Sustainable Development and its Impact on International Investment Law

Introduction

Sustainable development principles are becoming the most hotly debated topic in international investment law, with a rising focus from policymakers, legal scholars and international organizations. As challenges such as climate change, environmental degradation and social inequalities are intensifying, people are increasingly realizing the need for investment agreements that are aligned with sustainability objectives. This article will assess the transition of international investment agreements (IIAs) through an examination of past developmental periods, with a particular focus on sustainability provisions and prospects for the future investment policies.

Evolution of International Investment Agreements

• Initially, IIAs were developed primarily to protect foreign investments and foreign investors from expropriation, to provide protections of fair and equitable treatment, and to permit the free transfer of funds across borders.[1]
• The agreements were designed to provide a stable and predictable investment environment and thereby encourage capital flow across borders into host countries.[2]
• However, traditional investor protection often neglected environmental and social impacts of investments, with critiques stating that IIAs favoured investor rights over sustainable development.[3]
• There has been a noticeable period of transition in recent years. More countries are beginning to see that investment protection should not have to clash with social wellbeing and environmental sustainability. This has forced an assessment of already existing and new IIAs merging sustainable development principles.[4]

Incorporation of Sustainability Provisions

The incorporation of sustainability into IIAs can take various forms.

• Explicit Sustainable Development Objectives: More recently, IIAs start off with preambles that reference the Sustainable Development Goals (SDGs). This cues up the agreement and sends a strong signal to the parties involved that they are really committing themselves to a balance between advancing investment on the one hand and environmental and social considerations on the other. For instance, UNCTAD notes that countries are increasingly aligning their investment agreements with sustainability objectives, a recognition echoed by ministers in G20.[5] 
• Assessment of Social Impact: Nowadays, provisions requiring investors to undertake environmental and social impact assessments on projects before they begin are becoming more popular. Such assessments help to pinpoint adverse impacts and curtail thereby from their beginnings in the investment phase. The rationalistic basis for incorporating such provisions to mobilize sustainable investment is discussed by the OECD.[6]
• Corporate Social Responsibility: Other IIAs contain clauses that call for or invite investors to respect international standards from the realm of Corporate Social Responsibility. Such are commitments to human rights, labour standards, and environmental protections. The IISD has developed guidance on how sustainable development can be articulated in international investment agreements, placing importance on its link with CSR provisions.[7]
• Right to Regulate: To ensure regulatory space, many modern IIAs expressly recognize the host state's right to take measures needed for public welfare purposes, including those of environment and public health purposes. Therefore, investment protections do not hinder the ability of any country in pursuit of sustainable development policies. The OECD notice on strengthening sustainable investment through IIAs explores the importance of ensuring a right to regulate in the sustainable development context.[8]
• Sustainable Development Chapters: Comprehensively, two parties may provide chapters toward the aim of sustainable development. Often, these establish frameworks for cooperation on environmental and social issues, ensuring an alignment of investment activities with sustainability goals. An analysis of the inclusion of those chapters can be found in the UNESCAP report on sustainable development provisions in investment treaties.[9]

Challenges and Criticisms

Though many advances have been made in integrating sustainable development into IIAs, challenges still remain:

• Balancing Investor Protection and Regulatory Autonomy: Striking the right two-pronged balance between banning any investors in a host state from interfering with states' reasonable legislative interests is still a controversial one. Rigorous investor protection may, on some occasions, fetter a state below the legitimate steps for social welfare.  Inadequate protections may lead to a disincentive for foreign investment. The Columbia Center on Sustainable Investment (CCSI) has argued for a rethinking of international investment agreements with acceptable investor protection in that such agreements may fail to benefit any investment directed to undermine the principles of sustainable development.[10]
• Enforceability of Sustainability Provisions: Whereas several IIAs now include clauses on sustainability, establishing their enforceability presents challenges. Dispute settlement mechanisms of a more traditional form may not be suited to deal with breaches of environmental or social commitments. The OECD Study considers the potential of IIAs to spur sustainable investment and examines the challenges of validity.[11]
• Policy Coherence: Establishing coherence between investment policy and other national policies, such as those on climate, labour, and public health, proves crucial. Misalignment drives conflicts that, in the long run, erode the quest for sustainable development. The Investment Policy Framework for Sustainable Development (IPFSD) from UNCTAD gives guidance on the formulation of investment policies that rightly align with the goals of sustainable development.[12]

