Towards sustainable investment: integrating ESG into Investor-State Dispute Settlement

Sebastián Green, Clara Ruiz Garrido.

2024 International Arbitration Outlook Uría Menéndez, n.º 13


Environmental, Social, and Governance ('ESG') considerations are gaining prominence in the business landscape, shaping investor and consumer decisions alike. With calls for greater corporate responsibility increasing, global regulatory frameworks are evolving to demand more transparent and comprehensive reporting on ESG metrics.

A 2023 United Nations report claimed that the Investor-State Dispute Settlement ('ISDS') system 'has become a major obstacle to the urgent actions needed to address the planetary environmental and human rights crises'.[1] A similar critique has led France and the United Kingdom, among others, to withdraw from the Energy Charter Treaty.[2] There is concern that the threat of investment claims hinders States from enacting crucial reforms to protect the environment and human rights, creating a 'regulatory chill' effect.[3]

Despite these criticisms, there is a noticeable trend towards incorporating sustainability (and, therefore, ESG-related) principles into the ISDS framework, as is evidenced by two main developments: (i) their inclusion in new bilateral investment treaties ('BIT'); and (ii) the rise of ESG issues in investment arbitration disputes. This article delves into these developments to understand how ESG might reshape the investment arbitration landscape.

The incorporation of ESG criteria into Bilateral Investment Treaties

As will be discussed in this article, to date, there is no treaty containing a reference to ESG as an autonomous topic. However, since the early 2000s, it has become increasingly common practice to include environmental and social considerations in some newly entered into BITs.[4] After addressing former BITs, this article considers the Morocco-Nigeria BIT, which has the potential to set an example for more sustainable BITs in the future.

(a) Types of recent BIT provisions

Treaty provisions, as opposed to preambular statements, establish concrete rights and obligations, and can therefore be crucial for enforcing ESG-related commitments. Their effectiveness, however, depends on their precise wording and the nature of the particular provision.

One common approach has been to include treaty provisions that reserve a margin of discretion for the State to adopt measures for the protection of the environment and human rights.[5] These types of provisions are designed to fight the investment arbitration 'regulatory chill' risk. For instance, a number of BITs adopted since 1999 have explicitly stipulated that measures necessary for the protection of natural resources and human health do not fall within their scope and, therefore, States may adopt such measures without breaching the BITs.[6]

Other treaty provisions aim to ensure that the promotion of investments does not lead to a relaxation of environmental or human rights standards. For example, the 2012 Iraq-Japan BIT asserts that it is inappropriate for either party 'to encourage investment by investors of the other Contracting Party and of a non-Contracting Party by relaxing its health, safety or environmental measures, or by lowering its labour standards.'[7]

Moreover, some BITs include provisions that carve out exceptions to specific treaty protections such as the prohibition of indirect expropriation and the minimum standard of treatment. The 2022 Hungary-Oman BIT, for instance, clarifies that:

Non-discriminatory measures that the Contracting Parties take for reason of public interest including for reasons of public health, safety, and environmental protection, which are taken in good faith and which are neither arbitrary nor disproportionate in light of their purpose, shall not constitute indirect expropriation.[8]

Another example is the 2018 Argentina-UAE BIT, which establishes that:

Non-discriminatory and non-arbitrary legislative or regulatory measures adopted by either Party to protect general welfare objectives, such as public order, public health, public security, environmental protection and economic policy, and which give an investor of the other Party the same treatment as that accorded to its own investors or to investors of third States in like circumstances, shall not be deemed to breach the minimum standard of treatment.[9]

According to Fauchald, the majority of ESG-related provisions in BITs consist of exceptions, recommendations and political commitments[10], meaning that they do not legally bind States or investors. Exceptions appear to be an important tool for combatting the much-criticised 'regulatory chill', although how effective they are will ultimately depend on how investment tribunals interpret them.

(b) The 2016 Morocco-Nigeria BIT: the way forward?

There are an even smaller number of new generation BITs, entered into since the UN General Assembly adopted the Sustainable Development Goals in 2015[11], that incorporate the concept of sustainable investment and create ESG-related obligations for investors. A notable example is the 2016 Morocco-Nigeria BIT which, although not yet in force, incorporates the concept of 'sustainable development' into the definition of 'investment', and makes protection under the treaty conditional on the investment contributing to the host State's sustainable development.[12] This requirement goes beyond the traditional one that the investment must contribute to the economic development of the host State.[13]

The Morocco-Nigeria BIT also imposes a number of ESG obligations on investors, albeit without classifying them as such:

