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Investor–State Dispute Settlement (ISDS) has long been a cornerstone of international investment protection, designed to encourage cross-border investments by offering foreign investors a neutral forum to bring claims against host states. However, over the years, the system has faced increasing scrutiny over fairness, transparency, and its impact on national sovereignty. Today, ISDS reform has become one of the most critical conversations shaping international arbitration.
The surge in ISDS claims, especially in the last decade, exposed the tension between protecting investors and preserving the regulatory autonomy of states. Cases involving public health regulations, environmental protections, and climate change policies have brought to light the extent to which ISDS proceedings can affect public policy. Critics argue that the system unfairly favors investors, allowing them to challenge legitimate government actions while domestic businesses and citizens do not enjoy equivalent protections.
One major point of concern is the inherent imbalance in ISDS: only investors have standing to initiate claims, and only states can be sued. This asymmetry has led to perceptions that ISDS grants special privileges to foreign investors, creating a parallel system of justice that bypasses national courts. Furthermore, allegations of conflict of interest have arisen, given that arbitrators often serve both as counsel and as adjudicators in different cases, undermining confidence in the impartiality of the process.
Transparency has also been a significant challenge. Historically, ISDS proceedings were largely confidential, with case details, pleadings, and even final awards shielded from the public. In disputes involving public welfare or taxpayer funds, this lack of openness has rightly drawn criticism. Today, the demand for transparency is driving reforms that mandate public hearings, publication of awards, and increased participation from non-disputing parties.
Another deeply rooted concern revolves around the chilling effect ISDS can have on state sovereignty. Governments, especially in developing economies, have faced claims and enormous financial liabilities for enacting regulations in the public interest. The fear of costly litigation or damage awards sometimes discourages needed reforms in areas like environmental protection, energy policy, and public health.
In response to these criticisms, significant reform efforts are underway. UNCITRAL’s Working Group III has been instrumental in leading discussions on procedural reforms. Notable initiatives include the drafting of a Code of Conduct for arbitrators to address conflicts of interest and “double-hatting,” alongside efforts to establish appellate mechanisms to correct errors and ensure consistency across decisions.
A particularly bold proposal involves the creation of a Multilateral Investment Court, with permanent judges and an appellate chamber, aimed at replacing the current ad hoc arbitration system. While supported by several states, this proposal has met resistance from others concerned about cost, complexity, and sovereignty.
ICSID, the world’s leading institution for ISDS cases, has also revised its rules to reflect growing concerns. New measures promote expedited arbitration, mandate publication of awards by default, and require disclosure of third-party funding. These changes mark a clear shift towards greater transparency and efficiency.
Environmental, Social, and Governance (ESG) concerns are increasingly influencing ISDS. Climate change disputes, particularly those arising from states’ transitions away from fossil fuels, have resulted in a wave of investor claims. In response, several countries have withdrawn from the Energy Charter Treaty, signaling a broader reevaluation of existing investment treaties.
At the same time, new investment agreements are being drafted with stronger transparency rules, clearer definitions of investor rights, and provisions allowing states to safeguard public welfare without fear of disproportionate liability. These developments illustrate a growing recognition that ISDS must evolve to remain a legitimate and effective tool for resolving investment disputes.
The ongoing reforms are complex and politically sensitive. Different countries bring different priorities to the table, and finding common ground is a gradual process. Nevertheless, there is clear momentum toward reshaping ISDS into a system that balances the legitimate rights of investors with the sovereign rights of states and the public interest.
As the landscape continues to evolve, it is essential for all stakeholders — from investors and arbitrators to policymakers and civil society — to engage thoughtfully with the reform process. The future of ISDS will depend on whether it can adapt to new global realities while maintaining the principles of fairness, impartiality, and transparency that underlie international arbitration.
