ESG in BITs (Part I): Why ESG Provisions in Recent International Investment Treaties Matter – JD Supra

Integration of Sustainable Development Goals into International Investment Agreements

The Challenge to SDG Advancement via Investor-State Dispute Settlement

Investor-state arbitration processes have faced significant scrutiny for potentially impeding global progress toward the Sustainable Development Goals (SDGs). Critics argue that these mechanisms can be used to challenge state measures designed to advance environmental and social objectives.

• A July 2023 report from the UN special rapporteur on human rights and the environment identified the investor-state dispute settlement (ISDS) process as a “major obstacle” to actions required to address environmental and human rights crises, directly impacting SDG 13 (Climate Action) and SDG 16 (Peace, Justice and Strong Institutions).
• A September 2022 report from the UN Conference on Trade & Development (UNCTAD) analyzed ISDS cases involving climate action, concluding that the risk of arbitration being used to challenge climate policies is a major concern for the advancement of SDG 13.
• State officials, including climate ministers from Denmark and New Zealand, have publicly stated that the threat of investor-state lawsuits has created a “regulatory chill,” preventing their governments from adopting more ambitious climate policies aligned with the SDGs.

Conflicting Perspectives on Investment Protection and SDG-Related Regulation

A tension exists between the right of states to regulate in pursuit of the SDGs and the need to provide foreign investors with protections that encourage capital flow, which is essential for SDG 17 (Partnerships for the Goals).

Key Arguments from Investors

1. Protection for Green Investments: Investors in renewable energy argue that ISDS is a vital tool to protect their contributions to SDG 7 (Affordable and Clean Energy). They can seek recourse if host states withdraw economic incentives or modify regulations that initially attracted their investment, as seen in cases like NextEra Energy Global Holdings B.V. v. Kingdom of Spain.
2. Pretext for Expropriation: Other investors express concern that states could use SDG principles as a pretext for expropriating foreign investments. They point to past arbitral awards to argue that legitimate state policy objectives should not negate the obligation to compensate investors, thereby upholding principles related to SDG 8 (Decent Work and Economic Growth) and SDG 16.

Divergent Arbitral Tribunal Precedents

• Prioritizing Investor Compensation: In cases such as Tecmed v. Mexico and Compañía del Desarrollo de Santa Elena, S.A. v. Costa Rica, tribunals ruled that even laudable environmental measures do not absolve a state of its obligation to pay compensation for expropriated property. These rulings highlight a potential conflict between investment protection and a state’s ability to pursue SDG 14 (Life Below Water) and SDG 15 (Life on Land) without financial penalty.
• Upholding State Regulatory Rights: Conversely, tribunals in cases like Urbaser S.A. v. Argentine Republic have rejected investor claims, affirming the right of states to implement environmental measures, thereby aligning with the broader framework of the SDGs.

The Emergence of SDG-Oriented Bilateral Investment Treaties

In response to these tensions, states have begun to integrate principles aligned with the SDGs directly into the text of new and revised Bilateral Investment Treaties (BITs). This reform aims to clarify the balance between investor rights and the sovereign right to regulate for sustainable development.

• The 2016 Morocco-Nigeria BIT was a pioneering agreement in this regard. Its Article 13 explicitly affirms that the treaty does not prevent a signatory state from adopting non-discriminatory measures it deems appropriate to ensure investment activities are sensitive to environmental and social concerns, safeguarding policy space for a wide range of SDGs.
• This trend is supported by international legal bodies. A recent Advisory Opinion from the Inter-American Court on Human Rights urged states to review existing investment agreements to ensure they do not restrict efforts related to climate change and human rights, reinforcing the primacy of SDG 13 and SDG 16.

Future Outlook and Key Treaties for Analysis

The common objective of modern BITs is to mitigate the risk that investor-state arbitration will undermine legitimate SDG-focused policies while continuing to protect and attract the foreign investment necessary for their achievement. Several recent treaties exemplify this approach by incorporating multiple provisions specifically aimed at furthering sustainable development goals.

Key examples for analysis include:

• The Georgia-Hungary BIT
• The Japan-Zambia BIT
• The New Zealand-United Arab Emirates (UAE) BIT

Relevant Sustainable Development Goals (SDGs)

• SDG 13: Climate Action

  The article directly addresses SDG 13 by focusing on the conflict between investor-state arbitration and states’ efforts to implement climate policies. It cites a UN report on investor-state disputes challenging “climate action” and quotes climate ministers from Denmark and New Zealand who stated that the “threat of investor-state lawsuits has prevented their governments from being more ambitious in their climate policies.” The discussion around the ICJ’s advisory opinion on states’ obligations concerning “climate change” further solidifies this connection.

