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Revealed: secret courts that allow energy firms to sue for billions accused of ‘bias’ as governments exit

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A secret court system that allows fossil fuel investors to sue governments for vast amounts of money has been accused of institutional bias, self-regulation issues and perceived conflicts of interest, as the drumbeat of EU countries leaving threatens to turn into a samba march.

On Wednesday, the EU will be meeting to discuss reform of the energy charter treaty (ECT) but at the end of last week, Germany became the latest European country to announce its intention to leave the treaty. Slovenia exited earlier in the week, after similar moves by France, the Netherlands, Spain and Poland. The UK is now one of the last large economies to remain in the ECT.

The ECT’s investment arbitration courts were set up in 1998 to protect energy firms operating in former Soviet Union countries from government expropriation and regulation. They gave the companies the right to seek compensation if legislation or policies were enacted that could be seen as hostile, using the investor-state dispute mechanism that stirred up much public controversy during the negotiation of the Transatlantic Trade and Investment Partnership (TTIP).

The treaty has since been signed by more than 52 countries across Europe and central Asia, with oil, gas and coal firms being awarded more than $100bn by the ECT tribunals. The UK oil firm Rockhopper was recently awarded $190m in a case it brought against Italy, which is contesting the decision. As countries have sought to curb their emissions in line with the Paris climate agreement after 2015, the number of claims being brought has exploded. Renewables companies have also brought a number of cases.

As its signatories prepare for a crunch meeting in Mongolia on 22 November, the ECT is facing what one critic has called a “crisis of legitimacy” for several reasons, including how the tribunals are composed, feeding growing concerns over perceived conflicts of interest.

The ECT’s tribunals can proceed under several systems, but the World Bank’s International Centre for Settlement of International Disputes (ICSID) rules are most commonly used. The system is different to most national legal systems, which employ a publicly appointed and independent judiciary. ICSID’s courts work with independent arbitrators appointed by the parties, but who may work in different roles for employers with conflicting interests within the system.

Each case is decided by a panel of three arbitrators: one appointed by the state, one by the investor, and a third who acts as president or chair and is selected by the other two arbitrators. The case is then argued before the panel by lawyers acting as counsel for each party. Cases are held behind closed doors, and there is no obligation to release the outcome. A choice of arbitrator can be challenged if a party disagrees, but there is no guarantee it will succeed.

“Double hatting” occurs when a lawyer takes more than one role across different cases – for example – sometimes acting as counsel for an investor, other times acting as a president, who is supposed to adjudicate independently.

An analysis of the cases brought so far under the ECT – carried out by the Guardian, the Transnational Institute and Powershift – has found that in a significant number of cases, an individual who had previously acted as an arbitrator appointed by an investor in one case was appointed to act as counsel (or advocate) for a party in another similar case.

Without full disclosure – which is one of the main reasons to challenge an arbitrator – there can be no guarantee that arbitrators have not had links to the law firm (or lawyers) acting as counsel in cases they are adjudicating, or that they have not acted as counsel in similar cases, leading to the risk of them prejudging the issues in play. Indeed, their reputations in this regard may lead some clients to seek them out.

Of the 191 arbitrators that have been nominated to sit in ECT hearings, just 37 elite lawyers – about 18% of the pool – have heard half of all the ECT’s cases. Seventeen members of this group have acted in the role of arbitrator and legal counsel, in the ECT and other investment courts.

Sixteen of the 17 arbitrators sat in fossil fuel cases – most were chosen by investors – and only three of the 37 have not sat in a fossil fuel-related arbitration panel.

Of the cases in which “double hatters” took part as arbitrators, 58% were won by investors, according to the analysis.

Under ICSID rules, arbitrators should be “persons of high moral character and recognised competence in the fields of law, commerce, industry or finance, who may be relied on to exercise independent judgment”.

However, these rules are self-regulated by the arbitrators – critics say they are unenforceable – and the successful removal of arbitrators is rare. In Spain, for example, just one proposed ECT arbitrator has been blocked, out of 19 challenges.

Many arbitrators believe they can separate the different roles they may play in different cases.

Klaus Sachs, an ECT-focused arbitrator based in Munich, said that “as in every profession, excellence is a way to success and among those arbitrators who are in high demand, you have very qualified people. They are very good lawyers.”

There was, he added, “a lot of new talent coming in and so the market is changing as a new generation enters the field”.