Case Studies

Urbaser v. Argentina:[13]

• Urbaser, the Spanish investor, filed an arbitration complaint against Argentina under the Spain-Argentina bilateral investment treaty, arguing that Argentina violated BIT when taking measures during its financial crisis. In return, Argentina counterclaimed that Urbaser failed to fulfil an obligation of access to water and sanitation within the purview of sustainable development. The tribunal ruled that there was no direct obligation under Urbaser to ensure sustainable development, but that corporations cannot take sides that violate human rights.
• The case has established that international investors may have sustainability and human rights obligations. As for corporations, they cannot evade human rights responsibilities while executing the international investment agreements; this decision changed investment arbitration in a way by introducing the environmental and social aspects.

Bilcon v. Canada:[14]

• The United States-based company, Bilcon, was to establish a quarry and marine terminal in Nova Scotia, Canada. However, the Canadian authorities rejected this project on the basis of an environmental impact assessment that indicated a significant negative effect. Under NAFTA, Bilcon challenged the decision, citing unfair treatment. The tribunal held in favour of Bilcon, contending that the environmental assessment process was arbitrary and unfair. This ruling raised fears that international investment law could undermine the states' power to enforce environmental and sustainability policies.
• In the face of environmental laws and foreign investment protection, the tribunal gives a favour to investors when environmental measures hurt their investment. The function of sustainable development policies in the context of international investment law is questioned.

Recent Developments

Several ongoing developments illustrate the continuing trend of incorporating sustainability into investment agreements:

• The European Union's Green Deal: The European Green Deal proposes to make the EU's economies sustainable by transforming climate and environmental challenges into actual opportunities. Clear policies and consistent regulations for the creation of sustainable investment and innovative moves must be developed. A recent commentary states that maintaining the Green Deal is vital to restore Europe's competitiveness and effectively handle climate change. Sustainable development is at the core of the Green Deal, as it aims to align economic growth with environmental sustainability, while international investment law supports the flow of capital to green initiatives by establishing stable legal frameworks for cross-border investments in climate-resilient projects.[15]
• The Barretts' Debt-for-climate Swap: Barbados went cargo, in April 2023, with a pioneering "debt-for-climate" swap financed by guarantees from the European Investment Bank and Inter-American Development Bank. This initiative allows money to flow toward climate resilience projects, a tapestry of investment agreements providing an archetype for bolstering sustainable development. Reuters reported on this significant development with echoing reviews, noting its potential to spark a "day of hope" that can be replicated by other climate-vulnerable nations. This initiative highlights the role of sustainable development by redirecting financial resources toward climate resilience in vulnerable nations, with international investment law facilitating such innovative financing structures through agreements and guarantees from global financial institutions.[16]

Future of Sustainable Development and International Investment Law

Transition Towards Inclusionary Framework:[17]

• Future international investment law would focus on the merger of investor protection with global sustainability practices.
• This will evolve into a new and inclusive form.

Integrating ESG Principles:[18]

• Investment treaties would introduce more robust environmental, social, and governance principles.
• These will ensure that investments create good economic growth whilst addressing climate change and social inequality.

Protecting State's Rights to Regulate:[19]

• Future treaties would reinforce the importance of states' permissions to regulate for sustainable development.
• The balance will be arrived at between investor protection and countries carrying out measures to attain sustainability.

Multilateral Efforts and OECD Guidance:[20]

• Multilateral frameworks, for example, the OECD's work, guide the integration of sustainability into investment law.
• Such an approach will be instrumental in shaping relevant policies and legal frameworks to harmonize investment law with global sustainability objectives.

Conclusion

The aspiration for the integration of sustainability principles into international investment law is not merely a policy preference but a necessity owing to the serious and simultaneous global environmental and social challenges that are already here. Therefore, to use FDI for the sustainable development of the world, the international community needs to amend the IIAs, elaborating strong environmental and social provisions that moderate investor rights with the regulatory power of states and multilateral frameworks. Though there remain a lot of hurdles, the current evolution of investment treaties stands as a bright ray, heading towards global sustainability goals.

