This chapter analyses selected provisions on sustainable investment derived from a sample of nine international investment agreements (IIAs), assessing them against the principles of the FDI Qualities Recommendation (FDIQR). This chapter describes the methodological framework guiding the stocktaking exercise. Then it takes stock of the scope, tools and approaches that IIA provisions adopt to pursue sustainable investment, comparing them against the FDIQR to identify those areas with a narrower, similar, or broader scope and those where the FDIQR is not addressed. Lastly, it identifies areas that offer an opportunity for further consideration of sustainable investment elements, in alignment with the FDIQR.
Strengthening Sustainable Investment through International Investment Agreements
Abstract
The FDI Qualities Recommendation (FDIQR) enshrines a set of policy principles with a view to strengthen the sustainable impact of investment. Such principles are divided into four categories: (i) policy coherence; (ii) domestic policies; (iii) technical and financial support; (iv) information and facilitation services; and (v) co-operation and partnerships. The FDI Qualities Policy Toolkit supports governments in identifying priorities for domestic policy and institutional reform to strengthen the sustainable impact of investment, providing practical examples for the implementation of the FDIQR principles. Due to the focus placed on sustainable investment beyond narrow investment facilitation, these instruments are particularly suitable to act as baseline against which existing international investment agreements (IIAs) that include sustainable investment elements can be compared.
The FDIQR dedicate a specific principle to IIAs, recognising the need to align IIAs with sustainable investment objectives, “including by ensuring appropriate domestic policy space and social dialogue to achieve these objectives”. More broadly, the FDIQR also calls for coherence between IIAs and other existing international obligations relating to specific sustainable development areas, including decarbonisation, gender equality, quality jobs and innovation. Understood in this sense, the FDIQR recognises the key importance of ongoing reform efforts to more closely align IIAs with sustainable development concerns and the Paris Agreement, such as those ongoing under the OECD-hosted work programme on the Future of Investment Treaties.
At the same time, new provisions on sustainable investment raise specific challenges, as they effectively call for the adoption at the domestic level of a wide range of measures seeking to support sustainable investment. Notably, such measures are expressly considered under the FDIQR principles, albeit outside of the specific IIA context. The issue therefore arises of how to reconcile specific FDIQR principles addressing what are essentially domestic measures to IIAs, as specific policy instruments of international nature. This exercise includes an element of discretionary choice, as it relies on the interpretation of the FDIQR. This needs to be taken into count when interpreting the results of the analysis. It also requires the development of a methodological framework that allows understanding and interpreting IIAs through the lens of the FDIQR.
The methodological framework is firmly grounded in the FDIQR and the principles it sets out to harness sustainable investment, both generally and in connection with specific sustainability goals – namely: (i) productivity and innovation; (ii) job quality and skills; (iii) gender equality; and (iv) decarbonisation. The methodological framework sets out the criteria that justify benchmarking an IIA provision against a specific principle in the FDIQR. For each principle of the FDIQR (identified through reference to its number and short title), Table 2.1 identifies the criteria justifying the consideration of an IIA provision under a certain principle. Annex B, Supporting Documents (DAF/INV(2024)26/ADD) sets out the full methodological framework for the assessment of IIA provisions against the FDIQR principles, also outlining the criteria under which a specific IIA provision would be considered as relevant for the achievement of the specific sustainability goals identified above.
1. The analysis does not include PFI areas relating to investment protection, competition, taxation, intellectual property, public procurement, and consumers protection. Promotion of responsible business conduct (RBC) falls under Recommendation 4.d.
2. Relevant international treaties and standards do not include international standards on RBC, as enshrined in the OECD Guidelines and other instruments (e.g. United Nations Guiding Principles on Business and Human Rights).
3. These references are related to investment facilitation understood in a narrow sense, focusing on the creation of a transparent, predictable and efficient regulatory and administrative framework for investment (OECD, 2018[1]).
2.1.1. Identifying a selected sample of IIAs
Provisions addressing sustainable investment have become increasingly common in IIA over recent years, and particularly since 2015 (UNCTAD, 2023[2]). However, due to the number of provisions involved, a mapping and stocktaking exercise of all IIAs addressing sustainable investment would be beyond the scope of this exercise. This paper limits the analysis to a sample of selected IIAs based on three criteria:
Temporal: Only IIAs signed or adopted in the past five years (2019 to 2023) are covered limiting the analysis to the most recent practice.
Subject-matter: Only IIAs that contain provisions on sustainable investment are included. These are understood in their broadest scope, i.e. to include the compendium of policies and measures that contribute to improving the domestic climate for investment, in line with the FDIQR and the OECD Policy Framework for Investment (PFI).
Type of treaties: To provide a balanced representation of the variety of IIAs in current practice, the sample draws from four different types of treaties, namely: (i) bilateral investment treaties (BITs); (ii) selected chapters of deep free trade agreements (FTAs) addressing Investment, Trade and Sustainable Development, chapters having specific cluster-level relevance (e.g., Gender, Small and Medium-sized Enterprises, Energy), and chapters addressing investment facilitation-related provisions (e.g., Good Governance and Regulatory Practices); (iii) regional and plurilateral IIAs; and (iv) new-generation agreements tackling specific sustainability issues, including by addressing investment. It is understood that the type of treaty will influence the amount and type of provisions on sustainable investment that the treaty may include.
