Opposition leader Bill Shorten has stated again that a future Labor government should not cancel the Adani mine licence for environmental reasons because of “sovereign risk”.

All major banks and financial institutions have refused to fund the Adani project because of both financial and environmental risks, and there is a strong grassroots movement which has moved public opinion and resulted in Labour opposing any use of federal funds to support the project.

So the Adani project itself is regarded by investors as very risky. As prominent economist Saul Eslake has argued, its demise is unlikely to result in a sudden fall of more general investor confidence in Australia, which is what “sovereign risk” implies.

There is a bigger risk for a future government which might choose to cancel the licence. Adani could sue the Australian government for millions of dollars through the process known as Investor-State Disputes Settlement (ISDS), using the now terminated Australia-India Bilateral Investment Treaty.

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ISDS gives giant global companies like Adani special legal rights that are not available to local companies to claim millions in compensation if they can argue that a law or policy has reduced the value of their investment, known as “indirect expropriation” and/or if they can claim that they were not properly consulted about the change in the law or policy.

The cases are heard by international tribunals that have been criticised by legal experts such as former High Court Chief Justice Robert French because they have no independent judges, no precedents and no appeals. There are now over 900 known cases and many are against health, environment, indigenous rights or other public interest regulation

Even when governments win, they lose, because it takes years and millions of dollars to defend ISDS cases. The US Philip Morris tobacco company lost its claim for compensation for Australia’s 2012 plain packaging legislation in the Australian High Court. The company could not sue under the Australia-US Free Trade Agreement because the Howard government had not agreed to ISDS in that agreement. The company moved some assets to Hong Kong and used ISDS in a Hong Kong-Australia investment agreement to sue the Australian government. It took over four years for the tribunal to decide that Philip Morris was not a Hong Kong company. It took an FOI case to reveal that it cost the government $38m of taxpayer dollars in legal fees to defend the case.

The Australia-India treaty was terminated by India on March 23, 2017 but it has an extraordinary grandfather clause that means its provisions apply to investments made before that date for another 15 years. India, South Africa and a number of other countries have terminated all such investment treaties because of the risks and costs to governments from unfair tribunal decisions. Australia’s Productivity Commission has condemned ISDS for the same reasons, as did the previous Rudd-Gillard Labor government.

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The European Court of Justice found recently that ISDS limits national sovereignty and that any trade agreement containing ISDS could not be negotiated by the European Commission, but had to be approved by each EU national parliament. Fearing rejection of ISDS, the EU has ceased including ISDS in its recent trade deals, including the one currently being negotiated with Australia

Current Labor policy opposes ISDS in trade and investment agreements because it “undermines fair competition, judicial independence and the Australian people’s sovereign right to legislate and implement policies in their interests through democratic processes”.

The cancellation of the Australia-India investment agreement in March 2017 means that Adani cannot claim compensation for investments made after that date. But under the 15-year grandfather clause, Adani could seek compensation for what it has claimed is the $3bn of investment made before March 2017 in preliminary costs including the Abbot Point port lease to export the coal.

Even the threat of an ISDS case can deter governments from taking action in the public interest. The New Zealand government deferred its plain packaging legislation for over four years until the Philip Morris ISDS case was over. Now it seems that Labor could be deterred from developing a policy against the Adani project because of the threat of ISDS.

This is yet another example of why Labor should implement its policy against including ISDS in all trade agreements, and remove it from current agreements like the TPP-11. Global corporations should not have special legal rights to undermine the policies of democratically elected governments. It would be a travesty of democracy if a government elected on the basis of majority support for regulation of carbon emissions and other action against climate change faced challenges from global companies aiming to frustrate their implementation.

• Dr Patricia Ranald is convener of the Australian Fair Trade and Investment Network and a research fellow at the University of Sydney