[1] UN TRADE & DEVELOPMENT, World Investment Report (Feb. 15, 2025, 9:45 PM), https://unctad.org/topic/investment/world-investment-report.

[2] OECD, Directorate for Financial and Enterprise Affairs (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/about/directorates/directorate-for-financial-and-enterprise-affairs.html.

[3] International Institute for Environment and Development, https://www.iied.org/search?k=international%20investment%20agreements%20sustainable%20development (last visited Feb, 15, 2025).

[4] WORLD TRADE ORGANIZATION, Lessons Learned and Challenges Ahead for the WTO Trade Monitoring Exercise (Feb. 15, 2025, 9:45 PM), https://www.wto.org/english/res_e/reser_e/ersd202003_e.html.

[5] UN TRADE & DEVELOPMENT, World Investment Report (Feb. 15, 2025, 9:45 PM), https://unctad.org/topic/investment/world-investment-report.

[6] OECD, Strengthening Sustainable Investment through International Investment Agreements (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/publications/strengthening-sustainable-investment-through-international-investment-agreements_a8729c98-en.html.

[7] J Anthony VanDuzer, Penelope Simons and Graham Mayeda, Integrating Sustainable Development into International Investment Agreements: A Guide for Developing Countries (Feb. 15, 2025, 10:45 PM), https://www.iisd.org/system/files/meterial/6th_annual_forum_commonwealth_guide.pdf.

[8] OECD, Strengthening Sustainable Investment through International Investment Agreements (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/publications/strengthening-sustainable-investment-through-international-investment-agreements_a8729c98-en.html.

[9] SUSTAINABLE DEVELPOMENT GOALS, https://sdghelpdesk.unescap.org/e-library/sustainable-development-provisions-investment-treaties (last visited Feb, 16, 2025).

[10] COLUMBIA CENTRE OF SUSTAINABLE INVESTMENT, Aligning Investment Treaties with Sustainable Development (Feb. 16, 2025, 9:45 PM), https://ccsi.columbia.edu/content/aligning-investment-treaties-sustainable-development.

[11] OECD, Strengthening Sustainable Investment through International Investment Agreements (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/publications/strengthening-sustainable-investment-through-international-investment-agreements_a8729c98-en.html.

[12] Investment Policy Framework for Sustainable Development, https://en.wikipedia.org/wiki/Investment_Policy_Framework_for_Sustainable_Development (last visited Feb, 17, 2025).

[13] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26.

[14] Clayton and Bilcon of Delaware Inc. v. Government of Canada (PCA Case No. 2009-04).

[15] Adam George Carruthers, Case study for the European Green Deal (Feb. 17, 2025, 9:45 PM), https://krex.k-state.edu/server/api/core/bitstreams/c286c0f3-5662-4139-a461-522d18064311/content.

[16] REUTERS, Marc Jones, Barbados debt-for-climate swap nears as EIB, IDB finalise guarantees (Feb. 17, 2025, 11:45 PM), https://www.reuters.com/sustainability/sustainable-finance-reporting/barbados-debt-for-climate-swap-nears-eib-idb-finalise-guarantees-2024-07-25/.

.[17] OECD, Strengthening Sustainable Investment through International Investment Agreements (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/publications/strengthening-sustainable-investment-through-international-investment-agreements_a8729c98-en.html.

[18] Aligning Investors with Sustainable Finance, https://d8g8t13e9vf2o.cloudfront.net/Uploads/q/b/f/aligninginvestorswithsustainablefinance_738858.pdf (last visited Feb, 17, 2025).

[19] OECD, Strengthening Sustainable Investment through International Investment Agreements (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/publications/strengthening-sustainable-investment-through-international-investment-agreements_a8729c98-en.html.

[20] OECD, Sustainable investment, (Feb. 15, 2025, 9:45 PM), https://www.oecd.org/en/topics/sub-issues/sustainable-investment.html.

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