• SDG 16: Peace, Justice and Strong Institutions

  This goal is central to the article’s theme of reforming international legal frameworks. The text examines how bilateral investment treaties (BITs) and investor-state arbitration systems function as institutions for resolving disputes. The criticism that the process is an “obstacle” to human rights and environmental goals, and the subsequent effort to reform BITs (like the Morocco-Nigeria BIT) to protect a state’s right to regulate, are direct efforts to build more “effective, accountable and transparent institutions” at the international level.

• SDG 17: Partnerships for the Goals

  The article is fundamentally about the rules governing international partnerships for investment. Bilateral Investment Treaties (BITs) are a primary instrument of global partnership between countries to facilitate foreign investment. The analysis of how new BITs (e.g., Georgia-Hungary, Japan-Zambia) are evolving to incorporate ESG principles demonstrates a reform of these partnerships to better align with sustainable development objectives.

• SDG 7: Affordable and Clean Energy

  The article explicitly connects investment disputes to the clean energy sector. It highlights cases brought by “renewable energy investors” against Spain following modifications to its “regulations and economic incentives for attracting solar energy projects.” This shows the direct relevance of investment treaties and arbitration to promoting or hindering investment in renewable energy infrastructure, a key component of SDG 7.

Specific SDG Targets

1. Target 13.2: Integrate climate change measures into national policies, strategies and planning.

   The article discusses the “chilling effect” that investor-state arbitration has on states’ ability to enact environmental regulations and “ambitious” climate policies. The new generation of BITs that explicitly protect a state’s right to regulate for environmental concerns is a direct attempt to facilitate the integration of climate measures into national policy without the threat of litigation.

2. Target 16.b: Promote and enforce non-discriminatory laws and policies for sustainable development.

   The article references the 2016 Morocco-Nigeria BIT, which allows signatory states to adopt or enforce measures “in a non-discriminatory manner” to ensure investment is “sensitive to environmental and social concerns.” This clause is a direct reflection of the principle of creating and enforcing non-discriminatory policies for sustainable development.

3. Target 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.

   The entire discussion revolves around the rules and fairness of the international investor-state dispute settlement (ISDS) system. By examining how tribunals have issued conflicting awards (e.g., Tecmed v. Mexico vs. Urbaser S.A. v. Argentine Republic) and how new treaties are trying to create a more balanced legal framework, the article addresses the effort to strengthen the rule of law in international investment.

4. Target 7.a: Promote investment in energy infrastructure and clean energy technology.

   The article highlights the case of renewable energy investors in Spain who used the ISDS system when the state modified economic incentives for solar energy projects. This demonstrates that the stability and structure of investment treaties are critical for promoting and protecting foreign investment in clean energy infrastructure.

Indicators for Measuring Progress

• Number and scope of ESG provisions in new and revised Bilateral Investment Treaties (BITs).

  The article implies this is a key indicator by tracking the evolution of BITs, starting with the 2016 Morocco-Nigeria BIT and mentioning new treaties from 2023. An increase in the number of treaties containing strong, enforceable ESG clauses would indicate progress.

• Number of investor-state dispute cases challenging environmental and climate policies.

  The article cites a UNCTAD report that analyzed such cases, suggesting this is a critical metric. A reduction in lawsuits that challenge legitimate, non-discriminatory climate policies could be seen as a positive indicator of a better-balanced system.

• Outcomes of arbitral tribunal awards where a state’s environmental regulations are challenged.

  The article contrasts different tribunal decisions, showing that the legal interpretation is evolving. An indicator of progress would be a consistent pattern of tribunal decisions that uphold a state’s right to regulate for legitimate ESG purposes, as seen in cases like Urbaser S.A. v. Argentine Republic.

• Volume of foreign direct investment in renewable energy sectors.

  The article uses the example of investments in “solar energy projects” in Spain. Tracking investment flows into renewable energy can serve as an indicator of whether the investment climate, as shaped by BITs, is successfully encouraging clean energy development.

SDGs, Targets and Indicators

Source: jdsupra.com