THE AUTHORS:
David Molina Coello, International Arbitration Associate, Bullard Falla Ezcurra +
Inmaculada Posada Gil, International Arbitration Associate, Bullard Falla Ezcurra +
Introduction
State power to regulate environmental matters as a defense in treaty-based Investor State Dispute Settlement (“ISDS”) has gone through several recurring sagas. Applying diverse treaties, arbitral tribunals may encounter provisions that explicitly preserve this power, or texts that are silent on the possibility altogether. Although accepted in theory, the question remains whether arbitral tribunals are inclined to apply State regulatory power under Customary International Law (“CIL”), in the absence of explicit treaty language.
This blog post explores arbitral jurisprudence to determine whether tribunals have referred to CIL in such circumstances, and whether investment jurisprudence is likely to converge with the International Court of Justice’s (“ICJ”) Advisory Opinion on the Obligations of States in respect of Climate Change, Advisory Opinion, 23 July 2025 (“Advisory Opinion”), which has made it clear that States have preventive and precautionary environmental obligations under CIL.
Treaty Generations and the Treatment of Environmental Regulation in Investment Arbitration
Literature often classifies International Investment Agreements (“IIAs”) into three generations, depending on the evolution of their provisions over time. First-generation treaties, predominant from the 1960s through the 1990s, were succinct, protection-oriented, and contained no provisions dealing with the environment or the host State’s regulatory power. Second-generation treaties, emerging in the late 1990s and early 2000s, incorporated general exceptions —allowing States to adopt certain public-interest measures— but did not yet include explicit right-to-regulate provisions. Third-generation treaties, beginning in the 2010s, adopted comprehensive right-to-regulate provisions, sustainability-related chapters, and detailed environmental carve-outs from investment protection.
Tribunals have dealt with environmental measures across all generations of IIAs. The tendency suggests that tribunals applying first-generation IIAs were often challenged to locate environmental concerns within the treaty’s investment-protection framework, while those applying modern treaties often rely on express treaty provisions.
First-Generation Treaties.
Under first-generation treaties, tribunals addressed environmental measures in the absence of treaty provisions, rendering uneven and frequently criticized decisions. In Tecmed v. Mexico, decided under the Mexico – Spain BIT (1995), the dispute arose from Mexico’s refusal to renew the permit for a hazardous-waste landfill, a decision justified on environmental and public-health grounds due to community concerns and regulatory noncompliance. The tribunal accepted that such environmental regulation fell within a State’s normal powers under CIL but applied a strict proportionality test focused on the measure’s economic impact and implementation. The tribunal ultimately found that Mexico’s refusal to renew the permit, despite its environmental rationale, amounted to an indirect expropriation.
In Copper Mesa v. Ecuador, decided under the Canada – Ecuador BIT (1996), the tribunal resolved the dispute on proportionality and minimum standard of treatment grounds without engaging with the discussion of the State’s regulatory power to adopt environmental measures under CIL.
These cases reflect hesitation not about the existence of a defense allowing States to adopt environmental measures under CIL, but about its implementation in the absence of a treaty framework.
Second-Generation Treaties.
Second-generation treaties provided general exceptions for regulatory powers, but tribunals failed to rely on them consistently.
In Metalclad v. Mexico, the tribunal held that the environmental purpose of the measure was irrelevant to the expropriation analysis, emphasizing that Article 1110 of the North American Free Trade Agreement (1992) (“NAFTA”) turns on the measure’s effects rather than its intent. By declining to consider Mexico’s environmental justification and focusing solely on the impact on the investment, the tribunal effectively left no room for an environmental defense under NAFTA Chapter 11.
In Methanex v. USA, the NAFTA tribunal took a notably bold approach, declaring that bona fide, nondiscriminatory environmental regulation cannot constitute expropriation because it falls squarely within a State’s inherent police powers under CIL.
In Chemtura v. Canada, applying the same treaty, the tribunal echoed this reasoning, upholding Canada’s pesticide measures as a good-faith exercise of regulatory authority consistent with international norms. However, tribunals did not uniformly follow this approach.
In Bear Creek Mining v. Peru, despite general exceptions in the Free Trade Agreement (“FTA”) between Canada and the Republic of Peru (2009), the tribunal refrained from characterizing environmental protection as a rule deriving from CIL. It recognized Peru’s police powers but grounded its analysis primarily in due process and legitimate expectations, ultimately declaring that the revocation of the concession was disproportionate. Overall, awards interpreting second-generation treaties confirm the status of the State power-to-regulate doctrine under CIL but apply that authority inconsistently due to the absence of a coherent interpretive framework.
Third-Generation Treaties.
Third-generation treaties provide tribunals with a clear framework to assess bona fide environmental measures.
