Rethinking investment policy to support sustainable development

Just a few words in an investment treaty can cost governments millions—or even billions—of dollars. The mere threat of such a costly dispute has led many governments to think twice before enacting new policies, from COVID-19 relief measures to anti-smoking legislation. IISD experts are pushing for reform and offering their expertise to ensure progressive, sustainable policy isn’t held back by the threat of arbitration.By Nathalie Bernasconi-Osterwalder on September 17, 2020Share this page:

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Economies need investment to grow, support public services and infrastructure, and make the clean energy transition a reality. With only a short time remaining to meet significant global commitments such as the Sustainable Development Goals (SDGs) and the Paris Agreement, every penny is crucial. While the challenge was already great, the devastation wrought by COVID-19 makes this work even harder, yet also more urgent and important. 

Most investment treaties, however, still do little to support investment that advances sustainable development and the post-COVID recovery. Instead of setting up a framework to promote collaboration on sustainable investment, these treaties can stifle government action to develop economies that create value in the country and are respectful of the environment. They can cost governments millions—or even billions—of dollars when a foreign investor decides to bring the government to international arbitration.  

Under most investment treaties, foreign investors have access to a powerful mechanism known as investor-state dispute settlement (ISDS), which allows them to sue the host governments if its actions harm current or future profits and are found in breach of one of the main principles included, such as those relating to non-discrimination, expropriation or ‘fair and equitable treatment’.

An aerial view of wind turbines on a hill top in Spain

Most investment treaties do little to support the type of investment that advances sustainable development, such as funding for renewable energy projects.

ISDS allows foreign investors to bypass local courts to challenge a wide range of measures, including those to protect public health or the environment, bringing claims directly to international arbitration tribunals, which will have the final say over whether or not the foreign investors should be compensated.

In recent decades, more than 1,000 known ISDS cases have been brought against states hosting foreign investors. Losing a case can be crushing: the average award is over USD 500 million. In at least nine cases, payouts have exceeded USD 1 billion

The mere threat of such a costly dispute can lead to a ‘regulatory chill’, hurting people and limiting governments’ policy space. Now, there is the very real risk of ISDS being applied to emergency measures that governments have adopted to fulfill public health and economic recovery objectives during the pandemic. 

But there is some hope. For several years, IISD has worked to shift the focus on investment at the international level away from a system that prioritizes investor protection to one that emphasizes the advancement of national and global development goals through sustainable investment.

IISD has worked to shift the focus on investment away from a system that prioritizes investor protection to one that emphasizes the advancement of national and global development goals through sustainable investment.

IISD has worked with and advised dozens of countries and regional groups on investment law and policy. Countries are, in fact, hungry for innovative ways to reform their outdated investment treaties, developing their own model investment treaties or developing strategies for renegotiating or exiting outdated treaties.  

A new investment model for sustainable development

As early as 2005, IISD developed a text for a Model International Agreement on Investment for Sustainable Development. This model has been extremely influential and has heavily influenced the development of modern investment treaty models with respect to the definition of investment that takes into account sustainable development; the formulation of investment principles that allow for the necessary policy space; alternatives to investor-state arbitration; obligations for investors to respect human rights, the environment, and refrain from illegal action, such as corruption and fraud; and obligations on home states to support sustainable investment and allow victims to seek justice in the home state of the investor.  

However, while newer treaties and treaty templates incorporate reforms to varying degrees, the stock of old and outdated treaties remains in large part intact. These treaties continue to present a great risk for governments around the world, including in the COVID-19 context. Governments must take action now – they have the knowledge and the tools. 

A speaker uses a microphone during a meeting

The annual Forum allows negotiators to take a deep dive into systemic reform of ISDS, which is another avenue where IISD has long worked to address some of the myriad imbalances in international investment governance / IISD Reporting Services

The Annual Forum of Developing Country Investment Negotiators

For discussing all these issues, IISD has established the only international platform for government officials exclusively from developing and emerging economies. This one-of-a-kind forum allows investment negotiators to strategize collectively, exchange best practices, and raise questions in a supportive environment. 

This year’s Forum, the 13th of its kind, was the first to be held virtually because of COVID-related travel restrictions. Whether in-person or online, the annual gathering offers developing country government participants a unique chance to share and learn from the experiences of colleagues across continents. Far more than just a meeting, the Forum has evolved into a vibrant community of government officials determined to work together toward systemic reform of international investment governance and to safeguard the best interests of their developing nations. 

The 2020 Forum was no exception. The discussions, co-hosted by the Government of Thailand and held online between September 3 and 11, looked not only at governments’ COVID-19 policy responses and what options investment negotiators have to safeguard these from ISDS challenges, but also debate about the road ahead. Negotiators debated what investment for a sustainable, resilient recovery might look like – and how countries can shift the focus of discussions in various ongoing international processes on the quality of foreign direct investment, rather than just its quantity. 

Far more than just a meeting, the Forum has evolved into a vibrant community of government officials determined to work together toward systemic reform of international investment governance.

With the stakes so high, we remain committed to ensuring developing countries can attract responsible investment that advances sustainable development while safeguarding their legitimate policy space. COVID-19 may have reshaped our world forever. But it has also reminded us that while the world of investment policy-making may move slowly, the risks can materialize quickly, and having a space where negotiators from developing countries can convene and debate a way forward at the national, regional, and multilateral levels is vital to enabling concrete change and resilient fairer economies. Share this page:

https://www.iisd.org/articles/rethinking-investment-policy-support-sustainable-development?

Rethinking investment policy to support sustainable development

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