States are increasingly addressing climate change not only through new climate laws and policies, but also by adapting existing environmental procedures. One of the most important ones is the environmental impact assessment (EIA). In many jurisdictions, EIAs are now being used to include climate impacts, including indirect and downstream (“Scope 3”) emissions.^[1] This reflects growing recognition that environmental decisions must account for the full, long-term impact of greenhouse gas emissions.

At the same time, stronger EIA requirements are starting to create tensions, potentially leading to ISDS claims. Decisions based on updated environmental assessments—especially in fossil fuel sectors—can make projects unviable and trigger claims under standards such as FET or indirect expropriation. Pending disputes, including Zeph v. Australia (II) and Woodhouse v. United Kingdom, show how climate-driven regulatory changes can lead to ISDS claims, even when they are based on evolving environmental obligations.

This raises a practical question: how can states strengthen EIAs to meet climate goals while reducing their exposure to investment treaty claims? This article argues that the key lies in how these decisions are designed and implemented. When EIA-based decisions are grounded in clear legal frameworks and supported by transparent, consistent, and well-documented processes, they are more likely to withstand legal challenge.

The analysis proceeds in three steps. First, it explains how EIAs are evolving to include climate impacts. Second, it shows how these changes affect investor claims at different stages of a project. Third, it outlines how states can defend such measures in practice and what this means for policy design.

Why EIAs Are Starting to Include Climate Impacts

EIA frameworks are changing. EIAs have gradually expanded beyond their original focus on local environmental effects. Many now incorporate social considerations through environmental and social impact assessments, while some frameworks also consider broader economic impacts (see, e.g., the Equator Principles and IFC Performance Standards). More recently, they are increasingly being used to assess broader climate impacts, including life-cycle and downstream emissions. The expectation is thus shifting: environmental assessments should capture a project’s full contribution to greenhouse gas emissions.

This trend is supported by developments at both international and domestic levels. International bodies have emphasized that states may need to assess climate-related risks associated with activities under their jurisdiction, including indirect and transboundary effects (see, e.g., ICJ Advisory Opinion on Climate Change [para. 298]; Inter-American Court of Human Rights Advisory Opinion on Climate Emergency [para. 359]; European Court of Human Rights Greenpeace Nordic v. Norway [para. 319]). At the same time, domestic courts in several jurisdictions have required that EIAs for fossil fuel projects consider emissions resulting from the eventual use of extracted resources. A prominent example is R (Finch) v. Surrey County Council, where the British Supreme Court held that downstream emissions must be assessed as part of the EIA process.

The key point is that EIAs are procedural tools. They do not dictate outcomes, but they shape how decisions are made. They require authorities to assess risks based on available science and explain their reasoning. This makes them flexible and able to adapt to new knowledge. For policy-makers, this is important. EIAs allow climate considerations to be integrated into decision making without automatically requiring a specific result. At the same time, they create a clear record of how decisions were reached, which becomes critical if those decisions are later challenged.

How EIAs That Include Climate Impacts Affect Investors

Investment treaty claims can arise from environmental assessment decisions generally. The inclusion of climate impacts—particularly downstream emissions—however, creates new situations in which projects may be refused, reassessed, or made subject to additional conditions. As a result, disputes may arise at different stages of a project and raise different legal issues.

The first situation concerns new projects. When EIAs include downstream emissions, projects that might once have been approved may now be refused. In these cases, investors typically bring claims under FET, arguing that the decision is arbitrary, inconsistent, or lacks transparency. Tribunals then look at whether the decision is properly reasoned, based on evidence, and applied consistently. Similar concerns have arisen in disputes such as Bilcon v. Canada, where the investor challenged the outcome of an environmental assessment process.

The second situation involves projects that have been approved but not yet implemented. Here, investors are more likely to rely on legitimate expectations under FET, and sometimes on indirect expropriation. They may argue that prior approvals created a stable basis for investment. Tribunals usually examine whether those expectations were reasonable, given the regulatory context, and whether the state acted proportionately and in a non-arbitrary way. Recent disputes, including Woodhouse v. United Kingdom, illustrate how climate-related regulatory changes affecting planned investments may give rise to such claims.

The third and most sensitive situation concerns projects that are already operating. If new EIA requirements lead to restrictions or closure, investors are more likely to bring claims under both FET and indirect expropriation. In these cases, tribunals focus on issues such as proportionality, due process, and whether the measure interferes with established rights, including whether it has retroactive effects. These issues are increasingly likely to arise as states tighten climate-related requirements for existing projects and operations.

These three situations also differ in terms of how easily states can defend EIA-based measures. Before turning to those scenarios, however, it is useful to consider how states can draw on evolving climate obligations and recent advisory opinions to support their position in investment disputes.

How States Can Use Climate Obligations in Their Defence

The discussion so far has focused on the types of claims investors may bring. The next question is how states can defend EIA-based measures when those claims arise. For states, the key challenge is to show that climate-related EIA requirements are not merely policy preferences but reflect broader legal obligations and emerging international standards.