Accordingly, the research will focus on a sample of nine IIAs, listed in Figure 2.1.
Note: The figure highlights the agreements that are part of the IIA sample. For FTAs, the research will focus only on specific chapters, although the research could be further expanded in the future through the assessment of provisions found in additional chapters.
Source: OECD.
It is understood that the IIA sample, and the treaties included therein, is not exhaustive and that there are additional IIAs that also meaningfully contribute to sustainable investment, including through the introduction of innovative tools and approaches (Box 2.1). The limitation in the sample size is nevertheless necessary to keep the scope of the research clearly manageable and defined. At the same time, the analysis below can still be useful to highlight emerging approaches to sustainable investment in IIAs, identifying potential areas that could be subject to further developments.
The United States-Mexico-Canada Agreement (USMCA), signed in 2018 and entered into force in 2020, provides heightened consideration to sustainable investments concerns. The USMCA includes provisions typically found in new-generation IIAs, including aimed at preserving the state’s right to regulate to ensure that investment activities are carried out “in a manner sensitive to environmental, health, safety or other regulatory objectives” (Article 14.16). In addition, it also adopts innovative approaches that can actively contribute to sustainable investment, in alignment with the principles of the FDIQR. Such approaches include, among other things:
Encouraging – compatibly with the parties’ own legal system – the recourse to flexible and voluntary mechanisms (e.g., auditing and reporting, sharing of information and expertise, public-private partnerships) to protect the environment and natural resources (Article 24.14);
Setting out a best effort obligation on the parties to facilitate and promote investment in environmental goods and services, with a view to contributing to green growth and encouraging sustainable development (Article 24.24);
Promoting co-operation to increase investment opportunities for small and medium-sized enterprises (SMEs), including owned by under-represented groups, with a view to promoting the exchange of information and best practices and facilitating SMEs’ access to international markets (Article 25.2);
Setting out binding obligations on the parties concerning the adoption of measures to prevent and combat bribery and corruption (Articles 27.1 and ff); and
Establishing a Rapid Response Mechanism designed to protect workers in case that their labour rights, in particular concerning freedom of association and collective bargaining, are violated in specific facilities (Annex 31-A).
Source: OECD based on the text of the USMCA.
2.1.2. Describing the methodology
The stocktaking exercise relies on two types of analysis. First, it identifies which principles of the FDIQR receive no or only limited attention in current IIA practice. This provides a first indication of the areas where sustainable investment considerations could be strengthened in future IIA practice. This exercise includes counting of provisions in IIAs that address the FDIQR. By itself, this type of analysis cannot be used to draw conclusions on how existing IIAs provisions in the sample address sustainable investment in line with the FDIQR. It only provides a snapshot on where gaps may exist.
The second type of analysis looks at the modalities with which the FDIQR and the provisions of the IIA sample address sustainable investment concerns. The exercise focuses on the content of the obligation enshrined in the relevant IIA provision (i.e. its subject-matter) comparing it with the content of the relevant principle under the FDIQR. On this basis, it assigns a grade from one (1) to three (3) in accordance with the scale below:
1. Narrow scope: The relevant IIA provision makes a general reference to an objective of the FDIQR but falls short on prescribing policy tools to achieve it.
2. Similar scope: The relevant IIA provision addresses both the policy objective to be achieved and the policy tools to be used, in line with the FDIQR.
3. Broader scope: The relevant IIA provision mentions the policy objective to be achieved and introduces specific policy tools that are not envisaged in the FDIQR.
The analysis allows to identify the areas where future IIA practice could go further, through reference to either additional policy tools and approaches mentioned in the FDIQR and not considered in the IIA sample or to specific policy tools enshrined in the IIA sample but not addressed in the FDIQR. The inclusion of such novel tools and approaches, however, will depend on the identification of the rationale justifying their inclusion in future IIA practice.
The degree of correspondence between an IIA provision and the content of a specific FDIQR principles may be also influenced by the legal nature of the provision itself – that is, its intensity. The “intensity” criterion is concerned with the legal nature of the obligation and, in particular, its binding force. As much as a provision may have a similar scope to the FDIQR from a subject-matter perspective, its contribution to sustainable investment will be much more limited if it is lacking a binding force. The analysis of each IIA provision will, therefore, need to consider how the provision is drafted, and in particular whether it falls under one of the following categories:
Declaratory provisions: they only reaffirm the parties’ existing rights or commitments under prior international agreements.
Permissive provisions: they reaffirm the parties’ prerogative to undertake a certain action (“may”) if they wish to do so.
Exhortative provisions: they encourage parties to act in a certain manner (“should”) but without imposing any binding obligation to do so.
Best effort provisions: they set out the parties’ obligation to adopt measures for the achievement of a certain objective but without requiring that the objective is effectively achieved (e.g. “shall endeavour”).
Provisions of result: they set out the parties’ obligation to achieve a specific result through a specific conduct (“shall”).
It is understood that the results of the analysis are subject to changes based on potential revisions to the methodological framework, which may affect the interpretation of relevant treaty provisions and correspondence with FDIQR principles. In addition, the analysis is based exclusively on the text of the relevant treaty provisions. It does not consider issues linked to the actual impact of treaty provisions. The relative novelty of provisions on sustainable investment – in particular appearing in more recent treaties such as the WTO IFD Agreement or the EU-Angola SIFA –and the ensuing lack of data availability, makes such an assessment impossible to perform at this stage.
