International investment rulemaking takes place at bilateral, regional, interregional and multilateral levels, with over 3000 investment treaties currently in force. Investment treaties can take a variety of forms and includes, for example, bilateral investment treaties (BIT), which are agreements made between two States establishing the terms and conditions for private investment by nationals and companies of one State in another State. This type of investment is usually called “foreign direct investment” (FDI).
Investor-state dispute settlements (ISDS) are measures which can be contained within certain investment agreements and give investors the right to call for arbitration in the event they believe that a government has violated such an agreement. Controversy arises when, for example, the investment treaty provides that a state will not amend its regulatory environment for a period of time (e.g. no environmental law amendments for ten years), but the state later wishes to amend the regulatory environment to fulfil human rights obligations, but the ISDS gives investors grounds to take action against the state if it makes such amendments.
The UN Business and Human Rights Guiding Principles (UNGPs), Guiding Principle 9, states:
“States should maintain adequate domestic policy space to meet their human rights obligations when pursuing business-related policy objectives with other States or business enterprises, for instance through investment treaties or contracts.”
“Economic agreements concluded by States, either with other States or with business enterprises – such as bilateral investment treaties, freetrade agreements or contracts for investment projects – create economic opportunities for States. But they can also affect the domestic policy space of Governments. For example, the terms of international investment agreements may constrain States from fully implementing new human rights legislation, or put them at risk of binding international arbitration if they do so. Therefore, States should ensure that they retain adequate policy and regulatory ability to protect human rights under the terms of such agreements, while providing the necessary investor protection.”+ Read more
The growing awareness of both the positive and negative impacts of investment treaties, be they bilateral or international, has resulted in various organisations such as UNCTAD and the South Centre, as well as NGOs, developing recommendations and concrete proposals on how to ensure that investment treaties are aligned and support human rights protection, or at the least do not limit it. UNCTAD’s Work Programme on International Investment Agreements (IIAs) actively assists policymakers, government officials and other IIA stakeholders in negotiating new IIAs with a view to making them more conducive to sustainable development and inclusive growth, and “modernizing the existing stock of old-generation treaties”. UNCTAD’s World Investment Report 2017 presents and analyses the costs and benefits of 10 policy options that countries can take to reform their old-generation treaties. Some States such as South Africa, India, Indonesia and Ecuador are leading the way in terminating some of their bilateral intevestment treaties. Such efforts are important examples of States achieving UNGP 9 by maintaining “adequate domestic policy space to meet their human rights obligations when pursuing business-related policy objectives with other States or business enterprises, for instance through investment treaties.” The UN Sustainable Development Goals also call for “respect [of] each country’s policy space and leadership to establish and implement policies for poverty eradication and sustainable development.”
One of the most controversial and disputed elements of the international investment agreements (IIAs) are provisions concerning the treaty-based Investor-State Dispute Settlement (ISDS). ECIPE has noted that “ISDS is a legal instrument in BITs, or other BIT-like bilateral and International Investment agreements, that grants investors the right to call for arbitration in the event they believe that a government has violated such an agreement”. Investor–state arbitration has greatly expanded over the past decade, with the total number of recorded cases rising from 51 in 2000 to 767 known arbitrations in 2016. Of those in 2016, UNCTAD has noted that 62 ISDS cases were initiated by investors pursuant to international investment agreements, who were mostly from Global South States. Alongside the increase in arbitrated cases, there has been growing concern by some states about the nature of arbitration claims by foreign investors against host states, which have included challenges to legitimate environmental and other public welfare and financial policy measures. The high costs of arbitration and lack of transparency, independence and predictability have also led several states to rethink the scope of their investment treaty obligations as well as the arbitration mechanisms incorporated in their investment treaties. While there is no legal aid equivalent for states defending themselves from these suits, corporations have access to a growing group of third-party financiers who are willing to fund their cases against states, usually in exchange for a cut of any eventual award. UNCTAD has launched the ISDS Navigator, which contains information about known international arbitration cases initiated by investors against States pursuant to international investment agreements (IIAs).
The ISDS mechanism came to be at the centre of controversy in a debate over the Transatlantic Trade and Investment Partnership (TTIP) and CETA, not least due to lack of transparency around those treaties development. In this context, it is important to note that there have been a number of important transparency-related innovations in international arbitration in recent years, for example the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, which came come into effect from April 2014. Also the EU Multilateral Investment Court project, which had an overall objective of setting up a permanent body to decide investment disputes, that would replace the system of ISDS based on ad hoc commercial arbitration and, like the approach in the FTAs, would bring the key features of domestic and international courts to investment adjudication. Both the EU-Canada Comprehensive Economic Trade Agreement (CETA) and the EU-Vietnam Free Trade Agreement foresee setting up a permanent multilateral mechanism and contain a reference to it. However, the EU’s approach has been criticised as “putting a sheep’s disguise on the ISDS wolf that still lurks beneath.”
The recent 2018 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) includes an ISDS mechanism. Notably, the text provides in relation to the Chapter on the ISDS that:
“Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.”
However, commentators have suggested that the text ‘otherwise consistent with this Chapter’ negates the potential effect of this provision.
The Regional Comprehensive Economic Partnership (RCEP), which has 16 member states, but nonetheless has been predicted to play a major role in maintaining and promoting world trade, is expected not to include the ISDS mechanism.
Some recent examples of ISDS in practice include:
After a decade-long fight, the citizens of the Italian region of Abruzzo won an important battle against the oil industry: they stopped the OmbrinaMare oil project, which would have had a large impact on the environment and climate. The Italian government agreed to pass a new law banning oil drilling near the Italian coast. However, the Italian government is now being sued for up to 350 million dollars in compensation under the Energy Charter Treaty.
For 13 years, the citizens of Dubrovnik have opposed the construction of a luxury resort on the hill overlooking their city. Ultimately, the project was stopped by Croatian courts. But the company behind it is now suing Croatia in a parallel justice system for corporations called ISDS, seeking $500 million in compensation – and trying to silence the community in local courts.
For 20 years, residents of Romanian town Roşia Montană have fought plans to build a gold mine which would impact on their homes and the environment. The project was stopped through a court caset, where the mine was declared illegal. But now Canadian company Gabriel Resources is suing Romania in an international tribunal, seeking US$5.7 billion in compensation – nearly 3% of Romania’s GDP.
The 2030 Agenda for Sustainable Development clearly recognises the role of investment, including in the form of Foreign Direct Investment (FDI), in achieving its objectives, especially through SDG target 17.3 on mobilising additional financial resources for developing countries from multiple sources; and SDG target 17.5 on adopting and implementing investment promotion regimes for least developed countries.
The need for a better investment climate for sustainable development is also detailed in the Addis Ababa Action Agenda (AAAA). The UNGPs firmly establish the relevance of international human rights law and due diligence to investment law and policy by emphasising the need for policy coherence. Moreover, they require ‘heightened’ due diligence where investment is supported directly by the State. This approach is reaffirmed in the 2030 Agenda, which, emphasises that investment must be targeted where the need is greatest, and meet certain prerequisites to ensure that it effectively contributes to sustainable development