Sovereignty vs Investment: The Emerging Reconfiguration of Investor–State Arbitration

A shifting foundation: from stability to structural tension?

For a considerable time, investor–state arbitration appears to have rested on a relatively stable framework: capital moves, states compete for that capital, and legal frameworks ensure that once an investment is made, the “rules of the game” will not change in a way that fundamentally undermines it.

Is that framework still applicable to the recent and forthcoming investor-state disputes?

Over the past several years, and particularly since 2020, one could observe a more deliberate reassertion of state control over key sectors of the economy. This does not appear to be an episodic reaction to crisis, but rather a broader recalibration of how states perceive risk, resilience, and strategic autonomy. Energy security, control over critical minerals, protection of technological infrastructure, and data sovereignty seem to have moved from policy discussions into concrete regulatory action.

The return of the state: investment under strategic control?

According to the UNCTAD World Investment Report 2023, between 40-50% of newly introduced investment policy measures in recent years have been restrictive in nature, reflecting a move away from the “liberalisation” trend that dominated in 2013-2019.

Within the European Union, this trend is visible in the expansion and increasing use of foreign direct investment screening mechanisms aimed at protecting strategic industries. What one might have considered a relatively technical process before has evolved into an instrument of economic policy, particularly in sectors such as energy, infrastructure, and advanced technologies.

At the same time, resource-rich jurisdictions appear to focus on the terms under which foreign investors participate in the extraction of critical minerals. For example, lithium deposits in Latin America have become an important point of policy considerations, as governments seek to balance the need for foreign capital with the ability to retain greater control over value creation within their own economies.

Parallel to this, the concept of data sovereignty has reshaped the regulatory landscape in digital markets, especially in Europe, where frameworks around data governance and digital services are increasingly defining how cross-border business can operate.

Taken together, these developments suggest that states are increasingly focused on ensuring that foreign investment aligns with broader national priorities, even if this entails altering previously established expectations.

Investor response: arbitration as a structure, not exception?

From the perspective of investors, ISDS mechanisms appear to remain one of the few structured avenues through which investors can seek redress when the economic basis of their investment is materially affected by host state action.

The data reflects this continuing reliance on ISDS. The number of known investor–state arbitration cases has exceeded 1,400 globally, with a steady flow of new disputes each year, as tracked by UNCTAD.

Many of these disputes are administered under the auspices of institutions such as ICSID and ad hoc tribunals operating under UNCITRAL rules, both of which continue to serve as central pillars of the ISDS system.

But what appears to be changing, however, is not simply the number of disputes, but their nature.

A more complex conflict: “right to regulate” vs investor’s expectations of “stability”?

Historically, many investor–state claims were grounded in instances of expropriation or discriminatory treatment. Today, a significant proportion of cases arises in circumstances where the state’s actions appear to be grounded not only within its domestic legal framework, but also in certain multi-state bloc, regional, or even global public policy objectives. Climate transition policies, changes in energy regulation, withdrawal of subsidies, windfall taxes, sanctions, or reconfiguration of licensing regimes are some of the examples of the state’s regulatory measures.

On the other hand, from the investor’s perspective, these same actions can fundamentally alter the economic viability of an investment or returns that this investment was expected to generate.

This potentially creates a far more nuanced and, in many ways, more challenging landscape for arbitration. The dispute becomes an exercise for the tribunal in balancing the state’s right to regulate in the public interest, and the investor’s expectation of a stable investment environment.

The transformation of valuation: from calculation to interpretation?

It is precisely in this space where valuation begins to play a different role.

In more “stable” economic and regulatory contexts, valuation methodologies such as discounted cash flow analysis may operate within a relatively narrow set of assumptions. While experts may differ on inputs (e.g. projected inflation), the underlying structure of the valuation model may remain reconcilable between the experts. In the current economic and geopolitical environment, however, both the individual assumptions and the “but-for the breach” positions themselves are increasingly contentious. Questions about the likelihood of regulatory change, the durability of policy commitments, and the appropriate counterfactual scenario introduce layers of uncertainty that are inherently difficult to quantify with precision.

As a result, divergence between experts may no longer simply be a matter of technical disagreement. In complex cases this divergence may reflect fundamentally different interpretations of how the future would have unfolded in the absence of the disputed state action. The same set of facts can translate into materially different valuation outcomes, depending on how one frames regulatory and other economic risks attached to the investment in question.

In this sense, valuation is evolving from a primarily mechanical exercise into a form of structured reasoning under uncertainty. The expert is not merely calculating a financial loss, but constructing a coherent economic narrative that can withstand scrutiny in a context where both the past actions and the future expectations are contested.

What lies ahead: disputes shaped by transition?

Looking ahead, there are indications that this trend might continue. The energy sector alone may generate a significant number of disputes as states balance decarbonisation targets with the current deficit in the global market, while investors seek to protect capital deployed under earlier regulatory regimes. Similarly, the regulation of digital infrastructure and artificial intelligence may give rise to new categories of claims, particularly where cross-border data flows and platform access are affected.

At the same time, ongoing discussions within UNCITRAL Working Group III highlight a broader effort to reconsider and potentially reform elements of the ISDS system itself (including certain aspects of awarding damages), suggesting that the institutional framework is also under pressure to adapt.

Will these trends fundamentally reconfigure the relationships between states and investors?

Conclusion: valuing economic loss in a “moving” system?

Investment may no longer be anchored in the expectation of static rules. It is increasingly shaped by the anticipation that those rules may evolve, sometimes rapidly and in response to forces that extend beyond the immediate investment context.

In this market environment, does the central question in arbitration shift? Is it still sufficient to ask whether an investor has been treated unfairly? Is the more difficult question how to assess economic loss in a situation where the regulatory baseline itself is moving?

Answering that question seems to be one of the challenges of the next generation of investor–state arbitrations.