A) Environmental

(i)   Article 14 requires investors or their investments to comply with the environmental impact assessment ('EIA') processes applicable to their proposed investments, and to apply the precautionary principle to their EIA and decision-making.[14]

(ii)  Under Article 18, investors must maintain an environmental management system and, for those in resource exploitation and high-risk industrial enterprises, a current certification to ISO 14001 or equivalent.[15] It also states that investors and their investments must not circumvent international environmental obligations to which the host State and/or home State are Parties.[16]

B) Social

(i)   Article 18 requires investors and investments to uphold human rights in the host State and to act in accordance with core labour standards as required by the ILO Declaration on Fundamental Principles and Rights of Work.[17] It also requires that investors and their investments do not circumvent international labour and human rights obligations to which the host State and/or home State are parties.[18]

(ii)  Article 19 states that investments 'shall establish and maintain, where appropriate, local community liaison processes, in accordance with internationally accepted standards [...].'

(iii) Article 24 establishes that investors and their investments shall 'strive to make the maximum feasible contributions to the sustainable development of the host State and local community through high levels of socially responsible practices'. It also obliges investors to apply the LO Tripartite Declaration on Multinational Enterprises and Social Policy.[19]

C) Governance

(i)   Article 17 explicitly prohibits investors and their investments from engaging in or being complicit in corrupt practices. It also specifies that a breach of this prohibition will be deemed to constitute a breach of the domestic law of the host State concerning the establishment and operation of the investment.[20]

(ii)  Article 19 expects investments to 'meet or exceed national and internationally accepted standards of corporate governance, for the sector involved, in particular for transparency and accounting practices.'

The Morocco-Nigeria BIT also reserves a certain margin of discretion for the State to adopt measures aimed at environmental protection and the safeguarding of human rights, among other objectives.[21] It also broadens the traditional scope of the right to regulate, extending it to encompass a wider array of measures 'to ensure that development in its territory is consistent with the goals and principles of sustainable development [...]'.

The Morocco-Nigeria BIT is a pioneering example of how BITs can be aligned with ESG principles. Including specific obligations for investors is particularly important and marks a significant step towards enforcing and advancing ESG through investment arbitration. As mentioned earlier, incorporating provisions aimed at reducing the 'regulatory chill' effect of BITs is also key to resolving the ISDS system's legitimacy crisis.
But despite all of these advances, the Morocco-Nigeria BIT has not yet entered into force and is still among a very small group of BITs that establish ESG-related obligations. Unfortunately, the fact that only a small number of treaties of this type have entered into force means they may have little or no effect.

The rise of ESG issues in investment arbitration disputes

ESG issues are appearing more and more in investment arbitration cases, primarily (i) through counterclaims filed by States; (ii) through the application of regulatory exceptions in the applicable BITs; (iii) as a result of heightened regulatory activity by States in areas concerning ESG; and (iv) in the assessment of damages.

First, States have filed counterclaims against investors for alleged breaches of environmental or human rights obligations. For instance, in Burlington v Ecuador and Perenco v Ecuador, Ecuador successfully filed counterclaims against the investors, accusing them of violating Ecuadorian environmental law and seeking compensation for environmental damage.[22] Similarly, in Urbaser v Argentina, Argentina filed a counterclaim against the investor based on an alleged violation of the international human right to water[23], which was upheld as to jurisdiction but dismissed on the merits. The Urbaser v Argentina case shows that counterclaims are unlikely to succeed when the applicable BIT does not specify obligations for investors.[24] Therefore, it is important to include ESG-related obligations in BITs to hold investors accountable for violating ESG commitments. As the number of BITs that incorporate ESG-related obligations increases, the frequency and effectiveness of counterclaims based on ESG breaches are also likely to rise.

On other occasions, ESG issues have emerged when regulatory exceptions in BITs, such as those already mentioned, are applied. For instance, in Eco Oro v Colombia, Colombia invoked Article 2201(3) of the Canada-Colombia FTA, which establishes a regulatory exception for the adoption of measures to protect the environment[25], to argue that it excluded its liability under the treaty.[26] Similarly, in Infinito Gold v Costa Rica, Costa Rica relied on Annex I, Section III(1) of the Canada-Costa Rica BIT, which also established a regulatory exception for environmental measures.[27] In both cases, the tribunals concluded that the exceptions did not absolve the State from liability for breaching the protections established in the treaty.

