings may not be initiated in relation to the revocation of fossil fuel extraction licences, carbon pricing or the termination of fossil fuel subsidies, both the state and the investor can assess the legal risks more accurately before the investment is made.
The exclusion may apply to an entire sector, such as investments connected with fossil fuels. The advantage of this approach is clarity: it is relatively easy to determine whether an investment falls within the excluded category. Its disadvantage is that it may be overly rigid and may exclude from protection measures that have no direct connection with climate protection.
Another possibility is a purpose-based exclusion covering all state measures aimed at reducing greenhouse gas emissions or mitigating climate change. This is a more flexible solution, but it may give rise to disputes over whether a particular measure genuinely pursued a climate protection objective.
A functional definition could combine the advantages of the two approaches. The treaty could generally exclude from the scope of the investment protection regime measures intended to reduce or stabilise emissions and supplement this definition with a non-exhaustive list of examples. The list could include, among other things:
- the refusal or revocation of licences for the exploration or extraction of fossil fuels;
- the gradual phase-out of coal-, oil- and natural gas-based energy production;
- the introduction of carbon taxes and other emissions-pricing systems;
- the termination of subsidies connected with fossil fuels.
The modernisation of the Energy Charter Treaty has moved partly in this direction. The flexibility mechanism allows contracting parties that apply it to exclude certain fossil fuel investments from the scope of protection. The modernised text was adopted by the Energy Charter Conference in December 2024, but the application of the amendments is neither automatic nor uniform among all contracting parties.
A carve-out does not, in itself, solve every problem. Imprecise wording may result in further interpretative disputes, while excessively broad application may unjustifiably reduce the legal protection available to investors. If appropriately designed, however, it can draw a clearer distinction between unpredictable or discriminatory state intervention and bona fide climate regulation adopted in the public interest.
Three Lessons for Investors and States
1. Investors’ rights cannot freeze the regulatory framework
Investors may legitimately expect predictable and fair conduct from states, but they cannot expect energy and climate policy rules to remain unchanged for several decades.
2. The legal risks of the green transition represent real economic costs
Investment protection proceedings may affect state budgets, the bankability of investments and the timing of climate protection measures. Legal risks must therefore be taken into account from the outset when regulations and projects are being designed.
3. Clear treaty rules serve the interests of both parties
A properly drafted climate carve-out can preserve the state’s regulatory space while allowing investors to foresee which measures fall outside the scope of the investment protection regime.
The conflict between the green transition and investment protection cannot be resolved by completely subordinating one interest to the other. The protection of foreign investment remains an important economic objective and an essential element of legal certainty. At the same time, the investment protection regime must not prevent states from adopting, in a timely manner, the measures necessary to mitigate climate change.
The real task is not to abolish investor protection, but to define more precisely where the investor’s protected expectations end and where the state’s indispensable responsibility for climate policy begins.
The author of this article is Igor Márk Beznoszka, a student at Mathias Corvinus Collegium (MCC).
Legal Disclaimer
This document has been prepared by Gránit Alapkezelő Zrt. (registered office: 1134 Budapest, Váci út 17; company registration number: 01-10-046307) for marketing and informational purposes. Accordingly, it has not been produced in accordance with legal requirements designed to promote the independence of investment research. Nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not constitute investment research or investment advice. Any data presented refers to past performance, and past performance is not a reliable indicator of future results. Each investor must make investment decisions at their own discretion and responsibility.