The stocktaking exercise entails a review of selected provisions in the IIA sample to assess if and how they address the principles of the FDIQR. The exercise analyses a total of 396 provisions from the IIA sample, by applying the methodological framework for alignment between FDIQR principles and IIAs. It focuses, in particular, on IIA provisions that address sustainable investment. This is understood in its broadest sense, i.e. as a compendium of policies and measures that can contribute to improving the domestic climate for investment, in line with the FDIQR and the OECD PFI. The review does not cover IIA provisions addressing investment protection or market access, which is the subject of ongoing OECD work on IIA reform, in particular under the “Future of Investment Treaties” Work Programme.
As a first step, the analysis counts IIA sample provisions that address FDIQR principles (Figure 2.2). When a treaty provision falls under the scope of more than one FDIQR principle, both primary and secondary – and, in limited cases, tertiary – correspondence is noted. The purpose of this exercise is simply to show which principles of the FDIQR are not addressed in the IIA sample, and where gaps may therefore exist. However, it does not allow to draw conclusion on how IIA sample provisions address the FDIQR principles.
The analysis shows that, based on the current formulation of the methodological framework, provisions in the IIA sample address most of the FDIQR principles. One notable exception is FDIQR principle 1.a on the development and promotion of investment-related strategies and plans coherent with sustainable development objectives, which does not find any correspondence in the IIA sample.
Note: The figure shows which FDIQR principles are addressed in the IIA sample and in specific treaties within the IIA sample. A treaty is deemed as addressing an FDIQR principle if it includes at least one provision that meets the criteria set out in the methodological framework. The level of alignment between the relevant provision and the underlying FDIQR principle is not relevant for the purpose of determining the correspondence. The figure shows that provisions in the IIA sample address most of the FDIQR principles, with one exception represented by FDIQR principle 1.a.
Source: Data from the sample of 9 selected IIAs.
Other principles only find limited attention in the IIA sample. This is the case, for example, for FDIQR principle 4.a on awareness raising on impacts of investment on sustainable development, which finds a mention in only three (3) treaties within the IIA sample – namely, the Chile-Canada FTA, the EU-New Zealand FTA and the Singapore-Australia Green Economy Agreement (GEA). FDIQR principle 1.b on inter-agency co-ordination, FDIQR principle 3.a on incentives for policy goals, and FDIQR principle 4.e on sustainability factors in FDI decisions also find limited attention in the IIA sample. More specifically, only the EU-Angola SIFA, the EU-New Zealand FTA, and the WTO Investment Facilitation for Development (IFD) Agreement address FDIQR principle 1.b on inter-agency co-ordination. FDIQR principle 3.a on incentives for policy goals is addressed in the Investment Protocol to the African Continental Free Trade Agreement (AfCFTA), the EU-New Zealand FTA and the WTO IFD Agreement, while FDIQR principle 4.e on sustainability factors in FDI decisions is regulated only under the Investment Protocol to the AfCFTA, the EU-New Zealand FTA and the Singapore-Australia GEA.
The stocktaking exercise also focuses on the IIA sample alignment with four sustainability areas considered under the FDIQR, and namely: (i) productivity and innovation; (ii) job quality and skills; (iii) gender equality; and (iv) decarbonisation (Figure 2.3). The results show that certain treaties within the IIA sample – and in particular the EU-Angola SIFA, the EU-New Zealand FTA, and the Investment Protocol to the AfCFTA – provide comprehensive attention to all four sustainability areas under the FDIQR. Other treaties, instead, prioritise certain sustainability areas over others, although almost all – with the exception of the WTO IFD Agreement – are explicitly concerned with issues linked to labour rights and the creation of quality jobs.
Looking at the data from the perspective of the individual treaties within the IIA sample, it is possible to note that the consideration given to the FDIQR principles varies depending on the underlying treaty. Some, like the EU-Angola SIFA, the EU-New Zealand FTA, or the WTO IFD Agreement, address almost all FDIQR principles. In others such as the Brazil-Morocco CFIA and the Switzerland-Indonesia BIT, instead, consideration is provided to only a limited number of FDIQR principles. Such a conclusion is not surprising. Indeed, the level of correspondence between an IIA and the FDIQR principles will depend also on the nature, scope, and objectives of the IIA itself. Treaties such as the Brazil-Morocco CFIA and the Switzerland-Indonesia BIT pursue very specific and targeted objectives. As such, it is to be expected that the consideration they give to FDIQR principles will also be more limited. On the contrary, IIAs like the EU-Angola SIFA or the WTO IFD Agreement look at sustainable investment more holistically, thus leading to a more widespread integration of FDIQR principles.
Note: The figure shows which FDIQR sustainability areas are addressed in specific treaties within the IIA sample. A treaty is deemed as addressing an FDIQR sustainability area if it includes at least one provision that meets relevant criteria under the methodological framework. The figure shows that only a limited number of treaties within the IIA sample address all the sustainability areas considered in the FDIQR, with most remaining focused only on quality jobs.
Source: Data from the sample of 9 selected IIAs.
