Sustainable International Investment Agreements (IIAs) must safeguard the balance of the overall give and take between the foreign investor and the host state as well as between economic, environmental and social priorities. Therefore, drafting Sustainable Development friendly IIAs involves a careful calculation of the costs and benefits of single IIA provisions and their combination – on political, economic and eco-social levels.
Contributor: Christoph Greil
Sustainable International Investment Agreements (IIAs) must safeguard the balance of the overall give and take between the foreign investor and the host state as well as between economic, environmental and social priorities. Therefore, drafting Sustainable Development friendly IIAs involves a careful calculation of the costs and benefits of single IIA provisions and their combination – on political, economic and eco-social levels. The inclusion of Sustainable Development into IIAs follows three basic technical ratios. First, common existing IIA provisions can be adjusted by using hortatory language, clarifications and carve-outs. Second, new provisions can be introduced which enhance host state rights, include investor obligations and ensure support by the investor’s home state to the host state. Third, "Special and Differential Treatment" can be achieved by including asymmetrical obligations, lowering the level of obligation for the developing party and requiring development friendly interpretation.[1]
Concerns for the public interest can be reflected in practically all parts and provisions of an investment agreement. Substantively speaking, host states should be utmost careful about the integration of extensive "most favoured nation treatment" and "umbrella clauses", since these provisions can extend host state obligations in unexpected ways. Moreover, states should be cautious about granting foreign investors the "right of establishment" in a liberal manner. Instead, it is recommendable to require thorough ecological, social and Human Rights impact assessments before an investment gets approval. In addition, host states should preserve (and actually make use of) their sovereign right to impose conditions and "performance requirements" on the foreign investor in order to ensure a fair state participation in the management as well as in the yield of the investment. Furthermore, it should be noted that "stabilization" or "freezing" clauses, which mostly aim at exempting the investment from the effects of legislative changes within the host state, can severely restrict the latter’s regulatory flexibility and might result in massive liability for losses occurred by the foreign investor due to changes within the domestic legal framework.
Technically speaking, the definition of the scope of investment protection should be well thought out. Definitions of "investor" and "investment", particular scope provisions but also preambles, exceptions and reservations should be used wisely to ensure that only sustainable investments effectively contributing to the host state’s development may be established and will be protected by the IIA. Furthermore, treaty drafters should bear in mind the normative uncertainties introduced by general exceptions as well as the advantages of precisely defining the scope of the protection standards. In this respect, the UNCTAD "Investment Policy Framework for Sustainable Development"[2] and the IISD "Model Agreement on Investment for Sustainable Development"[3] represent well sorted pools of progressive drafting ideas. In line with these publications, the following depiction presents options for designing major IIA standards of investment protection in a more sustainable way:
- "Expropriation" clauses can clarify that non-discriminatory host state measures in the public interest applied in accordance with due process are not deemed expropriatory and compensable. Investment protection can be limited to tangible property. "Partial expropriation" can be excluded. Exceptions for measures to protect health, the environment and other policy priorities can be included. The clause can state that only direct losses are compensable and that the amount of compensation or damages can be limited to "appropriate" while empowering the tribunal to reduce the payment due according to considerations of fairness and equity.
- "Fair and equitable treatment" clauses can be linked to the customary minimum standard and its scope of application can be limited to specific kinds of host state actions. The clause can clarify that a breach of other IIA standards of protection does not automatically constitute a breach of the "fair and equitable treatment" standard. In addition, the clause may require the interpreter to take the host state’s level of development and financial abilities into account, both on the level of liability and compensation or damages.
- "Full protection and security" clauses can clarify that the obligation refers to physical protection only and can reduce the degree of diligence and protection owed by the host state to a reasonable degree taking into account the actual possibilities of the host state.
- "National treatment" clauses can require the interpreter to consider Sustainable Development relevant factors when deciding whether investors or investments are in "like circumstances": e.g. the effect of the investment on third persons, the local community, the regional environment and the global commons; the business sector; the production methods; the goal of the alleged discriminatory measure.
- "Most favoured nation" clauses can be drafted in a similar way with respect to the relevant comparator. Moreover, they can be limited in various ways: limited to specific activities (not including establishment, acquisition and expansion); limited to listed policy areas, sectors and measures (positive and negative lists); limited to de jure discrimination and only subject to local law.
In any event, unambiguous treaty language is in the interest of legal certainty and can avoid that vague terms receive their meaning by reference to predefined standards of international law or recourse to unsuitable jurisprudence. Moreover, including clauses explicitly preserving the host state’s regulatory space while prescribing substantial investor obligations (e.g. to respect international Human Rights, labor and environmental norms and to comply with local law) will safeguard the public interest and protect host state measures from challenges under the investor-state dispute settlement mechanism. In this context, even soft law, such as the UN "Guiding Principles on Business and Human Rights"[4], can be elevated to a binding standard.
Finally, it is advisable for host states to strive for the creation of treaty-based (claim and counter claim) mechanisms to hold transnational corporations effectively liable for misconduct – both civil and criminal. In this context, the creation of "enterprise liability" would be capable of piercing the corporate veil and holding the entire globally acting corporation liable for damages caused by the entity installed in the host state.
To sum up, the combination of carve-outs, positive and detailed affirmations of the host state’s right to regulate, substantial investor obligations and effective enforcement mechanisms will be a strong agenda for strengthening the host state’s position as well as the public interest.
[1] Compare United Nations Conference on Trade and Development (UNCTAD), Investment Policy Framework for Sustainable Development, United Nations, New York/Geneva, 2015 pp 85 et seqq, available at unctad.org/en/PublicationsLibrary/diaepcb2015d5_en.pdf
[2] See above footnote 1
[3] International Institute for Sustainable Development (IISD), Model Agreement on Investment for Sustainable Development, Second Edition, 2006, available at www.iisd.org/pdf/2005/investment_model_int_handbook.pdf
[4]United Nations, Guiding Principles on Business and Human Rights, 2011, available at www.ohchr.org/documents/publications/guidingprinciplesbusinesshr_en.pdf