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Addressing the imbalance of investor-state obligations in investment treaties will promote sustainable development within global business practice.

International investment agreements demand reform to meet the urgent need for more sustainable development, says a UNSW expert. Today’s pressing social and environmental challenges make mobilising investment that contributes to sustainable development goals more important than ever, says Associate Professor Kun Fan from the in UNSW Law & Justice.

“We live in a world where the planet’s oceans and biodiversity are at great risk; where global warming is set to intensify over the course of the next 30 years; where our future generations may suffer a scarcity of resources within a less-than-supportive environment,” A/Prof. Fan says.

“Sustainable development – development that meets the needs of the present without compromising the needs of the future, if we follow the – is our only means to prevent this. [However,] to date, few international investment agreements address sustainable development in any meaningful way.”

International economic law plays an essential role in realising sustainable development goals (SDGs) in foreign investments; yet supremacy of investment protection provides a key challenge within the current system, she says.

“[Older] investment treaties are often silent on investors’ contributions to sustainable development. They impose numerous obligations on the states, but do not seem to hold corporations accountable for the environmental, economic, human rights, and public health and safety consequences of their activities,” she says.

A lack of practical implications or sanctions for businesses amounts to a system of no accountability, she says. 

“Stronger, more progressive reforms are required to secure the social, environmental and economic benefits of the SDGs, which have typically been marginalised or ignored in investment treaties and investor-state arbitration.”

Associate Professor Kun Fan

A/Prof. Fan’s research focuses on the intersection of investment law, environmental law and sustainable development law. She specialises in alternative and online dispute resolution, comparative legal studies, and law and society, with a particular interest in China.

The interdisciplinary scholar has worked as counsel, secretary for the arbitration tribunal and as an arbitrator in international arbitrations; she has overseen more than a hundred arbitrations administered by the ICC International Court of Arbitration as deputy counsel.

She has conducted a comprehensive treaty survey of China’s international investment agreements (IIAs) analysing China’s progress on sustainable development goals. “China is in a position of influence within the global arena,” she says.

“Greater understanding of the status quo and the trend towards SDG provisions within its bilateral investment treaties (BITs), multi-lateral treaties, and free trade agreements (FTAs) allows [global] policymakers to grasp the potential for future treaties.”

The treaty review is part of a project, funded by Bird & Bird, examining trends within sustainable development clauses and exploring new opportunities and approaches to embedding SDGs in investment treaties and investor-state arbitration. 

The research will provide national investment policy guidelines to incorporate SDGs in investment policymaking for developed, emerging and developing nations and policy recommendations for negotiating sustainable-development-friendly international investment agreements. It will also recommend legal frameworks for investment arbitrators to balance the state’s SDGs and investors’ rights and help businesses better understand how these changes might affect their future operations. 

Activating greater investor responsibilisation through incentives

A/Prof. Fan’s research maps a global shift toward placing greater responsibility for SDGs on investors – investor responsibilisation; this has produced a new generation of investment policies prioritising inclusive growth and sustainable development.

Peak bodies, including the , and the , have produced models to help advance the sustainable development agenda and promote responsible business conduct in treaties.

Additionally, the that states include in BITs and FTAs “specific provisions on the legal responsibility of transnational corporations and investors to make reparation for environmental, health and other damage caused by their activities”.

However, their integration in IIAs is hampered by the lengthy nature of such agreements, business reticence and a lack of political will, A/Prof. Fan says. Rather than imposing direct obligations on investors, many countries have taken ‘soft’ approaches, using ‘encouraging’ language to promote sustainable development within their IIAs, she says.

While Africa has invested in sustainable development since the 2006 Pan-Africa Investment Code and the EU has a clear agenda to integrate SDGs into investment and trade, “China [for example] has not yet been a rule-maker in the integration of sustainability into investment governance despite its potential influence in the global arena,” she says.

“[Yet] while there is still an overall lack of sustainable development provisions in its existing IIAs, an increasing number of China’s recent treatises move towards sustainability.” 

Associate Professor Kun Fan

The majority of these are achieved through general exceptions or carve-out provisions that preserve the states’ right to regulate for the purposes of legitimate public welfare, such as public health, safety and the environment, she says.  

The general exception allows the state to adopt or maintain environmental measures necessary to protect human, animal or plant life, or health without being held liable as a violation of the BIT. The carve-out provisions exempt states from specific treaty obligations, such as expropriation, for adopting non-discriminatory measures for the purpose of legitimate public welfare. 

Some more recent Chinese IIAs have also emphasised corporate social responsibility (CSR), often as part of an IIA’s preamble, asking – rather than obligating – investors to commit to supporting SDGs, she says. Indirect obligations, such as maintaining national environmental, labour and social standards (‘no lowering of standards clauses’) or best endeavour provisions also ‘encourage’ corporations to voluntarily adhere to CSR standards in their operations. 