The recent climate advisory opinions provide states with particularly useful arguments in this regard. The ICJ Advisory Opinion emphasizes that climate-related risks may require specific forms of environmental assessment and notes that EIAs may need to evaluate the downstream effects of proposed activities on the basis of the best available science (para. 298). This supports the view that assessing climate impacts, including foreseeable downstream emissions, forms part of the due diligence expected of states when authorizing activities that contribute to greenhouse gas emissions. The Joint Declaration of Judges Cleveland and Bhandari strengthens this point. They argue that states should take account of the cumulative climate effects of activities under their jurisdiction, including the foreseeable downstream emissions resulting from fossil fuel production (para. 15). In their view, states cannot properly assess environmental risk without considering these foreseeable consequences, which form part of their due diligence obligations under international law.

Other advisory opinions point in the same direction. The International Tribunal for the Law of the Sea Advisory Opinion confirms that environmental assessments may take into account cumulative impacts, recognizing that activities that appear insignificant in isolation may have significant effects when assessed together (para. 365). The Inter-American Court of Human Rights opinion goes even further, stating that projects with the potential to generate significant greenhouse gas emissions should be subject to a specific climate impact assessment and that climate impacts should be evaluated separately from other environmental effects (para. 359).

Together, these opinions provide states with authoritative support for integrating climate considerations into environmental assessment procedures. Arbitral practice shows that tribunals are willing to consider external legal regimes as evidence of the legitimacy and importance of regulatory objectives (see, e.g., Philip Morris v. Uruguay, para. 401). Climate-related advisory opinions can therefore help demonstrate that climate-enhanced EIAs are grounded in authoritative interpretations of states’ environmental obligations under international law. The stronger and more coherent the record showing how climate considerations were assessed and incorporated into the decision-making process, the easier it becomes for states to defend those decisions in investment arbitration.

Three Common Dispute Scenarios

The climate-related obligations discussed above can support state defences across all three situations identified earlier. Their practical significance, however, depends on the stage of the project and on how EIA-based measures are implemented.

For new projects, EIAs that include climate impacts provide a strong basis for defence. Investor rights are still conditional on approval, and most claims focus on arbitrariness or inconsistency. These risks are reduced when decisions are based on evidence, follow a clear process, and are applied consistently.

For approved but unimplemented projects, the situation is more complex. Investors may rely on legitimate expectations and, in some cases, indirect expropriation. However, regulatory changes can still be justified under the police powers doctrine in expropriation cases. This doctrine allows states to adopt non-discriminatory measures for legitimate public purposes—such as environmental protection—without paying compensation, as long as they act in good faith and follow due process (Chemtura v. Canada, para. 266; Magyar Farming v. Hungary, para. 366). The strength of the state’s position depends on how the reassessment is carried out. It should be transparent, consistent, and proportionate. It also helps if investors are given a chance to respond or adjust. In some cases, proportionality may require considering less restrictive options, such as allowing gaps in an EIA to be corrected rather than cancelling a project outright.

The most difficult cases involve projects that are already operating. Here, EIAs alone are usually not enough. Measures that significantly affect the value of an investment are closely scrutinized and may raise concerns about retroactivity. In such cases, broader approaches—such as phased transitions or compensation—may be required. That said, EIAs still matter in specific situations. Where projects require renewal, modification, or extension of permits, updated assessments can justify new conditions. These measures are forward-looking rather than retroactive. Investors should expect that continued operation depends on meeting updated environmental requirements. This reinforces the point that, at this stage, EIAs are most effective when used to adjust the conditions of continued operation, rather than to justify abrupt or retroactive interference.

Implications for Policy: Designing EIAs to withstand legal challenge

As EIAs evolve to include climate impacts, they are becoming a key point of interaction between environmental regulation and investment protection. This does not entirely eliminate the risk of ISDS claims, but it changes how that risk can be managed. For policy-makers, the key question is thus how to incorporate climate impacts into EIAs while minimizing exposure to investment treaty claims. Six points are particularly important.

• First, climate impacts should be built into EIA frameworks early, not added later during project review or disputes.
• Second, EIAs should be thorough and well-documented, clearly showing how climate impacts—including downstream emissions—have been assessed.
• Third, approval frameworks should avoid creating fixed expectations. They should allow for reassessment as law and science evolve.
• Fourth, similar projects should be treated consistently to reduce the risk of claims based on arbitrariness or discrimination. At the same time, states should make clear that evolving scientific knowledge and legal obligations may justify different outcomes over time.
• Fifth, policy-makers should distinguish between project stages. Measures affecting new or not-yet-implemented projects are generally easier to justify than those affecting existing operations, particularly where retroactive effects are involved.
• Sixth, EIA-based decisions should be clearly linked to international obligations and emerging legal standards.

Taken together, these measures can help states integrate climate considerations into environmental decision-making while reducing the risk of successful investment treaty claims.

Author

Nicolò Andreotti recently completed a PhD in international law at the University of Padua, Italy. His research focuses on international investment law, climate and energy governance, and the law of the sea.

^[1] “Scope 3” emissions refer to emissions generated by the eventual use of a project’s products, such as the combustion of extracted oil, gas, or coal.