Balancing Investors' Rights with Environmental Protection in International Investment Arbitration: An Assessment of Recent Trends in Investment Treaty Drafting

• Author: Camille Martini
• Position: The author would like to thank Frank J. Garcia, Professor of Law & Dean's Global Fund Scholar at Boston College Law School, and Lise Johnson from the Columbia Center on Sustainable Development for their help and support. The opinions expressed in this article remain his own.
• Pages: 529-583

Balancing Investors’ Rights with Environmental

Protection in International Investment

Arbitration: An Assessment of Recent Trends

in Investment Treaty Drafting

C

AMILLE

M

ARTINI

*

I. Introduction

International investment law and the current investor-state dispute

settlement system are going through a legitimacy crisis.

1

With parallels to

the intense criticism faced by the international trade framework more than

twenty years ago,

2

a wide range of critiques,

3

both at the substantial and

procedural levels, have been formulated towards both the international

investment legal framework and the investor-state dispute settlement (ISDS)

mechanism. Scholars have opposed the asymmetry

4

of International

Investment Agreements (IIAs),

5

which allegedly jeopardizes states’ exercise

of national sovereignty and limits their right to regulate.

6

The substantive

protection granted by states to foreign investors under international

investment law has been criticized as being broad, vague,

7

and a source of

uncertainty.

8

ISDS itself has been denounced as “tainted by incoherencies

and imbalances.”

9

Deficiencies in the procedural mechanisms established by

the Convention on the Settlement of Investment Disputes between States

* The author would like to thank Frank J. Garcia, Professor of Law & Dean’s Global Fund

Scholar at Boston College Law School, and Lise Johnson from the Columbia Center on

Sustainable Development for their help and support. The opinions expressed in this article

remain his own.

1. Frank Garcia et al, Reforming the International Investment Regime: Lessons from International

Trade Law, 18

J.

OF

I

NT

’

L

E

CON

. L.

861, 862 (2015).

2. Id. at 863.

3.

A

NDREW

N

EWCOMBE

& L

LUIS

P

ARADELL

, L

AW AND

P

RACTICE OF

I

NVESTMENT

T

REATIES

: S

TANDARDS OF

T

REATMENT

, 63

(

Kluwer Law International ed. 2009).

4. Andra K. Biorklund, The Necessity of Sustainable Development, in

S

USTAINABLE

D

EVELOPMENT IN

W

ORLD

I

NVESTMENT

, 373-74 (Marie-Claire Cordonier Segger et al. ed.,

2011).

5. The term “International Investment Agreements” (IIAs) is substituted to the term

“Bilateral Investment Treaties” (BITs) whenever applicable, to include investment chapters

contained in Free Trade Agreements (FTAs).

6. Stephanie Bijlmakers, Effects of Foreign Direct Investment Arbitration on a State’s Regulatory

Autonomy Involving the Public Interest, 23

A

M

. R

EV

.

OF

I

NT

’

L

A

RB

.

245, 249 (2012).

7. Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbirtation: Privatizing Public

International Law Through Inconsistent Decisions, 73

F

ORDHAM

L. R

EV

.

1521, 1589 (2005).

8. Id. at 1583.

9. Bijlmakers, supra note 6, at 245.

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530 THE INTERNATIONAL LAWYER [VOL. 50, NO. 3

and Nationals of Other States (the ICSID Convention), which established in

1965 the International Centre for Settlement of Investment Disputes

(ICSID), have also been pointed out.

10

Many actors have pointed to the procedural deficiencies of the current

ISDS system. Engaged at the frontline, several states have dissociated

themselves from a framework they contributed to shaping their dual role as

negotiators of and parties to IIAs as well as defendants in ISDS proceedings.

A few developing countries, Bolivia,

11

Ecuador,

12

and Venezuela,

13

denounced the ICSID Convention. Such defiance towards the current

system is not fortuitous. Developing countries have been victims of

“asymmetries of power. . . [and] of information in dealing with developed

countries and foreign investors,

14

which have led to the implementation of a

system tailored to benefit multinational enterprises (MNEs) of developed,

capital exporting countries. While I do not intend in this article to

undertake a thorough assessment of these critiques, a preliminary conclusion

can already be drawn: international investment law has failed to project itself

as a “comprehensive governance system meant to ensure justice and the rule

of law in one aspect of international economic relations, the allocation of

investment capital.”

15

The field of environmental protection has particularly crystallized the

existing tensions within the international investment legal framework

between foreign investor’s rights and states’ right to regulate.

16

It is first

necessary to recall that the primary purpose of the international investment

legal framework is the promotion and protection of foreign direct

investments (FDI), as a means to achieve economic growth. IIAs are not

construed as corrective tools to compensate for the absence of a binding

conventional framework regulating cross-border activities by MNEs and

10. See, e.g., Dobyun Kim, The Annulment Committee’s Role in Multiplying Inconsistency in ICSID

Arbitration: the Need to Move Away From an Annulment Based System, 86

N.Y.U. L. R

EV

.