This correspondence-based stocktaking exercise does not say anything about how IIA sample provisions address the principles of the FDIQR. This assessment can be done only through the application of a specific subject-matter scale, seeking to determine whether the relevant provision has narrower scope compared to the FDIQR principles, a scope similar to the corresponding FDIQR principle, or if it goes beyond the FDIQR and the policy tools it envisages to harness sustainable investment (Figure 2.4).
In general, all treaties within the IIA sample contain one or more provisions with a similar scope to the FDIQR principles from a subject-matter perspective. Limited exceptions relate to FDIQR principle on awareness raising, where the limited number of IIA sample provisions on this topic simply refers to the importance of raising awareness on specific sustainable development-related issues without providing any guidance or identifying specific policy tools on how to do so. Certain treaties within the IIA sample also have a more similar scope to the FDIQR principles than other IIAs, offering opportunities to shape future practice. For example, all IIA sample treaties have a similar scope to the FDIQR when it comes to traditional investment facilitation measures like transparency of investment information and streamlining of administrative procedures. However, only certain IIAs within the sample create a stronger alignment between investment promotion and facilitation activities and the specific sustainability areas under the FDIQR, in alignment with FDIQR principles 4.b and 4.c.
Note: This table shows the subject matter comparison between the FDIQR principles and the IIA sample, as well as specific treaties within the IIA sample. It does so by applying a subject-matter scale that shows how the scope of provisions within the relevant treaties compares to the FDIQR principles, and in particular whether they have a narrower, similar or broader focus. The figure shows that provisions in the IIA sample are generally aligned with the principles of the FDIQR, although there are areas where relevant provisions have a narrower (e.g. awareness raising) or broader (e.g. consideration of sustainability factors in FDI decisions) scope. Please note that the results of the analysis are subject to changes based on revisions and amendments to the methodological framework.
Source: Data from the sample of 9 selected IIAs.
There are also treaties within the IIA sample that seem to have a broader scope compared to specific FDIQR principles, when introducing policy tools not discussed therein. For example, the Investment Protocol to the AfCFTA appears to go beyond the scope of the FDIQR principles when it refers to the local content measures to align investment and sustainable development, and when the Investment Protocol to the AfCFTA, the Brazil-Morocco CFIA or the Switzerland-Indonesia BIT introduce specific investor obligations. Both the Investment Protocol to the AfCFTA and the EU-New Zealand FTA provide more precise criteria guiding the assessment of FDI’s impacts on sustainable development, beyond the current scope of FDIQR principle 1.d on impact assessment and periodic review. While these provisions may offer suggestions of additional sustainable investment-related elements that could be considered through future IIAs and the FDIQR, their usefulness and desirability will have to be carefully assessed.
Based on the high-level overview of the IIA sample, compared against the FDIQR principles, the stocktaking exercise identifies three main areas that offer opportunities for reflection on additional sustainable investment areas, in line with the FDIQR principles, that states might decide to address through their IIAs:
1. Areas where IIA sample provisions do not address, or only narrowly address, tools and practices in line with the FDIQR principles.
2. Areas where IIA sample provisions introduce tools and practices in line with the FDIQR principles that can strengthen the consideration of sustainable investment.
3. Areas where IIA sample provisions introduce tools and practices beyond the scope of the FDIQR principles.
Table 2.2 shows the full list of the identified areas. The detailed analysis of IIA sample provisions falling under each category is set out under Annex C, Supporting Documents (DAF/INV(2024)26/ADD), with main findings summarised below.
The table also shows that not all FDIQR principles are considered in the analysis. For example, only a limited number of treaties in the IIA Sample address FDIQR principle 1.b on inter-agency co-ordination. However, they do so in a manner that is already contributing to sustainable investment, in line with the FDIQR principles. The possibilities to consider additional elements in this area, therefore, are more limited. The full analysis of IIA sample provisions falling under the scope of FDIQR principles and not providing possibilities for further development is set out under Annex D, Supporting Documents (DAF/INV(2024)26/ADD).
2.3.1. Areas where the IIA sample does not address, or narrowly addresses, FDIQR principles
FDIQR principle 1.a: National strategies and plans
FDIQR principle 1.a encourages national strategies and plans on investment, growth, innovation, jobs and skills development, gender equality, decarbonisation and regional development to be as coherent as possible (OECD, 2022[3]).
While generally referring to the importance of policy coherence in specific sustainable development-related areas, treaties within the IIA sample do not specifically address FDIQR principle 1.a. None of the provisions examined expressly calls for the integration of sustainable development concerns in national investment strategies and plans at the level of detail expected under the FDIQR. For example, to achieve decarbonisation objectives, FDIQR principle 1.a encourages national strategies and plans to set out clear and specific environmental and decarbonisation targets, identify the resources and tools to achieve them, and provide for performance indicators to measure progress over time. In the gender area, FDIQR principle 1.a recommends mainstreaming gender considerations into investment promotion strategies and plans, to ensure that efforts to attract FDI to specific sectors or regions do not exacerbate existing inequalities.
The implementation of FDIQR principle 1.a, however, is grounded in choices related to the allocation of domestic resources, the definition of clear action plans and targets and the definition of monitoring and evaluation frameworks. Given the specificity in the implementation of this FDIQR principle, which will depend on the actual institutional context in the negotiating parties, the principle might not be adequately addressed in international instruments such as IIAs. Parties could, however, include a reference to national strategies and plans in existing provisions addressing the need for coherence between investment policies and sustainable development-related objectives.
