BlackRock retains 7% stake in German firm suing Netherlands over coal phase out

As European countries continue to withdraw from an energy treaty that allows foreign investors to sue nation states should they believe their assets to be under threat from legislative reform or policy changes, the veracity of net-zero pledges made by asset managers and institutional investors holding these firms is being called into question.

A case in point is the retaining by US asset management giant BlackRock of a 7% stake in German energy firm RWE. This is despite ongoing efforts by the Essen-based company to sue the Dutch government under the Energy Charter Treaty (ECT) for its intentions to phase out coal by 2030.

According to RWE’s latest investor breakdown, 87% of its shares are owned by institutional investors.

International Energy Charter data reveal that RWE and another energy company, Uniper, are suing the Dutch government in cases marked pending, over plans to phase out coal in line with Paris targets. In September, Bloomberg Law reported a German court had ruled the two firms would be unable to proceed in their arbitration cases.

RWE’s press team did not respond to a request for comments, while Uniper said that, as proceedings were ongoing, it had no comment to make at this time.

Net Zero Investor understands that BlackRocks’s exposure to energy companies often comes about through its passive exchange-traded fund offering. While the firm engages with the energy transition and believes this has the potential to influence company valuations, BlackRock’s approach to ESG is driven by clients and its fiduciary duty to them.

Investor-state disputes

Nation states and environmental lobbyists have opposed proposed reforms to the treaty which they say do little to eclipse investor-state disputes or the sunset clause linking states to disputes for 20 years after withdrawal.

Paul DeClerck, economic justice coordinator at Friends of the Earth Europe, said the revised ECT was “not in line with the European Union’s climate obligations”, including those set out in Europe’s Green Deal and the Paris Accord.

He notes: “Existing fossil fuel investments will continue to be protected for another ten years after the ratification of the revised ECT and new sources of energy, such as fossil-based hydrogen and biomass, will now also be covered by the reformed ECT.”

“If investors have ESG policies that claim to be in line with the Paris Accord, they would also have to conclude that the ECT is not in line with these policies. They should draw conclusions from that and shift their investments away from fossil fuels.”

DeClerck said the investor-state dispute settlement (ISDS) mechanism had always been incompatible with EU law and declared “unacceptable” by the EU itself five years ago. “For us, the revised ECT is not fit for purpose, and we call on EU member states to reject the compromise proposal in the EU Council,” he added.

Elsewhere, founder and principal of independent disputes practice Vail Dispute Resolution, Tomas Vail, said environmental activists should “think carefully before celebrating”.

“People forget that the ECT holds states to account on their renewable energy commitments, with renewable energy projects amounting to 60% of ECT arbitrations. In withdrawing from the ECT, states are walking away from a framework that ensures their commitment to renewable energy projects, which are often expensive and complex to deliver.”

According to Vail, decisions by Poland, Spain, France and the Netherlands to withdraw from the ECT could be perceived as allowing them more freedom on their energy policy.

“Whether that translates into prioritising renewable energy projects remains to be seen, but the picture so far is not encouraging,” he said.

ECT is ‘major blockage’

The ECT has been identified by the Intergovernmental Panel on Climate Change (IPCC) as a major blockage to effective climate policy, according to senior analyst at thinktank InfluenceMap, Venetia Roxburgh.

Given growing interest from investor groups in responsibly supporting the energy transition, the composition of the treaty’s Industry Advisory Panel is likely to be of concern, especially if their input makes that goal more difficult to achieve, she said.

Members of the panel are selected from voluntary applications from within the business community.

“The threat of legal action under the treaty has an indirect, knock-on effect on the ability of investors to meet their net-zero goals, given it protects the long-term investments of the fossil fuel sector,” Roxburgh said.

An influenceMap analysis suggests the majority of corporate voices involved in the treaty are misaligned with Paris goals when it comes to energy lobbying efforts.

The International Institute for Sustainable Development (IISD) argues in a report that investment treaties impose significant barriers to the cancelling oil and gas projects currently in development and that, more broadly, there are serious flaws in the way companies set net-zero targets.

Kyla Tienhaara, Canada research chair in economy and environment at Queen’s University, Ontario, and co-author of the report, told Net Zero Investor: “Providing fossil fuel investors with investment protection during a climate emergency is highly problematic. But there are ways to address this problem, either individually by governments or through international coordination.”

The study notes that the shift away from fossil fuels and toward renewables faces several structural obstacles that require public and private actors to resolve.

Investment treaties like the ECT must be “urgently and radically reformed”, it said, to allow governments to reduce oil and gas reliance without facing up to $340bn in claims from cancelled projects.

BlackRock declined requests for comment.