However, critics argue this is a recent and overstated trend. They say that allowing parties to appoint arbitrators who have acted as counsel in similar cases opens up what Lucía Bárcena, of the Transnational Institute, called “a Pandora’s box of conflicts of interest”.

It has also caused “long-running and heated debate within the international commercial arbitration community”, according to a 2017 study. In it, the international legal expert Philippe Sands asked whether a lawyer could impartially wear the hat of an arbitrator in the morning and counsel in the afternoon. “Speaking for myself, I find it difficult to imagine that I could do so,” he said.

George Kahale III, the chair and partner of the law firm Curtis, Mallet-Prevost, Colt & Mosle, which represents states in international arbitration cases, said the small number of arbitrators available to states also caused “a clear structural bias” toward investors in the ECT’s courts.

“The pool of arbitration candidates who I would consider to be ‘straight shooters’ … is very, very small, whereas the pool of investor-friendly arbitrators is as wide as the Pacific Ocean,” he said, over a video call from New York.

Kahale, an ECT veteran, said he had sat in many ISDS cases where he knew what the outcome of a tribunal would be as soon as he saw its composition.

“There’s virtually no chance of getting someone from that small pool [of arbitrators] that states would normally consider appointing,” he said.

Defenders of the system say the pool for defending states is filled with “very prominent and good arbitrators”, and it is “relatively large”, albeit smaller than that for investors.

“When it comes to the chair, obviously it becomes more complicated,” Sachs said. “But I don’t think, when a party learns that I’ve been appointed chair of a case, that they know what the outcome will be, and I feel that is true for a large majority of the real professional arbitrators.”

Sachs stressed that challenging arbitrators could be a lawyerly tactic and that “in most cases, the decisions are well-reasoned and balanced”. But he accepted that arbitrators were “not often” removed under challenge.

Kahale said that factoring in all of this – and what he called “a virtual explosion” in the size of damages claims – the result was “a crisis of legitimacy within the [ISDS] system”. That view is shared by Sands.

Laurence Tubiana, one of the architects of the Paris deal and the chief executive of the European Climate Foundation, said the analysis “clearly shows that the energy charter treaty’s court system reeks of potential conflicts of interests which favour fossil fuel investors and threaten the Paris climate agreement. Once again, the oil and gas industry has found ways to control the game.”

Within a system that could shower fossil fuel investors with more than a trillion dollars of compensation pay-offs by 2050, there are widespread fears the ECT could spark what the UN Intergovernmental Panel on Climate Change (IPCC) called “regulatory chill” at just the moment new climate laws are needed.

“The energy charter treaty is not consistent with the Paris agreement,” said Patrice Dreiski, a former ECT executive. “The main goal of the ECT is to promote and protect fossil fuels investment, which is not at all the goal of the Paris agreement.”

To date, investors have won 64% of concluded ECT cases, three-quarters of which covered the fossil fuel sector, according to the analysis.

The data was compiled mostly by the Transnational Institute from the UN Conference on Trade and Development database, the ECT’s own overview of cases, the ICSID and Permanent Court of Arbitration databases that administer disputes, public tribunal documents published on and specialised media.

The impression of a legal web geared to structurally benefit fossil fuel investors may even be reflected within the ECT secretariat itself, which promotes ECT conferences, oversees treaty rules, and provides institutional support to achieve the ECT’s objectives.

Almost three-quarters (72%) of experts on the secretariat’s industry advisory panel – which provides policy advice to the body with “a particular focus on risk mitigation and improvement of the business climate” – also work for fossil fuel companies or their financial beneficiaries.

Guy Lentz, the secretary general of the ECT secretariat and a former Shell executive, accepted that the panel was “structurally biased”, but added: “We want many more renewable energy companies. We are working really hard on that, but it takes time.”

Fabian Flues, a trade and investment adviser for the Berlin-based non-profit Powershift, said the analysis showed the ECT was “dominated by interests with a stake in maintaining the highly lucrative system of investment arbitration. It enables them to rake in huge fees, often coming out of taxpayers’ pockets.”

However, disquiet at the treaty’s threat to timely climate action has now spurred Brussels to propose phasing out the ECT’s writ within the EU’s border, even as the bloc’s own members queue up to jettison the pact.

It appears, however, that the UK will not be joining that queue. A government spokesperson said only that signatories “will decide whether to adopt the modernised energy charter treaty at the energy charter conference on 22 November”.


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Elon Musk ‘doesn’t seem like’ right person to own Twitter, says co-founder

Elon Musk “doesn’t seem like” the right person to own Twitter, the social media platform’s co-founder has said, adding that improvements to morale and content policies at the business have been reversed under its new proprietor.

