Book Symposium Investment Law: The role of International Investment Agreements in Fostering Sustainable Development

[Wolfgang Alschner is a PhD Candidate and Teaching Assistant at the Graduate Institute in Geneva, and Elisabeth Tuerk is Officer in Charge (OiC) of the Section on International Investment Agreements (IIAs) in UNCTAD’s Division on Investment and Enterprise.] 

One of the policy tools typically aimed at attracting foreign investment has been the conclusion of international investment agreements (IIAs). Foreign investment is an important source of finance for sustainable development, especially in low-income countries. However, the benefits from foreign investment are not automatic and the link between IIAs and sustainable development is a complex one: whereas IIA may contribute to more attracting more (sustainable) investment, they also constrain regulatory action by host governments that seek to maximize the positive and minimize the negative effects of foreign investment on sustainable development.

This paper gives an overview of recent UNCTAD research on the nexus between IIAs and sustainable development in three areas of public policy-making. These include 1) combating climate change; 2) integrating investment and industrial policy; and 3) promoting responsible corporate behaviour. The paper concludes on the need for more inter-State cooperation to address the various challenges facing the IIA regime today and to enhance its sustainability dimension.

1) IIAs and climate change

When it comes to combating climate change, IIAs are a double edged sword. On the one hand they can help promote investment in green technologies. Investment in renewable energies and low-carbon activities is often reliant on public incentives and government promises of support; that is why the stabilizing effect of IIAs is considered particularly important for fostering investment in these sectors. On the other hand, IIAs may be used to challenge regulatory efforts aimed at reducing greenhouse gases. Since these policies often impose costs on particular investors e.g. by regulating the use of land or by increasing manufacturing costs, they may expose states to investment claims under an IIA.

In response, states have sought to create space for green policies in their IIAs. Some agreements include a reference to the objective of combating climate change in the preamble of the agreement.  Others include climate change related exceptions into the treaty text. Some treaties also have references to multinational environmental agreements, a practice aimed at fostering a harmonized reading of potentially conflicting international obligations. A final, yet unexplored option would be a multilateral declaration, as suggested by the UNCTAD World Investment Report 2010, to enhance coherence between the IIA and the climate change regimes.

2) Foreign investment and its role in industrial policy

In recent years, policy-makers from both developing and developed countries have shown a new interest in industrial policy and brought to light a more proactive role of governments in guiding industrial development towards a more sustainable future. Similar to the climate change context, IIAs can potentially support sustainable industrial policies, i.e. by promoting inward investment, but they can also potentially constrain industrial policies, i.e. by exposing nascent domestic industries to external competition or by limiting the right to impose performance requirements. One way to preserve industrial policy space is for states to include non-conforming measures in their IIAs listing sectors that are carved-out from specific IIA obligations. The drawback of such a reservation approach is its complexity. Some developing countries may not have sufficient capacity to identify sectors and measures vital for sustainable industrial policy purposes.

3) Fostering responsible investor behaviour

Most current IIAs provide investors with rights e.g. to bring claims against the host State before international arbitration. Yet, they do not confer independent obligations on investors. As a result, IIAs do little to ensure that States get the development contribution they seek from foreign investment in return for tying their hands in an international agreement. In some cases, investment may have a negative impact on sustainable development, if investors fail to act responsible e.g. by not respecting core environmental or labour standards. Acknowledging that not only States but also investors should act responsibly is an important step towards ensuring that investment is conducive to sustainable development.

An important innovation in recent IIAs in this respect is the inclusion of corporate social responsibility (CSR) references. First, some IIAs encourage a CSR-friendly reading of the entire treaty by including a CSR reference in the IIA’s preamble. A second type of CSR-specific clauses includes treaties that call on the contracting States – through best endeavour commitments – to promote the adoption of CSR standards by companies. A more far-reaching third development already envisaged in model BITs but not yet established in treaty practice is the imposition of CSR obligations directly on investors. A fourth way consists of a screening procedure of incoming investors to enable the potential host country to seek information on the investor’s CSR-record prior to admission. All these developments point to a stronger role of IIAs in fostering responsible investment behaviour.

Conclusion: The need for more interstate cooperation

The three issues discussed above – climate change, industrial policy and responsible investor behaviour – are but three examples of the broader nexus between investment treaties and sustainable development. While more recent treaties demonstrate greater awareness of sustainability issues, the majority of IIAs in force still follows a traditional approach of focusing exclusively on investment protection. Hence, many challenges for sustainable development remain and States need to be more pro-active and comprehensive in fostering a more sustainable investment law system.

Inter-State, cooperative solutions for more sustainable investment policies can be achieved on three levels. First, on the bilateral level, contracting States can be more active in re-asserting their authority over the application and interpretation of investment treaties through cooperative efforts. Second, on the regional level, investment rule-making is picking up speed which provides an unprecedented opportunity to promote sustainable development in IIAs. Third, on the multilateral level, issue-specific negotiations and deliberations, e.g. on the nexus between IIAs and Human Rights through the 2011 UN Guiding Principles on Business and Human Rights, can tackle some of the IIA regime’s systemic sustainability challenges multilaterally. On all three levels, investment policy-makers can take guidance from UNCTAD’s recently released Investment Policy Framework for Sustainable Development (IPFSD).