FDIQR principle 3.a: Incentives for policy goals
FDIQR principle 3.a addresses the specific types of assistance – including financial and technical incentives – that states can use to pursue specific sustainability goals linked to decarbonisation, productivity and innovation, job quality and gender equality.
Given the variety of measures that states can adopt to support sustainable development-related policy goals, the limited provisions in the IIA sample do not address the principle in a comprehensive manner. The approach adopted in certain treaties – such as the Investment Protocol to the AfCFTA – is to first reaffirm in general the parties’ power to introduce incentives to pursue sustainable development. The treaty then also provides for a non-exhaustive list of financial and technical assistance measures that the parties may introduce, including in connection with specific areas, such as low-carbon investment (Article 8, Investment Protocol to the AfCFTA). Another approach is to address specifically only certain types of incentives that can facilitate the achievement of targeted sustainable development objectives, such as technology transfer, local suppliers’ development, and decarbonisation (see Article 25, WTO IFD Agreement; Article 19.11(2), EU-New Zealand FTA; Articles 29-30, Investment Protocol to the AfCFTA).
Decisions on incentives are essentially a domestic matter and depend on the party’s own priorities and resources. As such, the matter might not be comprehensively regulated in an IIA context. Current practice in the IIA sample already ensures alignment with FDIQR principle 3.a. In fact, provisions listing existing examples of incentives or highlighting specific incentives that can contribute to achieve targeted goals may provide a useful indication as to what the parties consider as “sustainable investment” to be pursued in an IIA setting. In addition, IIAs may contribute to fostering co-operation in the areas of incentives. Such a co-operation could be directed, in the first instance, to improving policy coherence in the field. For example, it could focus on the identification of which incentives should be allowed to pursue specific sustainable development objectives, thus also reducing risks of conflicting incentive regimes. Co-operation could also be directed at enhancing parties’ capacity to comply with treaty provisions addressing incentives, in particular concerning their periodic review. In this context, they could support the implementation of initiatives aimed at strengthening domestic capacity on reporting and assessment on the incentives’ impacts on the desired sustainability goal.
FDIQR principle 4.a: Awareness raising
FDIQR principle 4.a addresses the need to raise stakeholder awareness on the impacts of their consumption and investment choices, in particular with respect to the specific areas of decarbonisation and gender equality.
Treaty references to awareness raising in the IIA sample are broadly absent and often have a narrower scope compared to FDIQR principle 4.a. In the gender area, existing provisions in the EU-New Zealand FTA (Article 19.4.4) and in the Chile-Canada FTA (Article Nbis-01.7) only address awareness raising on “gender equality laws, regulations, policies and practices”. However, they fail to consider the impacts on gender stereotypes and discrimination resulting in reduced access to opportunities for women, in line with the FDIQR. In the decarbonisation area, instead, the EU-New Zealand FTA (Article 19.11.5) treats awareness raising as secondary concern in provisions addressing investment promotion and facilitation, which can be implemented also through public education campaigns. The Singapore-Australia GEA (paragraph 9.g.v), instead, implicitly refers to awareness raising when addressing the partners’ co-operation with ecolabelling organisation.
Given the importance of awareness raising in aligning sustainable development and investment outcomes, states wishing to putt a stronger focus on related activities in line with FDIQR principle 4.a may rely on different options. A first approach could be to build on existing provisions. Alternatively, or in addition, they could decide to focus on co-operation, for example through the development between the parties of joint awareness raising initiatives, addressing decarbonisation and gender. In this respect, future IIAs could provide additional indications as to potential activities – such as public information campaigns, or public-private policy dialogues – that the parties could pursue, in line with FDIQR principle 4.a.
FDIQR 4.e: Sustainability factors in FDI decisions
FDIQR principle 4.e concerns the need for investors, both financial and operational, to consider sustainability factors – that is, environmental, social and governance (ESG) concerns – when making investment decisions.
There are only limited references to this principle in the IIA sample. Environmental factors sometimes appear among the criteria that should guide decisions on investment, often in conjunction with the consideration of available technical and scientifical information or the application of the precautionary approach (see Article 19.13, EU-New Zealand FTA; Article 34.1(d), Investment Protocol to the AfCFTA). In other cases, IIA sample provisions address the need for voluntary disclosure and sustainability schemes (see Article 19.11.1, EU-New Zealand FTA; Article 39.4, Investment Protocol to the AfCFTA). The Singapore-Australia GEA is notable in this regard, as it sets out a framework for the partners’ co-operation on (i) the strengthening of ESG ecosystem in their respective countries, “to improve decision-making by businesses and investors” (paragraph 9.c.vii); and (ii) the development of robust global climate-related financial disclosures and reporting standards (paragraph 9.c.viii). Co-operation in these areas is essential. FDIQR principle 4.e recognises that the lack of consistency and comparability in ESG reporting standards is one of the main issues that the FDIQR identifies as negatively affecting the effectiveness of non-financial disclosure measures.