In an interview with the Guardian, Biz Stone said positive changes he had helped oversee in recent years had been unwound by the Tesla chief executive.

Stone said running social media companies is “not really a win-win situation … it’s always tough”, because “50% of the people are gonna be happy, 50% of people are gonna be upset with you”.

“You have to be OK with stuff that you just don’t like or don’t agree with being on there,” said Stone, adding: “Otherwise, you should just go buy a magazine or a newspaper or something where it’s OK to have a specific leaning.”

Asked if Musk was the right owner for Twitter, Stone said: “It doesn’t seem like it right now, but I could be wrong.”

Musk has come under fire for temporarily banning journalists from the platform and reinstating previously banned accounts such as those belonging to the former US president Donald Trump and the self-proclaimed misogynist Andrew Tate.

Stone, who co-founded Twitter in 2006 with Jack Dorsey, Noah Glass and Evan Williams, returned to the business in 2017 at the behest of thenchief executive Dorsey to “guide the company culture, that energy, that feeling”. Stone said improvements during his four-year stint, particularly in morale and overseeing content, have been lost under Musk.

“We made a lot of improvements in those areas. And that’s all gone now.”

Biz Stone and Jack Dorsey in 2008
Biz Stone, left, and Twitter co-founder Jack Dorsey in 2008. Photograph: Zuma Press/Alamy

Musk has rowed back on a pledge to establish a “content moderation council” that would have overseen big content decisions and account reinstatements, instead relying on more arbitrary methods such as user polls hosted on his own Twitter account. He also fired approximately half of Twitter’s workforce within days of buying the business for $44bn (£35bn) last year.

Stone added that employees should not have been named as part of the release of the so-called Twitter files, a series of internal documents detailing decisions such as the suspension of Donald Trump.

“When that happens, people get a lot of harassment,” said Stone. “It’s really bad.” Twitter’s former head of trust and safety, Yoel Roth, was reportedly forced to leave his home when Musk posted tweets misrepresenting Roth’s 2016 academic thesis, “Gay Data”.

Stone said the concept of Twitter would survive, regardless of the company’s current financial struggles. “I don’t know that Twitter as a company is going to succeed for ever but the idea of Twitter I think will be around,” said Stone, pointing to the success of alternative platforms such as Mastodon.

“It would only matter that Twitter the idea continued. And that’s happened. That seems to be happening already. Mastodon seems to be winning the open-source, decentralised version of Twitter. People seem to be going there.”

He added: “I don’t know the future. I don’t know what’s gonna happen and maybe things will be great in a year and [it] had to go through this trial by fire. But, right now it does not look good, I would say.”

Stone spoke to the Guardian as he confirmed he is joining the board of Chroma, a Swedish startup in which he is also an investor. Chroma creates an audio-visual experience for mobile phone users, describing itself as “a world of sound experiences in a pocket” where users can change what they see and hear.

Describing Chroma’s work as “soundplay”, Stone added: “It’s a new way to interact with sound and to play with sound.” Last year Chroma collaborated with Venezuelan musician Arca to create Lux Aeterna, an app that creates an “ever-evolving, boundless audio-visual world”.

Stone said his investment philosophy is simple – “do I like this person” and “do I think they can pull off this thing I would use myself?” He adds: “If those two answers are yes, I’m usually in.”

Referring to Chroma’s CEO and founder, Andreas Pihlström, he said: “I like working with Andreas. He is a really talented designer.” Stone’s co-investors in Chroma include Evan Sharp, the co-founder of digital pinboard platform Pinterest, and Ben Silbermann, the co-founder and CEO of Pinterest, where Pihlström worked as a creative director.

Stone, who has also invested in the messaging service Slack and Pinterest, added that he never thought of Twitter as being successful when he co-founded it in San Francisco.

“I tell young people – if you’re doing something to try to get rich, it’s probably not going to work. You should do something that you’re just really enjoying working on and then you actually have a greater chance of becoming wealthy.”

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US economy grows strongly but interest rate rises starting to slow momentum

The US economy maintained a strong pace of growth in the fourth quarter as consumers boosted spending on goods, but momentum appears to have slowed considerably towards the end of the year, with higher interest rates eroding demand.

Gross domestic product – the broadest measure of economic health – increased at a 2.9% annualized rate last quarter, the commerce department said in its advance fourth-quarter GDP growth estimate on Thursday. The economy grew at a 3.2% pace in the third quarter. Economists polled by Reuters had forecast GDP rising at a 2.6% rate.

