Shut down the World Bank’s 'corporate court'
The World Bank Group is co-hosting its Spring Meetings alongside the International Monetary Fund in Washington, D.C., this week, with delegates and observers from around the world engaging in discussions on debt, economic recovery and climate change. As in previous years, protesters will also descend on the capital to highlight the inadequacies of the bank’s efforts on these issues and to demand change.
This year, activists plan to focus on a relatively unknown arm of the bank, the International Center for the Settlement of Investment Disputes. Sometimes referred to as a “corporate court,” it is the most utilized forum for investor-state dispute settlement, the controversial process allowing foreign investors to bypass local courts and sue governments in international arbitration.
Relying on vague rules, arbitrators can award investors hundreds of millions and even billions of dollars in “lost future profits” when policy changes impact their investments.
Developing countries, including those that depend on development finance from the World Bank, have borne the brunt of the impact of investor-state dispute settlement, as the system primarily protects multinational corporations that invest in the Global South.
In 2019, an International Center for the Settlement of Investment Disputes tribunal ordered Pakistan to pay a company $5.8 billion in lost profits for a mine that had never been built. The award was released less than two weeks after the IMF had agreed to a $6 billion loan to help Pakistan navigate an economic crisis.
Honduras recently announced it would leave the International Center for the Settlement of Investment Disputes after being hit with a $10.8 billion claim from the U.S. company Prospera over the repeal of a law allowing special economic zones.
More than 30 U.S. legislators, including Sen. Elizabeth Warren (D-Mass.), have urged the U.S. trade representative and the secretary of State to intervene in support of Honduras. Meanwhile, 85 leading economists have commended Honduras for its withdrawal as a “critical defense of Honduran democracy and an important step toward its sustainable development.”
Although poorer countries are hit the hardest, developed countries are not immune from investor-state dispute settlement. And, increasingly, investors are challenging efforts by North American and European countries to meet their commitments under the Paris Agreement.
The U.S. government is battling a $15 billion claim from TC Energy, the company behind the Keystone XL Pipeline. The Biden administration blocked that project because of the risks it posed to the environment and because it was inconsistent with national climate objectives. Canada is facing a $20 billion claim from U.S. firm Ruby River Capital over the rejection of a proposed liquified natural gas facility due to its assessed environmental and climate impacts.
Climate concerns have also led many European countries and the United Kingdom to withdraw from the Energy Charter Treaty, which relies on the International Center for the Settlement of Investment Disputes, among other fora, to handle investor claims. Italy lost a $260 million energy charter treaty case concerning a ban on offshore oil drilling in 2022 and the Netherlands and Germany have both been sued by coal power operators over their energy transition plans.
Cases are likely to continue piling up. Our research published in Science shows that if countries banned new oil and gas developments in line with what climate science indicates is necessary to avoid the worst impacts of climate change, aggrieved firms could launch claims of upwards of $340 billion, effectively chilling ambitious and necessary climate policy.
All this is taking place while the World Bank Group develops a roadmap “to better address the scale of development challenges...including climate change.” Despite the shared vision of different group members, there is a staggering lack of policy coherence. One arm of the bank is purportedly working to address the climate finance needs of countries as another arm facilitates redirecting that finance to private multinational corporations, including the fossil fuel firms that are the principal cause of the climate crisis.
The International Center for the Settlement of Investment Disputes is an outdated institution that does not contribute to economic development or address global challenges like climate change. Countries can opt out, as Honduras did, but many may fear this will generate a backlash from the international community.
A coordinated exodus by all members would bring much-needed consistency to the various mandates of the World Bank and signal that protecting foreign investors is incompatible with the group’s primary mission.
Although shutting down the International Center for the Settlement of Investment Disputes would not rid the world of investor-state dispute settlement, it would be a major milestone on the path to boosting shared prosperity on a livable planet for all in line with the World Bank’s mission.
Kyla Tienhaara is the Canada research chair in economy and environment, an associate professor in the School of Environmental Studies and Department of Global Development Studies at Queen’s University, and a non-resident fellow with the Global Economic Governance Initiative at the Boston University Global Development Policy Center. Rachel Thrasher is a researcher with the Boston University Global Development Policy Center’s Global Economic Governance Initiative.