As States intensify their regulatory activity around ESG-related matters, the number of investment arbitration cases concerning ESG issues is expected to increase. This trend is evident in the context of climate change and environmental protection, as there has already been a rise in ISDS cases related to the introduction, withdrawal or amendment of policy measures aimed at achieving a country's climate objectives or related to the protection of the environment.[28] For instance, the Eco Oro and Red Eagle cases against Colombia originated from measures Colombia took to protect the páramo ecosystems, which affected the investors' mining projects within those regions.[29] The increase in environmental permitting requirements has also led to cases related to States' decisions in this area, such as the Transcanada v USA[30] and the Rockhopper v Italy[31] arbitrations. Moreover, several cases have arisen from the introduction of policy measures justified by climate concerns, such as the RWE v Netherlands, Uniper v Netherlands and the Lone Pine v Canada arbitrations.[32]

Finally, ESG has sometimes influenced damages assessments in investment arbitration cases. An illustrative example is Bear Creek Mining v Peru, where the investor's mining project affected the territories of local indigenous peoples. The tribunal found Peru liable and awarded damages to the investor.[33] However, in a dissenting opinion, arbitrator Prof Philippe Sands KC considered that the damages should have been reduced due to the investor's conduct, which was not in line with the consultation requirements established in the Indigenous and Tribal Peoples Convention.[34] Similarly, in Copper Mesa v Ecuador, the tribunal took into account the investor's negligence to reduce the damages awarded to the investor.[35]

Conclusion

The emergence of ESG issues in investment arbitration disputes and the inclusion of ESG criteria in new BITs are indicative of a nascent yet necessary trend. But the adoption and enforcement of ESG principles within the ISDS framework is still limited, primarily because of the absence of ESG provisions in existing BITs and the lack of binding obligations on investors. The Morocco-Nigeria BIT serves as an example of how modern treaties can promote sustainable investment, yet this is the exception rather than the norm. To truly integrate ESG principles within investment arbitration, continuous efforts are needed to standardise their incorporation in international treaties and to ensure that they are not only recognised but also actively enforced. This is crucial for the modernisation and future of the ISDS system.


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[1].    D. R. Boyd, 'Report of the Special Rapporteur on the issue of human rights obligations relating to the enjoyment of a safe, clean, healthy and sustainable environment: Paying polluters: the catastrophic consequences of investor-State dispute settlement for climate and environment action and human rights' (2023) A/78/168, United Nations, p 2.  

[2].    Department for Energy Security and Net Zero (2024) <https://www.gov.uk/government/news/uk-departs-energy-charter-treaty> ('[r]emaining a member would not support our transition to cleaner, cheaper energy, and could even penalise us for our world-leading efforts to deliver net zero'), accessed 17 April 2024. 

[3].    S. W. Schill, 'Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?' (2007) Journal of International Arbitration 24(5), p 470. 

[4].    References to the environment in BITs started to become more common in 2002, while references to human rights started to appear from 2009 onwards. See K. Gordon and J. Pohl, 'Environmental Concerns in International Investment Agreements: a survey' (2011) OECD Working Paper, 2011/01, p 8. Such BITs are still in the minority. See O. K. Fauchald, 'International investment law in support of the right to development?', Leiden Journal of International Law (2021) 34, p 189. 

[5].    See K. Gordon and J. Pohl, 'Environmental Concerns in International Investment Agreements: a survey' (2011) OECD Working Paper, 2011/01, p 14. 

[6].    Bilateral Investment Treaty Between Argentina and New Zealand, 27 August 1999, Art 5. Provisions of this type are also framed as 'general exceptions' to State obligations under the treaty. See Bilateral Investment Treaty Between Japan and Uruguay, 26 January 2015, Art 22; Bilateral Investment Treaty Between Turkey and China, 29 July 2015, Art 4; Bilateral Investment Treaty Between Colombia and the United Arab Emirates, 13 November 2017, Art 11; Bilateral Investment Treaty Between Singapore and Kenya, 12 June 2018, Art 26. 

[7].    Bilateral Investment Treaty Between Japan and Iraq,7 June 2012, Art 22.  

[8].    Bilateral Investment Treaty Between Hungary and Oman, 02 February 2022, Art 6, (emphasis added). See also Bilateral Investment Treaty Between Singapore and Myanmar, 24 September 2019, Annex II; (Bilateral Investment Treaty Between Argentina and United Arab Emirates, 16 April 2018, Art 6.  

[9].    Bilateral Investment Treaty Between Argentina and United Arab Emirates, 16 April 2018, Art 5, (emphasis added). 

[10].   O. K. Fauchald, 'International investment law in support of the right to development?', (2021) Leiden Journal of International Law, 34, p 189. 

[11].   United Nations General Assembly, 'Transforming our world: the 2030 Agenda for Sustainable Development' (21 October 2015) A/RES/70/1. 

[12].   Bilateral Investment Treaty Between Morocco and Nigeria, 3 December 2016, Art 1(3). 