That could be the last quarter of solid growth before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s kick in. Most economists expect a recession by the second half of the year, though mild compared with previous downturns.

Retail sales have weakened sharply over the last two months and manufacturing looks to have joined the housing market in recession. While the labor market remains strong, business sentiment continues to sour, which could eventually hurt hiring.

Robust second-half growth erased the 1.1% contraction in the first six months of the year. For all for 2022, the economy expanded 2.1%, down from the 5.9% logged in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.

Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth, mostly reflecting a surge in goods spending at the start of the quarter. Spending has been underpinned by labor market resilience as well as excess savings accumulated during the Covid-19 pandemic.

But demand for long-lasting manufactured goods, which are mostly bought on credit, has fizzled and some households, especially lower-income, have depleted their savings. Business spending also lost some luster as the fourth quarter ended.

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US activist investor who accused Adani of ‘biggest con in corporate history’ dares Indian group to sue

The US investor targeting Indian conglomerate Adani Group over what it claims is the “biggest con in corporate history” has dared the company to sue, given it would open the coal producer to further scrutiny.

Hindenburg Research’s report has already wiped billions of dollars of value from the sprawling empire of Gautam Adani, the world’s third richest man, and drawn in the contentious Carmichael coal and rail project in Queensland.

Hindenburg said in a statement that Adani had not responded to any of the substantive issues raised in its report that accused the company of engaging in a “brazen stock manipulation and accounting fraud scheme”.

“Instead, as expected, Adani has resorted to bluster and threats,” the statement said.

“Regarding the company’s threats of legal action, to be clear, we would welcome it. We fully stand by our report and believe any legal action taken against us would be meritless.

“We have a long list of documents we would demand in a legal discovery process.”

Activist investors like Hindenburg typically take a short position in a listed company they believe is heavily overvalued and has poor or fraudulent business practices.

Founded by Nate Anderson, Hindenburg is a US activist fund named after the 1937 airship disaster that looks for stocks that could crash. It has accused Adani of loading companies with debt that puts the entire group on a “precarious financial footing”.

The battle comes amid a large scheduled fundraising attempt by Adani Enterprises, the company’s listed flagship, in which Adani is seeking US$2.5bn from investors to fund capital expenditure and reduce debt.

Adani has threatened to seek “remedial and punitive” action against Hindenburg over what it said was a “maliciously mischievous, unresearched report”.

“Clearly, the report and its unsubstantiated contents were designed to have a deleterious effect on the share values of Adani Group companies as Hindenburg Research, by their own admission, is positioned to benefit from a slide in Adani shares,” Adani Group’s legal head Jatin Jalundhwala said in a statement on Thursday.

The statement said Adani was disturbed by the “intentional and reckless attempt” of a foreign entity to mislead investors and the general public and sabotage the public offering.

Adani has previously said that allegations in the report had been discredited and rejected by India’s highest courts, and that Hindenburg had not attempted to verify information with the company before publishing.

The Hindenburg report cited a series of transactions tied to Adani’s Australian operations that it alleged may have allowed Adani to avoid disclosing large asset impairments to investors.

Located in Queensland’s coal-rich Galilee Basin, the Adani project exported its first coal in late 2021, drawing opposition due to the fossil fuel’s contribution to greenhouse gas emissions.

That project went ahead after the Queensland government struck a royalties deal with the miner that allowed it to defer payments, although the full details of the agreement have not been made public.

The Queensland government’s resources department said media questions about the report should be directed to financial regulators.

The Australian Securities and Investments Commission, which declined to comment, would typically assess the report to determine if it should investigate.

The Greens industry spokesperson, Penny Allman-Payne, said the Hindenburg report raised concerns over Adani’s actions, prompting questions over its right to operate in Australia.

“This should give Queensland Labor serious pause about its reckless and misguided decision to get into bed with Adani, and should call into question the company’s future in Australia,” Allman-Payne said.

More than US$9.4bn (A$13.2bn) in value was wiped off listed companies in the Adani network on Wednesday after the Hindenburg report was published. Those same companies fell further in early trading on Friday, after Indian markets were shut on Thursday, creating selling momentum.

The billionaire US investor Bill Ackman said in a tweet he found the Hindenburg report to be “highly credible and extremely well researched”. He acknowledged the hedge fund he leads, Pershing Square, had not done any independent research into Adani.

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