States wishing to expand consideration of sustainability factors in IIA in line with FDIQR principle 4.e could consider building on efforts ongoing in international fora to further foster the parties’ regulatory and technical collaboration on the development and uptake of clear, comparable, and proportionate ESG frameworks and metrics that contribute to sustainable investment.
2.3.2. Areas where the IIA sample can strengthen consideration of sustainable investment, in line with the FDIQR principles
FDIQR principle 1.d: Impact Assessment
FDIQR principle 1.d relates to the assessment of FDI’s impacts on sustainable development through a variety of processes, and namely: (i) the impact assessment of investment-related policies, laws, regulations, or investment projects; and (ii) the periodic review of the adopted measure or the authorised project. It also tackles FDI’s potential positive contribution to productivity and innovation, gender equality, decarbonisation, and quality jobs through reliance on adequate monitoring and evaluation frameworks.
Several treaties in the IIA sample address FDIQR principle 1.d on impact assessment and periodic review, to a different extent. Among all, the regime set out in the EU-New Zealand FTA is particularly noteworthy. After reaffirming the parties’ commitment to perform an impact assessment and periodic review of major measures of general application, the treaty sets out the criteria that regulatory authorities shall apply when conducting such exercises. For impact assessment (Article 22.8.2), these include the consideration of whether a regulatory measure is needed in the first place, what options are available that would allow a party to achieve the same policy objective without the need to regulate, and what are the potential social, economic and environmental impact of the options. As such, it specifically requires the assessment of environmental and social impacts, including on decarbonisation, labour issues and SMEs development. For periodic review (Article 22.9.1 and 22.9.2), relevant criteria include the consideration of more efficient alternatives and whether the current measure is still adequate considering the objective to be achieved. It further provides that, in the impact assessment and periodic review of measures aimed at protecting the environment or labour conditions and potentially entailing adverse consequences on investment, parties shall take into account available scientific and technical information and apply the precautionary approach (Article 19.13). Lastly, the EU-New Zealand FTA also goes further than other treaties in the IIA sample by setting out an obligation for the parties to ensure that their own domestic legislation provides for the implementation of an environmental impact assessment (EIA) for energy or mining projects having significant impact on the environment (Article 13.8.1).
Examples in the IIA sample on monitoring and evaluation are scarce. The only treaty that briefly discusses the issue is the Singapore-Australia GEA, which identifies data measurement, statistical capacity, and development of indicators and data tracking tools as some of the areas on which partners will co-operate (paragraph 9.g.vii). By doing so, parties can contribute to ensuring that monitoring and evaluation activities are grounded in reliable and comparable data. Partners’ co-operation extends also to the exchange of measurements and reporting and verification in carbon accounting mechanisms, with a view to building trust in the carbon market (paragraphs 9.d.ix and 9.d.x).
Additional sustainable investment-related elements that states could decide to address through IIAs potentially include criteria for impact assessment and periodic review, including through reference to available scientific and technical information. States could also decide to strengthen the intensity of relevant obligations, by turning the hortatory language into obligations of result. This exercise, however, will have to be carried out with caution, as the potential suspension of the investment project at the conclusion of the EIA process could expose the state to liability in case it was to amount to a breach of investment protection provisions potentially enshrined under the relevant IIA or other existing BITs. Lastly, parties may decide to address monitoring and evaluation directly in IIAs, either in the form of collaboration for the development of relevant frameworks and indicators – as done, for example, in the Singapore-Australia GEA – or through provisions referencing the need for parties to apply such frameworks in their impact assessment and periodic review exercises.
FDIQR principle 2.b: Domestic alignment
FDIQR principle 2.b addresses the issue of policy coherence by requiring alignment between domestic policy frameworks with sustainable investment objectives. In general, treaties within the IIA sample achieve a good level of alignment with FDIQR principle 2.b, especially when it comes to the consideration of areas such as decarbonisation and job creation (see Article 30, Article 31.2.b and Article 32.2.b, EU-Angola SIFA; Article 19.3.8, EU-New Zealand FTA).
One area where there is limited domestic alignment between investment and sustainable development objective relates to gender equality. Provisions addressing investment and gender only appear in a limited number of treaties – namely, the EU-Angola SIFA, the Chile-Canada FTA, and the EU-New Zealand FTA. None of them expressly calls for investment policies to actively advance gender objectives. In fact, treaties only go as far as recognise the role that investment policies play in advancing gender equality and the importance of incorporating a gender perspective into investment relationships (see Article 35, EU-Angola SIFA; Article 19.4.1, EU-New Zealand FTA). In their stronger language, they reaffirm the parties’ commitment to either adopt and implement gender equality laws and regulations – without creating any explicit link to investment and economic empowerment – or to implement the treaty itself in a manner that promotes gender equality (see Article N-01bis.6, Chile-Canada FTA; Article 35, EU-Angola SIFA). As such, the alignment between the IIA sample and FDIQR principle 2.b is overall limited.
There are several options available to states wishing to ensure increased policy coherence between investment and gender equality objectives in their IIAs. For example, they can decide to strengthen existing commitments relating to the implementation of the treaty in a manner conducive to gender equality, turning relevant provisions into either best effort obligations or obligations of result. Parties could also actively co-operate in the achievement of gender equality in the context of investment relations, for example by outlining activities for collaboration in support of women.
