International investment agreements ("IIAs") are traditionally focused on the promotion and protection of foreign investors in the host country of their investments. In the last decade a new generation of IIAs has emerged that seek to take a broader approach to foreign direct investment ("FDI") and its impact on the economic and social development of the host State as well as on the cooperation between the contracting parties.

The concept of sustainable development has found its way into this new generation of IIAs and with it the central objective of protecting the environment against negative impact of foreign investment projects on the environment and on exhaustible natural resources. This new generation of IIAs has done it in a careful and balanced way, seeking to remain focused on investment protection and refraining, in their vast majority, to overload investment agreements by introducing obligations on foreign investors in matters of environmental protection.

While an older generation of traditional IIAs did not touch upon environmental protection at all, the generation of post-NAFTA treaties that followed in the 1990s focused mainly on a “non-lowering of standards” approach and introduced soft-law obligations on investors to follow best practices. Recent IIAs have become mindful of and specific on environmental issues, focusing on the protection of projects that will not be contrary to the protection of the environment and expressly protecting the State’s right to regulate for environmental purposes, using various treaty-making techniques to either exclude environmental regulation from the scope of protection of the treaty or providing for broad exceptions to cover a State’s right to regulate on human, animal, plant health and life.

Only few IIAs have gone all the way to include objective obligations on investors to protect the environment and have generally not provided for concrete sanctions in the treaty itself, leaving it to the domestic laws and regulations to take such measures or to be raised as a defence in investor- State disputes.

This chapter will explore approaches taken in recent treaties and highlight the way they acknowledge and take into account the central concern of sustainable development and environmental protection into their provisions. It will offer some remarks on the way IIAs have balanced environmental protection with investment protection and sought an equilibrium to address the potential tension between two un-dissociable components of economic development.

Indeed, the recognition that protection of the environment is one of the fundamental items of the broader sustainable development agenda on the one hand, and the reaffirmation that FDI is an engine of sustainable economic growth on the other, have highlighted the potential tension between these two concurrent objectives: protecting the environment against potential damages generated by foreign investors and protecting foreign investors against changes in the investment climate and damage generated by interference of the State with their investment for environmental motives.

A number of claims and cases have been brought under BITs for the promotion and protection of investment, generating controversy about the respective obligations of environment protection that befall States as part of their inherent role as regulators and the obligations undertaken under IIAs to protect investors against interference with their investments.

At the same time, disputes relating to damages on the environment, on land, on exhaustible natural resources such as water or other commodities have been raised by authorities, communities and stakeholders repeatedly against investment projects in protected areas either to challenge the establishment of such projects or to call for compensation of environmental damages.

Encouraged by the approach taken in the international trading system and included in recent free trade agreements, the State’s right (or duty) to regulate for public purpose particularly in the area of protection of the environment has found its way as a balancing element into IIAs.

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Environmental Protection in Traditional IIAs

As economic instruments aiming at the promotion and protection of investment, IIAs have evolved over the last decade to reflect the growing awareness of the interconnection between broader environmental concerns, sustainable economic development and investment promotion and protection.

Hortatory Language in the Preamble

Early IIAs, when they made a reference to the environment, addressed the protection of the environment in hortatory terms, primarily in the preamble, in the form of mere “string references,” where the environment is simply mentioned along with other concerns or broader objectives such as, for example, economic cooperation between the countries. Over time, these objectives have found their way into the main body of the treaty and into obligations or exceptions to the extent that, very few recent treaties omit a reference to environmental protection nowadays.

In fact, traditional BITs protect investments made “in accordance with the laws and regulations” of the host country. This reference clearly includes environmental regulation and conformity with environmental standards of the host State among the conditions for an investment to be protected under the investment treaty. The BIT between Costa Rica and the Netherlands1 goes as far as providing, specifically in its Article 10 that covered investments are investment made in accordance with the laws and regulations of the host country, which includes “its laws and regulations on the environment.”

A reference to the necessity for investments to protect the environment of the host country can only reinforce the understanding that indeed, the environmental regulations of the host country form an integral part of the requirements for an investment to benefit from the advantageous status of protected investment and resort to international dispute settlement.

A First Evolution: Addressing the Pollution Haven Hypothesis.

The provisions in the IIAs contemporaneous to the NAFTA and the MAI negotiations are based on the assumption that environmental protection regulation in home and host countries of FDI may not be equally stringent and that countries may seek to attract heavily polluting industries by maintaining or setting low environmental standards as an incentive for investors. Along with other norms and standards, environmental regulation is seen as a means to pursue disguised protectionism and is a central issue in international trade and investment negotiations. It is still a mystery today what empirical evidence shows investors seeking to reduce production costs by locating their investment into “low”-standards host countries with a low level of environmental regulation while maintaining access to “high”-standards markets for their products. At least in comparison to other more obvious investment determinants such as labor costs, the availability of natural resources or the size of the market. Similarly, empirical evidence of countries actively pursuing such policies is scarce. Nowadays this phenomenon continues to raise concerns however at the international level and is known as the “carbon leakage hypothesis,” whereby investors in countries with stringent carbon regulations would relocate to countries with low levels of carbon. Under this hypothesis, there is fear that with the liberalization of investment rules and an increased competition for FDI, host States may decide to lower their environmental standards to attract investment from companies from industrialized countries with high carbon regulation standards. The resulting distortion in competition could result in environmental dumping, which could severely impact the protection of the environmental standard but also the free flow of investment and trade.