[13].   K. Mahmutaj, 'Will the Morocco-Nigeria Bilateral Investment Treaty Transform Sustainable Development into Hard Law?', in EJIL:Talk! (2022) <https://www.ejiltalk.org/will-the-morocco-nigeria-bilateral-investment-treaty-transform-sustainable-development-into-hard-law/> accessed 17 April 2024. 

[14].   Bilateral Investment Treaty Between Morocco and Nigeria, 3 December 2016 ('2016 Morocco-Nigeria BIT'), Arts 14(1) and 14(3). 

[15].   2016 Morocco-Nigeria BIT, Art. 18(1).

[16].   2016 Morocco-Nigeria BIT, Art. 18(4).

[17].   2016 Morocco-Nigeria BIT, Arts. 18(2), 18(3).

[18].   2016 Morocco-Nigeria BIT, Art. 18(4).

[19].   2016 Morocco-Nigeria BIT, Art. 24.

[20].   2016 Morocco-Nigeria BIT, Art. 17(2), 17(3).

[21].   2016 Morocco-Nigeria BIT, Art. 23.

[22].   Burlington Resources Inc. v Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Ecuador's Counterclaims, para 52 (7 February 2017) ('Burlington v Ecuador'); Perenco Ecuador Ltd. v Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No ARB/08/6, Interim Decision on the Environmental Counterclaim, para 36 (11 August 2015) ('Perenco v Ecuador'). 

[23].   Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v The Argentine Republic, ICSID Case No ARB/07/26, Award, para 1156 (8 December 2016) ('Urbaser v Argentina')

[24].   See M. Brenninkmeijer and F. Gelinas, 'Counterclaims in Investment Arbitration: Towards an Integrated Approach', ICSID Review, (2023) Vol. 38, No. 3, pp 567–594. 

[25].   Free Trade Agreement Between Canada and Colombia, 21 November 2011, Art 2201.3. 

[26].   Eco Oro Minerals Corp. v Republic of Colombia, ICSID Case No ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum, para 362 (9 September 2021) ('Eco Oro v Colombia')

[27].   Infinito Gold Ltd. v Costa Rica, ICSID Case No ARB/14/5, Award, para 757 (3 June 2021) ('Infinito Gold v Costa Rica'); Bilateral Investment Treaty Betwwen Canada Costa Rica (18 March 1998) Annex I. 

[28].   A 2021 joint study by Columbia University and Hasselt University, for instance, identified at least 13 climate-related ISDS cases filed since 2012. See C. Higham and J. Setzer, 'Investor-State Dispute Settlement' as a new avenue for climate change litigation' (2021), <https://www.lse.ac.uk/granthaminstitute/news/investor-state-dispute-settlement-as-a-new-avenue-for-climate-change-litigation/#:~:text=At%20least%2013%20climate%2Drelated,meet%20a%20country%27s%20climate%20goals> accessed 17 April 2024. 

[29].   See Eco Oro Minerals Corp. v Republic of Colombia, ICSID Case No ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum (9 September 2021); Red Eagle Exploration Limited v Republic of Colombia, ICSID Case No ARB/18/12, Award (28 February 2024) ('Red Eagle v Colombia'). 

[30].   TransCanada Corporation and TransCanada PipeLines Limited v The United States of America, ICSID Case No ARB/16/21 ('TransCanada v USA'). 

[31].   Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd and Rockhopper Exploration Plc v Italian Republic, ICSID Case No. ARB/17/14 ('Rockhopper v Italy')

[32].   RWE AG and RWE Eemshaven Holding II BV v Kingdom of the Netherlands, ICSID Case No ARB/21/4 ('RWE v Netherlands'); Uniper SE, Uniper Benelux Holding B.V. and Uniper Benelux N.V. v Kingdom of the Netherlands, ICSID Case No ARB/21/22 ('Uniper v Netherlands'); Lone Pine Resources Inc. v The Government of Canada, ICSID Case No UNCT/15/2 ('Lone Pine v Canada')

[33].   Bear Creek Mining Corporation v Republic of Peru, ICSID Case No ARB/14/21, Award, para 738 (30 November 2017) ('Bear Creek Mining v Peru'). 

[34].   Bear Creek Mining Corporation v Republic of Peru, ICSID Case No ARB/14/21, Partial Dissenting Opinion of Professor Philippe Sands QC, paras 11 et seq (30 November 2017). 

[35].   Copper Mesa Mining Corporation v Republic of Ecuador, PCA Case No 2012-02, Award paras. 6.40, 7.30 (15 March 2016) ('Copper Mesa v Ecuador').

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