242, 249

(2011) (arguing that annulment committees have been unable to bring more coherence to the

ICSID arbitration system).

11. Press Release, Int’l Ctr. for Inv. of Disputes, Bolivia submits a notice under Article 71 of

the ICSID Convention (May 15, 2007), http://icsidfiles.worldbank.org/icsid/ICSID/StaticFiles/

Announcement3.html.

12. Press Release, Int’l Ctr. for Trade and Sustainable Dev., Ecuador finiquita convenio con el

CIADI (July 14, 2009), http://www.ictsd.org/bridges-news/puentes/news/ecuador-finiquita-

convenio-con-el-ciadi.

13. Press Release, Int’l Ctr. for Trade and Sustainable Dev., Venezuela’s Withdrawal From

ICSID: What it Does and Does Not Achieve (Apr. 13, 2012), https://www.iisd.org/itn/2012/04/

13/venezuelas-withdrawal-from-icsid-what-it-does-and-does-not-achieve/.

14. Joseph E. Stiglitz, Regulating Multinational Corporations: Towards Principles of Cross-Border

Legal Frameworks in a Globalized World Balancing Rights with Responsibilities, 23

A

M

. U. I

NT

’

L

L.

R

EV

.

451, 479 (2008); see Frank Garcia et al., Reforming the International Investment Regime:

Lessons From International Trade Law, 18

J.

OF

I

NT

’

L

E

CON

. L.

861, 862 (2015).

15. Garcia et al., supra note 14, at 874.

16. For a more detailed analysis of the right to regulate in international investment law, see

generally

A

IKATERINI

T

ITI

, T

HE

R

IGHT TO

R

EGULATE IN

I

NTERNATIONAL

I

NVESTMENT

L

AW

(Marc Bungenberg et al ed., 1st ed. 2016).

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PUBLISHED IN COOPERATION WITH

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2017] BALANCING INVESTORS’ RIGHTS 531

their impact on the environment. More generally, IIAs are not by

themselves legal instruments promoting environmental concerns.

17

Nonetheless, the social aspects of international investment law ought to be

addressed. As stated by Federico Ortino, “[e]conomic growth and prosperity

engenders higher societal expectation for higher quality jobs, employment

protection, workers’ participation in business management, corporate social

responsibility, health standards and protection, etc. Even more crucially,

economic growth and prosperity makes available the resources necessary to

meet such expectations.”

18

Yet, an overview of the current framework reveals

that international investment law has not developed in a way that fosters the

mutual benefits of host states and foreign investors. Indeed, the current

ISDS system, as developed by the arbitral practice, is asymmetric, fully

oriented towards the protection of investors’ rights.

While international investment law has developed on the premise that

FDI is inherently good—and therefore, that sustainable development would

necessarily follow, the reality is quite different. IIAs do play a role in

reducing political and regulatory risk, from a foreign investor’s perspective,

19

but they have also been used by international investors as a basis to challenge

environmental regulations when they were conflicting with their economic

interests.

20

Such antagonism between the public interest (including

environmental concerns), the protection of property, and commercial

interests of foreign investors has logically crystallized around investment

arbitration and the ISDS mechanism.

From the investor’s perspective, regulations can create additional barriers

and lead to potential losses.

21

In contrast, several factors such as new

scientific developments, shifts in public opinion, improved understanding of

environmental impacts and how to prevent them, or changes in modes of

production or consumption frequently require states to adapt their

environmental regulatory framework.

22

States may also undertake new

commitments pursuant to the adoption of international environmental

agreements. The resulting conflict between a host country’s environmental

policies whether or not they arise from binding legal instruments and its

international obligations under an applicable IIA can eventually act as a

deterrent. Under the threat of damages claims brought before arbitral

tribunals by foreign investors impacted by a new regulatory measure, a host

17. See Rosalien Diepeveen et al., Bridging the gap between international investment law and the

environment, 30

U

TRECHT

J

OURNAL OF

I

NT

’

L

& E

UR

. L.

145, 151 (2014).

18. Federico Ortino, The social dimension of international investment agreements: Drafting a new

BIT/MIT model?

O

RGANISATION FOR

E

CONOMIC

C

O

-

OPERATION AND

D

EVELOPMENT

, (Mar.

27-28, 2008), https://www.oecd.org/investment/globalforum/40311350.pdf.

19. Wolfgang Alschner & Elizabeth Tuerk, Fostering Sustainable Development, in

I

NVESTMENT

L

AW

W

ITHIN

I

NTERNATIONAL

L

AW

: I

NTEGRATIONIST

P

ERSPECTIVES

217, 221 (Freya Baetens

ed., 2013).

20. Bijlmakers, supra note 6.

21.

S

AVERIO

D

I

B

ENEDETTO

, I

NTERNATIONAL

I

NVESTMENT

L

AW AND THE

E

NVIRONMENT

13 (Andrea K. Bjorklund & August Reinisch eds., 1st ed. 2013).

22. Id. at 39.

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