For example, the 2024 Red Eagle Exploration v. Colombia award, rendered under the Canada – Colombia FTA (2008), expressly applied the treaty’s State regulatory-power provision and a defined framework to assess environmental-related measures. The dispute arose after Colombia restricted mining activities in the Chocó Andino, a highly sensitive ecosystem that is now a protected area. The tribunal held that the challenged measures fell squarely within the State’s police powers as preserved in Annex 811. Crucially, the tribunal noted that the “rare circumstances” that may limit the State’s regulatory power, such as the State having undertaken a specific commitment to the investor, were not established on the facts. Lacking a specific commitment from Colombia, the expropriation claim, including the argument based on legitimate expectations, was dismissed. Because no breach of Chapter Eight was established, the tribunal found no need to address the general environmental exception in Article 2201(3).
Applying third-generation treaties, tribunals have relied almost entirely on express right-to-regulate clauses, leaving little reason to engage with CIL. By contrast, cases applying first and second-generation treaties show notable hesitation, not because tribunals questioned the existence of environmental CIL, but because earlier treaties provided no interpretive framework through which to operationalize it.
CIL and the Emergence of an Autonomous Environmental Defense
The issue remains whether tribunals must look beyond the treaty to determine whether environmental measures are authorized under CIL. Under Article 38 of the ICJ Statute (1945), CIL is a primary source of international law. To interpret any treaty, Article 31(3)(c) of the Vienna Convention on the Law of Treaties (1969) requires interpreters to consider “relevant rules of international law”. Tribunals are therefore not merely permitted, but obliged, to engage with CIL when assessing State regulatory measures.
Environmental protection has long been recognized as embedded in CIL. In Pulp Mills on the River Uruguay (Argentina v. Uruguay), the ICJ held that the principle of prevention, grounded in due diligence, forms part of “the corpus of international law relating to the environment”, reiterating earlier statements in the Advisory Opinion on the Legality of the Threat or Use of Nuclear Weapons. These principles bind States independently of treaty language and, where relevant, inform the interpretation of treaty obligations.
As the ICJ emphasized in Continental Shelf (Libyan Arab Jamahiriya/Malta), adjudicators must determine whether treaty provisions reflect customary norms binding independently of the treaty—a step investment tribunals have not undertaken consistently.
The Advisory Opinion and the Future of Environmental Defenses in ISDS
The Advisory Opinion has the potential to be a turning point in the tendency not to engage with State regulatory power under CIL when assessing environmental measures in the absence of treaty-specific provisions. Responding to a request from the United Nations General Assembly, the ICJ concluded that CIL imposes binding preventive and precautionary obligations, including duties to regulate private actors whose emissions risk causing significant transboundary harm.
The Advisory Opinion reframes environmental due diligence as a legal obligation rather than a matter of policy discretion. By providing a clear articulation of customary environmental obligations, it establishes a robust baseline that investment tribunals must consider. If environmental regulation is mandated by CIL, then measures adopted in furtherance of such obligations possess an inherent legitimacy that does not hinge on the absence of treaty carve-outs.
Final Remarks
Treaty-based ISDS arbitral tribunals must apply the CIL standard on State regulatory power to assess environmental measures affecting foreign investments.
The Advisory Opinion on climate change helps narrow the mismatch in arbitral jurisprudence. By holding that preventive and precautionary environmental obligations arise under CIL—and bind States irrespective of treaty wording—the Advisory Opinion provides a standalone rule applicable across all treaty generations. It also clarifies that States must adopt reasonable, good-faith, and proportionate regulatory measures, including regulation of private actors, to prevent significant environmental or climate-related harm. This standard mirrors the logic of third-generation treaties.
In this way, the Advisory Opinion supplies the missing framework for disputes under first and second-generation treaties. Although no treaty-based investment tribunal has yet relied on the Advisory Opinion, its implementation serves the principle that all relevant rules of international law, including CIL, must be considered when interpreting a treaty. In the authors’ view, integrating the Advisory Opinion into ISDS reasoning is not a question of “if” but of “when”. Once tribunals begin incorporating the Advisory Opinion into their reasoning, the effective implementation of environmental defenses will no longer face the issue of absent treaty carve-outs. They will rest on a stable and authoritative foundation under CIL. The architecture is now firmly in place; it is for ISDS tribunals to embrace this trajectory.
ABOUT THE AUTHOR
David Molina Coello is a mid-level International Arbitration Associate at Bullard Falla Ezcurra+ in Madrid, with previous experience at Three Crowns LLP in London (2022–2023) and Jaramillo Dávila Abogados in Ecuador (2017–2021). He also lectures on Advanced Legal Writing for International Litigation at ICADE, Madrid. He holds the MIDS LL.M. from Geneva (Distinction equivalent) and an LL.B. from Universidad Hemisferios in Quito (summa cum laude). Second place in the 2023 Young ITA Writing Competition and a member of the Ecuadorian Arbitration Institute, his work focuses on AI-driven innovation in arbitration, investment and commercial disputes, and international law.
Inmaculada Posada Gil is an International Arbitration Associate at Bullard Falla Ezcurra+ in Madrid. She holds both an LL.B. and a Master’s Degree in Legal Practice from Universidad Carlos III de Madrid (qualification to the Spanish Bar pending). Co-coach of the UC3M Moot Arbitration Team for the XVIII Edition of Moot Madrid, she won first place for Best Award at the XVII Edition of the competition.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