FDIQR principle 4.b: Investment promotion
FDIQR principle 4.b recommends linking investment promotion activities to sustainable development objectives. The FDI Qualities Policy Toolkit identifies several ways in which Investment Promotion Agencies can create such linkages, including through prioritisation, policy advocacy, and the removal of information barriers preventing foreign investors’ access to new opportunities.
Treaties in the IIA sample often address FDIQR principle 4.b from the perspective of prioritisation. They set out an obligation either of result or of best efforts (or, in case of the Singapore-Australia GEA, a non-binding commitment) to encourage investment in certain key sectors. In the decarbonisation area, these include sustainable production and consumption (Article 33, EU-Angola SIFA), environmental goods and services (Article 33, EU-Angola SIFA; Article 19.4, EU-New Zealand FTA), climate change mitigation and adaptation (Article 26, Investment Protocol to the AfCFTA; Article 33, EU-Angola SIFA), sustainable food systems (paragraph 9.a.xii, Singapore-Australia GEA), renewable energy and low carbon technologies (Article 26, Investment Protocol to the AfCFTA; Article 13.13, EU-New Zealand FTA), and natural resources and raw materials (Article 13.13, EU-New Zealand FTA).
In a limited number of cases, treaties in the IIA sample go a step further by providing additional guidance as to what investment promotion activities entail. For example, the Investment Protocol to the AfCFTA (Article 6) sets out a general provision on investment promotion, stating that parties shall endeavour to undertake activities such as awareness raising (e.g. organisation of joint activities between the parties’ Investment Promotion Agencies, conferences and seminars, and information exchanges sessions), policy and advocacy (e.g. collaboration with regional economic communities and the Investment Agency of the AfCFTA), and provision of aftercare services (e.g. business matching activities with domestic firms). Similarly, the EU-New Zealand FTA clarifies through an interpretative provision that investment promotion will entail awareness raising and public information campaigns, the adoption of conducive policy frameworks, and the uptake of sustainability assurance schemes, especially for SMEs (Article 19.11.5). With specific reference to the energy sector, investment promotion under the EU-New Zealand FTA also entails awareness raising on environmentally friendly policies and best practices and promotion of R&D activities on energy efficiency and raw materials (Article 13.13).
The precise guidance in provisions such as those enshrined in the Investment Protocol to the AfCFTA and in the EU-New Zealand FTA may be useful to facilitate the domestic implementation of international obligations in alignment with FDIQR principle 4.b. States could evaluate whether to identify, in their IIAs, specific investment promotion activities contributing to the achievement of sustainable development objectives. For the time being, guidance is limited to the decarbonisation area, including from an innovation and R&D perspective. However, states are not limited to this area alone, having the option to consider also investment promotion activities in other areas, including gender equality.
FDIQR principle 4.c: Investment facilitation
FDIQR principle 4.c addresses investment facilitation and suggests avenues on how to improve its link with sustainable investment objectives. In this sense, the FDIQR goes beyond the traditional understanding of investment facilitation to look at the broader institutional, policy and legal environment where the investment takes place, with a view to strengthening linkages with specific sustainable development-related areas such as decarbonisation, productivity and innovation, gender equality and quality jobs.
The IIA sample treaties focus investment facilitation efforts on two main areas, namely decarbonisation and productivity and innovation. The approach followed is similar to the one used for investment promotion. First, treaty provisions would identify specific areas or sectors where investment facilitation efforts should be directed. These include, among others, sustainable production and consumption (Article 33.1, EU-Angola SIFA), climate mitigation and adaptation (Article 33.1, EU-Angola SIFA; Article 26, Investment Protocol to the AfCFTA), and environmental goods and services (Article 33.1, EU-Angola SIFA; Article 19.11, EU-New Zealand FTA). Certain treaties, such as the EU-Angola SIFA, adopt a systematic approach to climate change mitigation and adaptation, by extending investment facilitation efforts to sectors with indirect relevance to the same, such as biodiversity, sustainable management of forests, and sustainable management of marine ecosystems and biological resources (Articles 33.3, 33.5 and 33.6, EU-Angola SIFA).
When it comes to investment facilitation, however, IIA sample treaties do not provide any guidance on what activities parties should implement for this purpose. The only exception is the EU-New Zealand FTA (Article 19.11). This treaty, however, considers investment facilitation jointly with investment promotion and seems to focus mostly on the latter, as relevant “investment promotion and facilitation activities” involve awareness raising, the adoption of conducive policy frameworks and the uptake of transparent, factual and non-misleading sustainability schemes. It is true that IIA sample treaties already include general provisions on investment facilitation that may apply also to investments in the decarbonisation area. However, the range of activities that parties could implement in this area is much broader and can extend to the provision of specific aftercare services aimed at identifying low-carbon business partners, organise matchmaking activities, and engage in training/advocacy activities to support the development of local workforce.
In the innovation area, IIA sample treaties seek to encourage linkages between the foreign investor and domestic SMEs, mostly through the establishment of domestic suppliers databases. The reference to this tool is particularly important, as it is considered under the FDIQR as an instrument to break down information barriers and facilitate spill overs between domestic and foreign firms. Obligations in these areas are drafted in mostly weak and general terms (Article 11, EU-Angola SIFA; Article 24, WTO IFD Agreement; Article 10.2, Chile-Singapore-New Zealand DEPA).