While these ‘soft’ approaches do not generally confer rights or obligations, these shifts can have significant practical implications for business, depending on their interpretation by the state, she says. 

“Best endeavour clauses, for example, can include enacting domestic laws that grant preference to CSR-compliant companies in the awarding of public contracts or financial encouragement, such as offering tax breaks or implementing CSR requirements for export credits,” she says.

“The Dutch government has linked the OECD guidelines to export credits such that investors who want to have their capital needs insured by the government are obliged to sign a declaration of intent that they will endeavour to implement OECD guidelines.”

Compliance with investor obligations can also be a condition for benefiting from the protections of the investment treaty, she says. “The best example is India’s revised Model BIT, revealed in the draft form in April 2015, that contained a variety of progressive provisions [that required investors demonstrate compliance in relation to corruption, mandatory disclosure, taxation, environmental, human rights and labour laws] … to benefit from the treaty provisions,” she says. 

“Significantly, it also allows the state to initiate a counterclaim against the investor for a breach of these positive obligations.”

However, all the above approaches still fall short of imposing explicit and direct legal obligations on investors. Most countries are still reluctant to stipulate direct obligations of investors in international agreements, due to lack of political will and possible resistance from the business community, she says.

That said, there are some interesting examples of the shift. While the final version of India’s Model BIT diluted and excluded some of these innovative provisions, the draft demonstrates the trend toward greater responsibilisation and the kinds of positive obligations businesses could face in the future, she says.

The 2016 Morocco-Nigeria BIT, still awaiting ratification, offers ground-breaking mechanisms to impose positive obligations on investors relating to human rights and environmental protection. 

“While the BIT does not explicitly provide for states to enforce these obligations against investors [through the investor-state dispute settlement system], these types of obligations potentially open the door to requiring investors under the BIT to assess, manage and mitigate their greenhouse gas emissions, for example,” she says.

China is playing a very important role in the economic order, she says. “It could and should play a more active role to lead the global initiatives aimed at rebalancing IIAs towards investors’ responsibilisation, moving from carve-out provisions and soft law to hard laws which impose positive and direct obligations on investors, paired with procedural mechanisms to assess their implementation.”

Arbitrator as guardian of public interest rather than mere service provider

While current treaty limits don’t empower arbitrators to hold investors to account, these indirect or “soft” provisions could serve as ‘contexts’ for interpretation within dispute arbitrations, A/Prof. Fan says.

“Arbitrators have discretion to limit damages based on a private entity’s non-performance of CSR or even award damages for investors’ breach of international human rights obligations; this would promote a change in jurisprudence towards a more balanced consideration of human rights, environmental and social issues in addition to investors’ vs states’ regulatory needs,” she says.

For instance, in the case Burlington v Ecuador, the ICSID tribunal awarded US$39.2 million to Ecuador for environmental harm caused by the investor in breach of the Ecuadorian statutory environmental regulation regime. In Urbaser SA & Ors v Argentina, the tribunal accepted its jurisdiction over Argentina’s counterclaim against the investor for its violation of human rights and confirmed that “right to water” was a human right under international law.

“[It encourages arbitrators] to go beyond the investment-supremacy approach … to take into account the various elements of broader public interest [in their decision-making].”

There are also an increasing number of treaties that include procedural mechanisms, such as a ‘clause of expert reports’ that allows for independent appointments to assess environmental, health, safety, or other scientific matters raised by parties in environmentally sensitive disputes, she says. 

“Such procedural provisions help establish a workable mechanism to discuss and resolve environmental issues.” 

Associate Professor Kun Fan

Raising greater awareness of these trends informs policymakers and arbitrators on the need to rebalance the rights and obligations of investors and states when treaties are both renegotiated and disputed, she says. “[And it encourages] business to comply with human rights standards, [for example], knowing that there may be obligations placed on businesses in the future.”

In policymaking, there are signs a new generation of investment treaties is aiming to do things differently, with the intension of placing duties on investors to act responsibly, such as the 2016 Morocco-Nigeria BIT and a number of model BITs, she says.

“In arbitral practice, despite some controversial decisions, there seems an emergence of jurisprudence, in which arbitrators take a more balanced view between the duties of states and investors, such as Burlington v Ecuador and Urbaser SA & Ors v Argentina,” she says.

“In business, Environmental, Social and Governance (ESG)-related conditions are becoming more common in long-term investment contracts, including in the energy, mining and infrastructure sectors. The America Bar Association also updated its model contract clauses, to protect human rights of workers involved in international supply chains. More efforts toward such direction are needed from all stakeholders.”

Written by Kay Harrison

Researcher