IIED | 16 October 2017
Responsible investment provisions in international investment treaties: where next?
by Lorenzo Cotula
The system of international investment treaties is at a crossroads. The standards of investment protection embodied in those treaties, and the legal arrangements that enable investors to bring arbitration claims against states, are driving heated debates.
Several states are reviewing their investment treaty policies to recalibrate investment protection standards, and some are exploring options to address perceived shortcomings of investor-state dispute settlement mechanisms (ISDS).
As debates intensify, there is a risk of neglecting an important area: how treaty reform could promote more responsible investment and advance sustainable development.
The case for investment quality
Time and time again we see an apparent paradox: low and middle-income countries strive to attract foreign investment for national development; yet when investments occur, they often create conflict – over land acquisition, environmental impacts or labour relations.
Making sense of this apparent paradox means recognising that the nature and quality of the investment, not just its quantity, influence the contribution that investment can make to sustainable development.
It is therefore important that countries carefully consider the types of investments they want to promote and the standards those investments should comply with.
Integrating responsible investment in investment treaties
Traditionally focusing on protecting investments, most investment treaties say little or nothing about the nature and quality of those investments, or standards of responsible conduct.
Investment treaties are not necessarily the best vehicle for tackling all the social, environmental and economic issues at stake in investment processes. National law has a key role to play. Also, many existing international instruments set standards relevant to responsible investment – from human rights treaties and labour conventions to international soft-law instruments on respecting land rights.
International law tools can help coordinate the application of multiple instruments, for instance by requiring tribunals interpreting investment treaties to "take into account" (PDF) other relevant international rules applicable in relations between the parties.
Yet applying different national and international norms in practice often gives rise to difficult issues. For example: what should an ISDS tribunal do if an investment has failed on its responsibility to respect human rights? More explicit treaty provisions would increase clarity and certainty.
In addition, the narrow focus on investment protection of first-generation bilateral investment treaties (BITs) creates imbalances in the rights and obligations of the key actors involved. And because investment treaties have bite, it pays to integrate standards of responsible investment in legal instruments that matter – not least because those standards could be more easily considered in ISDS.
What might responsible investment provisions look like? Evolving treaty practice shows fewer developments in the area of responsible investment compared with investment protection standards. But some innovative features are emerging.
Treaty provisions on state obligations
A number of treaties seek to clarify what states must do to promote responsible investment:
Investor obligations clauses
Some recent treaties clarify the responsibilities of investors. For example, a few treaties (or treaty templates) require investors to comply with applicable laws. Examples include the India Model BIT 2015 and the Intra-MERCOSUR Protocol 2017.
In some countries, compliance with national law may not be enough to uphold minimum standards. Some recent treaties refer to compliance with international standards of corporate social responsibility. But these provisions are not typically mandatory nor assisted by effective enforcement mechanisms.
The Morocco-Nigeria BIT 2016 innovates, for instance requiring in mandatory terms that investors:
Several instruments, including the India Model BIT 2015, the Investment Morocco-Nigeria BIT 2016 and the Intra-MERCOSUR Protocol 2017, prohibit investors from engaging in corruption.
Moving forward: three challenges
These new departures in formulating treaties provide food for thought on possible ways to integrate responsible investment standards into investment treaties. Yet we are still far from a consolidated set of solutions.
First, this area of treaty practice is yet to settle. Responsible investment provisions remain rare and often seem underdeveloped relative to other treaty clauses. Some of the model treaty provisions mentioned above are yet to be translated into actual treaties, and the Morocco-Nigeria BIT and the Intra-MERCOSUR Protocol are not yet in force.
Second, complex issues are at stake. Many of the international instruments that investment treaties could refer to are directed at states rather than investors. Coupled with limited investment treaty practice, these complexities create challenges for drafters – for instance, on how to design effective investor obligations clauses.
Third, many fundamental questions remain unresolved, such as how to ensure that responsible investment provisions have legal bite. Simply referencing international standards is unlikely to have much effect.
This would require, for example, thinking through the consequences of investor non-compliance in an ISDS context. Should non-compliance be a jurisdictional issue, where investments that breach responsible investment standards are excluded from protection?
Or else, how should tribunals consider responsible investment standards when deciding the merits of the dispute? Should states be able to bring counterclaims against investors based on alleged violations of those standards?
Also, what scope, if any, should there be for third parties to invoke responsible investment provisions? Many contemporary investor-state disputes are rooted, at least in part, in conflicts that involve third parties, such as people affected by the investment. A recent IIED report found that third-party perspectives are often overlooked in ISDS proceedings in their current design.
These are difficult questions, both technically and politically, and there is real value in different actors – states, international organisations, civil society, the private sector and researchers – coming together to debate issues, share lessons and explore ways forward.
Lorenzo Cotula (firstname.lastname@example.org) is a principal researcher (law and sustainable development) in IIED’s Natural Resources research group. This is a lightly revised version of remarks made at the UNCTAD Annual High-Level IIA Conference, held in Geneva on 9-11 October 2017.