India’s Race to the Bottom: Bilateral Investment Treaties and the New Draft Environmental Impact Assessment Notification

[Madhav Mallya is a lecturer at the Jindal Global Law School.]

When a country dilutes its environmental and human rights protections in a bid to attract more investment, it is then said to be engaged in a “Race to the Bottom” competition.  A reading of India’s new Draft Environmental Impact Assessment (EIA) notification makes it easier to get environmental clearances by excluding several projects from public consultation. The draft EIA notification indicates that it will be easier for foreign investors to get pre-investment environmental clearances or approval even after the project has commenced. “Strategic” projects are excluded from public consultation. However, it is the government which decides which projects are strategic. The term has not been defined in the notification and no guidelines to define it have been prescribed. The period for public consultation has been reduced to a period of 20 days from the earlier 30 days and finally, projects which are in violation of environmental laws can be approved post facto, subject to implementing a remediation plan and submitting a bank guarantee (see here).

The public participation requirement is an important component of environmental impact assessment procedures. It has been codified in Principle 10 of the Rio Declaration which mandates that every individual shall have access to information concerning the environment held by public authorities and that states shall provide effective access to judicial and administrative remedies. The Draft EIA notification does not give citizens access to any direct remedies in respect of withheld information.

While these measures will affect the environmental impact of any project in India, this brief note discusses why the new EIA notification is problematic in the context of the Bilateral Investment Treaty (BIT) regime surrounding India.

First, India is trying to attract more foreign investment by renegotiating and signing BITs with several nations. Most BITs mandate that a foreign investor is bound to comply with the domestic law of the host state. Therefore, if the host state does not implement stringent and rigorous environmental screening procedures, neither is the foreign investor bound to conduct an EIA with all its procedural requirements including public participation. Moreover, if a host state attempts to amend domestic law post the establishment of an investment, and this amendment affects the economic value of the investment, an expensive investment treaty claim could arise.

Second, BITs do not actually impose binding and enforceable environmental obligations on foreign investors in accordance with international environmental law. The objective of investment treaties is, for the most part, the promotion and protection of foreign investment. While BITs do not preclude a host state from regulating the investment in exceptional circumstances, they primarily try to protect the investment from the arbitrary exercise of regulatory power by the host state. Foreign investors are non-state entities which are not subject to international law obligations. Moreover, states are often reluctant to impose binding environmental obligations on foreign investors since they do not want to disincentivize the inflow of capital and technology.

If domestic environmental law is weak, can international law help combat a Race to the Bottom?  Can the drafters of BITs hold foreign investors liable for environmental and human rights violations in accordance with international law, rather than domestic law? The following analysis highlights a few innovative approaches of treaty drafters and investor-state arbitration tribunals in trying to impose obligations on foreign investors in accordance with international law.

The actual imposition of direct international law obligations on foreign investors

The Nigeria-Morocco BIT of 2016 states that investors shall comply with the EIA procedures applicable to their investments, as required by the laws of the host state. In addition, the BIT hints at cooperation between the investor and host state in protecting the environment by mandating that the investors,  their investment, and the host state authorities shall apply the precautionary principle(arguably, a principle of customary international law)  to their EIA and to the proposed investment and take any necessary mitigating or alternative measures. In addition, the BIT requires that investors and investments shall uphold human rights in the host state and shall not operate in a manner that circumvents international environmental, labour and human rights obligations. Of course, the efficacy of this clause to a large extent depends on robust domestic environmental law mechanisms.

However, the Nigeria-Morocco BIT is an exception to the general trends of BIT drafting. Recent BITs signed in 2019 and 2020 including the Brazil-India BIT, Morocco- Japan BIT, Hong Kong SAR- United Arab Emirates BIT and the India- Kyrgyzstan BIT do not attempt to impose binding obligations on the investors. Rather these treaties continue to incorporate the traditional methods of regulation such as general exception clauses, non-precluded measures, no relaxation in standards clauses and voluntary corporate social responsibility (CSR) clauses. These powers allow the host state to regulate the investment but do not impose any direct and binding obligations on foreign investment.

Since investment treaties are often used to try and attract foreign investment, it is difficult to imagine binding investor obligations being imposed on foreign investors soon. Several model treaties like the Draft Pan African Investment Code (PAIC)of 2016, the South African Development Community Model BIT and the International Institute for Sustainable Development Model BIT have remained models.

The use of carefully drafted counterclaim clauses.

The Draft Pan African Investment Code of 2016 is a model investment treaty drafted by the African Union (AU) which attempts to promote sustainable investments in accordance with international environmental and human rights norms. It states that when an investor or an investment have failed to comply with their obligations under the code or the relevant rules of domestic and international law, a member state may initiate a counterclaim.

Of course, very few BITs allow for the filing of a counterclaim for the violation of international law.   Again, even if BITs do allow host states to file counterclaims against foreign investors for violating domestic environmental law, the success of the counterclaim will also rest on how rigorous the domestic environmental regime is.

A clause that stipulates that the BIT be interpreted in accordance with international law

In Urbaser v Argentina, the tribunal interpreted a clause in the Spain-Argentina BIT which stated that the treaty was to be interpreted in accordance with the general principles of international law. While observing that the principle that corporations are not subject to international law has lost its impact, the tribunal stopped short of asserting that private corporations had direct international law obligations. Rather, it stated that the BIT had to be construed with other relevant rules of international law, including those of human rights.

Tribunals are reluctant to read investor obligations into investment treaties if they are not expressly incorporated into the treaty. Moreover, even if investor obligations are to be construed in accordance with international law, there must be other treaties and norms providing for the binding obligations of private corporations. At present those obligations only exist in the form of soft law. 

Mandating compliance with domestic law and international law to access dispute resolution

In Cortec Mining v Kenya, the investors claimed that their mining license was arbitrarily revoked. The tribunal ruled that the license had not been obtained in accordance with domestic law since the investor had not followed domestic EIA procedures and to qualify for protection, the investment must be made in accordance with the laws of the host state. Several BITs have a compliance with domestic law clause and limit protection to investments in compliance with domestic law.  Likewise, the Colombia Model BIT requires investors to respect human rights and environmental norms contained in any treaty to which a contracting party is a party to qualify for submitting a claim to a court or arbitral tribunal.

 The last date for the public to file objections to the draft EIA notification was August 11^th, 2020. Millions of citizens have filed their objections, and, in the meantime, the notification has been challenged in several courts across the country. Yet the government is trying its best to go ahead with the final publication of the draft. (see here).

For several years now, treaty drafters and the academy have waxed eloquent on how the international investment law regime limits the sovereign regulatory power of the host state. Not surprisingly, it seems somewhat ironic that often, states themselves water down domestic environmental and human rights protection measures. BITs have been viewed as being antithetical to the conservation of natural resources and human rights. In response to these arguments, BITs have evolved from being mere instruments of investment protection and promotion to giving host states the power to regulate the investment in exceptional circumstances such as the protection of public health and the environment. But these efforts to create a balance between investment protection and regulation will be rendered nugatory if host states themselves disregard established norms of environmental regulation and governance.