IIAs have commonly approached this issue through commitments by contracting parties not to lower their environmental standards to attract investment, basically, not to engage in environmental dumping to attract investment projects.

FTA between Canada and Colombia of 2010) in Article 815: Health, Safety and Environmental Measures, states that:

The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that the other Party has offered such an encouragement, it may request consultations with the other Party. The Parties shall make every attempt through consultations and exchange of information to address the matter.

This provision is more typical to treaties that provide rights and obligations among member countries or contracting parties and not only for investors. They are more typically found in free-trade agreements. It is also typical of treaties that deal with liberalization of investment flows and the right of establishment for the foreign investors, hence of entry into the market and not so [Page64:] much of traditional bilateral investment treaties focused on protection of established investments made in accordance with the laws and regulations of the host country.

Introducing Soft Obligations for Investors: Reference to the OECD Guidelines and Other Codes

At the same time, IIAs have also increasingly introduced the requirement for international investors to abide by international best practices, including through the use of environmentally friendly technologies for production and management of their projects, even in the absence of more stringent requirements of domestic laws in the host country of their investment. In this sense, the reference to the OECD Guidelines for Multinational Enterprises and corporate social responsibility provisions serves this purpose.

In Recent IIAs: Environmental Protection as an Area Where the Contracting States Retain the Right to Regulate for Public Purpose.

The role of States and their duty to regulate for the preservation of the environment is reaffirmed as a trend in recent treaties. Treaties have dealt with it through strong exception language, through language which identifies the right to regulate directly, that requires that the measures be otherwise consistent with the substantive protection provisions of the treaty or that directly play the role of an exception to the provisions of the treaty.

Early Comprehensive Investment Treaties Have Followed the GATT Approach:

The NAFTA2 under articles 11-14 provides that “Nothing in Chapter 11 on Investment shall be construed to prevent a Party from adopting, maintaining or enforcing any measures 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 concerns.” Similar to the approach taken in the GATT, the right to regulate for environmental purposes is recognized as an exception to investment protection obligations as long as it is consistent with the investment chapter.

Article 18 of the Energy Charter Treaty3 provides that “Each state continues to hold in particular the rights to decide the geographical areas which in its Area to be made available for exploration and development of its energy resources, the optimization of their recovery and the rate at which they may be depleted or otherwise exploited, and to regulate the environmental and safety aspects of such exploration, development and reclamation within its Area.”

The Trans-Pacific Partnership Treaty concluded recently between 12 countries of the Pacific Rim in 20164 combines a specific provision on environment in the investment chapter and a separate chapter on cooperation on environment protection.

Article II.15: Investment and Environmental, Health and other Regulatory Objectives

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.

Article II.16: Corporate Social Responsibility

The Parties reaffirm the importance of each Party encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party.

Exceptions and Carve-Outs

Recent BITs and FTAs have taken more radical approaches and chosen to carve-out environmental regulation with broader worded exceptions and permit public policy measures, otherwise inconsistent with the treaty, to be taken to preserve the environment provided, however, that these measures are applied in a non-arbitrary manner and do not constitute disguised restrictions to investment.

The ASEAN ACIA is an illustration of this trend. Article 18 of the ASEAN ACIA5 provides that:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between Member States or their investors where like conditions prevail, or a disguised restriction on investors of any other Member State and their investments, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member State of measures:

...(b) necessary to protect human, animal or plant life or health…

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(f) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

Article 2 of the draft proposal made by the European Union to the United States for the Trans- Atlantic Trade and Investment Partnership Agreements (Draft TTIP6) makes a clear statement at the beginning of the treaty regarding the State’s right to regulate for environmental purposes:

Article 2 — Investment and regulatory measures/objectives

  1. The provisions of this section shall not affect the right of the Parties to regulate within their territories through measures necessary to achieve legitimate protection of public health, safety, environment or public morals, social or consumer protection of cultural diversity.
  2. For greater certainty, the provisions of this section shall not be interpreted as a commitment from a Party that it will not change the legal and regulatory framework, including in a manner that may negatively affect the operation of covered investments or the investor’s expectations of profits.

As a general trend, measures taken by the State to protect the environment are provided for specifically under most recent IIAs in the expropriation provisions, taking different approaches to the wording of the impact of such measures on the finding of an indirect expropriation.

The 2004 US Model Treaty and subsequent investment chapters in Free Trade Agreements concluded by the United States include a remark in the Annex on Indirect Expropriation, whereby: Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

The TTIP proposal made by the European Union, reflected in the recent treaties it negotiated with Canada (CETA7) and with Viet Nam 8 follows the same approach in the provisions guiding arbitral tribunal in the finding that an indirect expropriation has occurred.

