Revealed: how Wall Street is making millions betting against green laws

Financial speculators are investing in a growing number of lawsuits against governments over environmental laws and other regulations that affect profits, often generating lucrative awards, the Guardian has found.

For a long time, litigation finance thrived primarily in the realm of car crashes and employment claims. “Had an accident that wasn’t your fault?” was the industry’s billboard catchphrase, offering to finance lawsuits in exchange for a cut of any payout.

Now, however, the sector has found a far larger playground: financing massive arbitration lawsuits launched by companies against governments, where claims can stretch to tens of billions of dollars.

These cases come under a little-known area of international law called investor-state dispute settlement (ISDS), which allows corporations to sue countries for actions that hurt their profits.

With litigation funders facing no risk of a counterclaim, and potential awards that now average more than $200m (£160m), legal experts warn that the system has become a “gambler’s nirvana” for hedge funds and specialist financiers.

Burford Capital, the world’s largest litigation-finance firm, says it provides access to justice by supporting plaintiffs who otherwise could not afford legal action. Photograph: M4OS/Alamy

Within the sector, the debate is growing: advocates for third-party funding say it increases access to justice but critics, including arbitrators who rule on cases, are raising concerns that the growth of third-party funding is fuelling expensive and potentially frivolous cases at enormous cost to the public.

A Guardian investigation, which analysed more than 1,400 cases launched against governments, found that ISDS cases have become far more common and lucrative. More than $120bn of public money was awarded to firms through ISDS courts, including at least $84bn to fossil fuel companies and $7.8bn awarded to mining companies.

The true figures are likely to be far higher as companies often do not disclose the size of payouts they receive. The Guardian found that in 31% of cases where a payout or settlement was made, the size of the award was not disclosed.

These cases have become an increasingly popular investment class for hedge funds and other investors, who back the legal action financially in exchange for a share of the final award. The Guardian identified at least 75 ISDS cases backed by third parties, although this too is likely to be a substantial underestimate: many treaties include no obligation to disclose third-party funding of cases, and the largest dispute-resolution body only began demanding disclosure in 2022.

Half of all third-party funded cases were launched by investors from the US, Britain or Canada, and more than 50% were cases relating to fossil fuels or mining. More than three-quarters of cases were against developing countries, according to Guardian analysis of data provided by Jus Mundi, a legal intelligence platform with access to the largest international law and arbitration database.

Examples of third-party funded cases include the Bermudan company South American Silver, whose subsidiary acquired mining concessions in an area of Bolivia mainly inhabited by Indigenous communities. In 2010, the company was accused of polluting sacred spaces and threatening community members, and the Bolivian government revoked the concessions. The government had to pay the mining company $18.7m in compensation.

The Malku Khota mine, one of the world’s largest reserves of silver, indium and gallium. South American Silver won millions in compensation after Bolivia revoked its concession in 2012. Photograph: TriMetals

In another case, the Mexican government is being sued by a Canadian mining company, Silver Bull, for $408m in damages after it failed to disband a blockade of local protesting miners. The case is expected to start in October.

This year, Burford Capital – the world’s largest litigation-finance company – is backing a case against Greenland for the impact of a uranium mining ban that a mining company argues in effect ended its development of one of the world’s largest rare earth mineral deposits. If Greenland loses the case, it faces either allowing the mining to go ahead or paying as much as $11.5bn in compensation.

Concerns are increasingly being raised by those who work within the ISDS system, including arbitrators who adjudicate cases.

Muthucumaraswamy Sornarajah, an international lawyer and ISDS arbitrator, believes third-party funding has made ISDS into “big business”. He said it was likely that there were more claims being brought, because the risk of losing the claim “vanishes” for the claimant: “So it would mean that the respondent states – most of which are developing countries – would have to face the cost of defending potentially frivolous claims that are brought with third-party funding.”

Sornarajah said the combination of ballooning legal fees and third-party funding meant “the extent of the business, or profits, that can be made as a result of ISDS is quite massive”.

Internationally, the litigation finance industry is booming, worth $17.5bn in 2024. Supporters of third-party funding typically argue that their participation makes the justice system more accessible.

Christopher Bogart, chief executive and co-founder of Burford Capital, the largest provider of litigation finance in the world, said third-party funding played an important role in providing access to justice by supporting litigants that otherwise would not be able to afford legal action. Burford Capital was the only third-party finance firm that would speak to the Guardian. The company said that as of September 2024, 93% of concluded cases generated a return for clients.

“Legal finance provides a vetting function and weeds out meritless cases: we only get paid when our clients win their cases – if the cases we fund lose, we lose 100% of our money,” the company said in a statement.

Bogart added: “I don’t think ISDS is any more high potential or lucrative than lots of other areas of litigation.”

The Kvanefjeld mine site near Narsaq. Greenland is being sued after it stopped Energy Transition Minerals mining rare-earth elements and uranium there. Photograph: Patrick Greenfield/Guardian

But critics warn that the rise of third-party cases is driving the growth of speculative cases. Lisa Sachs, director of the Columbia Center on Sustainable Investment, said: “Third-party funding enables, or even encourages, investors to pursue claims off investors’ balance sheets, removing a key deterrent to bringing weak or speculative claims.

“The litigation funders seek out and invest in cases as an opportunity to generate a return on their investments, at times partnering with law firms who have a financial interest in bringing more claims as well. This dynamic incentivises more arbitration, regardless of broader public interest or the legitimacy of the claims.”

However, Burford said: “We would go out of business if we chose bad or frivolous cases and business necessity requires us to be highly selective in our investments and to back winning cases. We enable businesses that wouldn’t otherwise be able to seek justice.”

Currently, arbitrators cannot financially penalise third-party funders by forcing them to cover a government’s legal costs. But some think that should change. Commenting on the case of Teinver v Argentina, one of the arbitrators, Kamal Hossain, said in a dissenting opinion that “the creation of a ‘gambler’s Nirvana’ by allowing third-party funders to use investor-state dispute settlements as a means of financial speculation, without any possibility of making costs awards against those funders, is deeply problematic.”

“The current inability of tribunals to make cost awards against third-party funders is a real and serious issue, and has attracted the concern of arbitrators in previous cases,” he said. “Their involvement may add to the costs of the proceedings. For that reason, as a matter of principle, a tribunal should be able to make a costs order against a third-party funder.”

The US-based Odyssey Marine Exploration won a payout of $37.1m from the Mexican state after it was denied a permit to mine the seabed on environmental grounds. Photograph: Reuters

In a recent dissenting opinion on the Odyssey Marine Exploration case against Mexico, Prof Philippe Sands, one of the arbitrators, highlighted the “jaw-dropping” costs that the claimant had racked up, which amounted to more than $21m, half of which was covered by third-party funding. The investors’ costs were about 10 times that of the government in defending the claim.

In a subsequent lecture, Sands raised the broader issue of third-party finance in the ISDS world, echoing concerns about how costly the system has become. “The arrangements may be said to assist in delivering a flowering of sorts: more fees for the lawyers, more cases for the arbitrators and a deeper, wider and more lucrative trough into which all of our snouts may be dipped,” he said.