For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity do not constitute indirect expropriations.9

A Marginal Trend: Spelling Out Positive Obligations for Investors and Drawing Consequences on Investment Dispute Settlement

A minority of treaties, so far, have taken a bolder approach and sought to rebalance investors' rights under investment treaties with investors' obligations to otherwise respect the laws and regulations of the host country, particularly in certain areas such as the protection of the environment. It may be argued that the reference to admission and protection in accordance with the laws and regulations of the host countries in traditional BITs did already take this same approach however it did not bring it to the end sought in the new generation of treaties, ie, to deprive investors that do not follow these obligations from their right to bring a case to international arbitration against the State.

The India Model BIT made available publicly in 2015 illustrates this approach:

Article 12: Compliance with Law of Host State

1.1 Investors and their Investments shall be subject to and comply with the Law of the Host State. This includes, but is not limited to, the following:

  1. Law concerning payment of wages and minimum wages, employment of contract labour, prohibition on child labour, special conditions of work, social security and benefit and insurance schemes applicable to employees;
  2. information sharing requirements of the Host State concerning the Investment in question and the corporate history and practices of the Investment or Investor, for purposes of decision making in relation to that Investment or for other purposes;
  3. environmental Law applicable to the Investment and its business operations;
  4. Law relating to conservation of natural resources;
  5. Law relating to human rights;
  6. Law of consumer protection and fair competition; and
  7. relevant national and internationally accepted standards of corporate governance and accounting practices.

1.2 Investors and their Investments shall strive, through their management policies and practices, to contribute to the development objectives of the Host State. In particular, Investors and their Investments should recognise the rights, traditions and customs of local communities and indigenous peoples of the Host State and carry out their operations with respect and regard for such rights, traditions and customs.

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The COMESA Common Investment Area also sought to link investors obligations to their right to bring claims under the investor-State dispute settlement mechanism provided for by the treaty and uses both general exceptions and specific exclusions for measures taken by the State to protect the environment. It should be mentioned however that this treaty concluded in 2007 has not come into force.

Conclusion

At the heart of the concept of sustainable development, the protection and sustainable use of natural resources features prominently in the objectives of investment policies, investment regulation and international investment instruments. Policy makers at the domestic and international levels and other stakeholders are paying attention to the way investment projects and broader environmental protection goals interact.

It is fair to say that while for many years IIAs have been largely silent about environmental issues, investment treaties nowadays pay attention to the quality of investment projects, to the requirement to meet environmental rules and regulations and to ensure that investments protected under IIAs do not harm the environment. They do so mainly through broader agreements, such as free trade agreements or economic cooperation agreements where the parties agree to cooperate on environmental matters and where the investment chapter acknowledges the right for the member States to take measures to protect the environment.

Treaty provisions and architecture ensure that investment rules will not frustrate the host countries’ efforts to protect the environment. Treaties have dealt with it in different ways: either by spelling out the objective of environmentally-sound investment in the preamble or the scope of the treaty, by excluding environmental regulations altogether from the scope of protection of the treaty, in a way it is done for taxation or other economic issues. It can also be done by reaffirming the State’s right to regulate for public purpose, including for environmental protection and ensuring that this right is not challenged by investors or if so, does not generate a right to compensation. In this sense, with careful wording, States can fully implement investment treaty obligations while preserving the authority to adopt and maintain measures for the protection of sustainable development and environment.

At the same time, investment treaty negotiators have resisted the temptation to bring binding and substantive environmental rules and provisions into investment treaties. IIAs are definitely not the priority instrument in which to deal with environmental issues. It is in the best interest of both contracting parties and negotiators not to confuse the role and the scope of investment instruments and not to use them for purposes that are not coherent with their role and objectives that are, and should remain, extremely focused and limited.

The provisions included in environment chapters of broader FTAs and the more recent provisions on investment facilitation illustrated by the recent Brazil model BIT for example, are interesting in so far as they can strengthen international cooperation among the member countries of the treaty in promoting and facilitating investments that contribute positively and concretely to broader environmental protection goals in harmony with the investment protection provisions of the same treaties. The investment facilitation agenda in many recent investment negotiations could be a good platform to introduce cooperation between investment promotion agencies, investment guarantee schemes of home States. IIAs can provide for a framework to encourage the transfer of clean technology and environmentally sound management practices to host countries, which could contribute to further the environmental protection objectives.

With this in mind, the avenue for international cooperation on environment protection and climate change is fully open and can take place alongside or above investment agreements in an architecture to be creatively developed.



*
Also see: Anna Jubin-Bret: Protecting the Investor and Protecting the Environment: Conflicting Objectives in International Investment Agreements in Bridging the Gap between International Investment Law and the Environment, Yulia Levashova, Tineke Lambooy and Ige Dekker (Eds.), Legal Perspectives for Global Challenges, Eleven International Publishing, 2015.


1
To consult the Bilateral Investment Treaties and other International Investment Agreements referenced in this chapter, please see UNCTAD Investment Policy Hub http://investmentpolicyhub.unctad.org


2
ibid


3
ibid


4
https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text


5
ibid


6
http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf


7
http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdfAnnex


8
http://trade.ec.europa.eu/doclib/press/index.cfm?id=1437


9
CETA Annex 8-A.3