Despite being drafted in a non-binding manner, the relevant provision in the WTO IFD Agreement goes further than the others by providing additional guidance on the features of the domestic suppliers database. In particular, the WTO IFD Agreement (Article 24) clarifies that the database should be made available online in one of the WTO official languages, kept regularly updated and be searchable by sector or industry, company, product or service, location, certifications. Linkages are also pursued through the establishment of skills development programmes, which seek to increase the capacity of local labour force to anticipate and meet the needs of foreign investors. These initiatives are also references in the WTO IFD Agreement, which encourages parties to “to implement programmes that strengthen the capabilities of local suppliers, especially [SMEs], to meet sourcing demands of investors of other Members/Parties” (Article 25). Also in this case, the provision is drafted in a non-binding manner. Yet, it remains notable as it is the only reference to skills development programmes that appears in the IIA sample.
Further research could evaluate whether future treaties should build on current practice in the IIA sample by clarifying the links between investment facilitation and sustainable development objectives, especially in the areas of decarbonisation and innovation. In the decarbonisation area, states may rely on the FDIQR to derive additional guidance on what investment facilitation in low carbon projects entails. This could include, for example, to business-to-business initiatives in support of the green transition, such as business matchmaking initiatives or information events seeking to showcase green technologies. In the innovation area, a useful starting point could be the strengthening of obligations concerning the establishment of domestic suppliers’ databases, with a view to turning them into clear and enforceable obligation of result. Additional facilitation activities could also be envisaged, including the organisation of business-to-business events or the implementation of skills development programmes contributing to sustainable development objectives in the employment area.
FDIQR principle 4.d: Promotion of RBC
FDIQR principle 4.d concerns the promotion of responsible business conduct (RBC) in the operation of the investment, including in the context of the investor’s relationship with business entities, including within its broader supply chain.
Most treaties in the IIA sample are already fully aligned with this principle, requiring parties to promote the uptake of international standards on RBC (see Article 34, EU-Angola SIFA; Article 37, WTO IFD Agreement; Article G-14 bis and Article N bis-01, Chile-Canada FTA; Article 19.12, EU-New Zealand FTA; Article 13, Switzerland-Indonesia BIT). Reference is often made to international instruments such as United Nations Guiding Principles on Business and Human Rights, the United Nations Global Compact, the ILO Tripartite Declaration on Principles concerning Multinational Enterprises and Social Policy and, notably, the OECD Guidelines for Multinational Enterprises. A limited number of treaties include an express reference to the need for the investor to implement due diligence, with a view to identifying and addressing the potential adverse effects of their activities (see Article 34.1, EU-Angola SIFA; Article 37.3, WTO IFD Agreement).
States wishing to strengthen the consideration provided in IIAs to the promotion of RBC have several options at their disposal. By way of example, they could simply adopt a stronger language in relevant provisions, going beyond declaratory terms to provide for specific obligations on the parties to promote and disseminate RBC and facilitate the implementation of due diligence processes in connection with the investment. Ultimately, the way in which future IIAs could address additional sustainable investment-related elements, in alignment with FDQR principles on RBC, will depend on the outcome of current developments in international and regional fora, including at the EU level, in particular with respect to ongoing discussions on issues such as the uptake of mandatory due diligence legislation.
2.3.3. Areas where the IIA sample goes beyond the FDIQR principles
The review of the IIA sample has led to the identification of additional policy tools designed to pursue sustainable development objectives and going beyond the scope of the FDIQR principles. While they might still offer suggestions on how to shape future practice, their lack of inclusion in the FDIQR principles means that their suitability to inform future IIAs must be carefully assessed.
Local content and performance requirements
A first area going beyond the scope of the FDIQR concerns local content and performance requirements. While there is no universally accepted definition of performance requirements, these are usually understood as measures designed to compel the foreign investor to implement its activities in a certain way considered beneficial for the host state, with a view to maximizing potential benefits (Genest, 2019[4]). These can consist of the promotion of capacity building of and technology transfer to local enterprises, the performance of specific levels of R&D in the country, or the achievement of a given number of local jobs.
Contrary to general standards on RBC, local content requirements have mandatory nature for the investor. For this reason, they are often perceived as an undue restriction to the free flows of FDI. Furthermore, their overall effectiveness in achieving the desires sustainable development outcomes is subject to debate. OECD studies show that, while local content requirements may help governments achieve certain short-term objectives in targeted industries (e.g. potential learning and technological spill overs, economies of scale), they undermine long-term competitiveness and may prove to be detrimental for FDI attraction and productivity growth in the long run (Stone, Messent and Flaig, 2015[5]).
These concerns have resulted in the prohibition of local content and performance requirements within certain IIAs (in the sample, see EU-New Zealand FTA) and WTO agreements, including the Agreement on Trade-Related Investment Measures, either in general or through a targeted approach that still allow for the introduction of specific PRs on local content, local employment, or technology transfer (Nikièma, 2014[6]). In the IIA sample, mention of local content appears in the Investment Protocol to the AfCFTA. This provides that state parties can introduce “measures to promote domestic development, including local content”. It provides a list of examples what such measures could entail, including: (i) granting of preferential treatment to qualifying domestic enterprises; (ii) establishing linkages with local firms; (iii) enhancing productive capacity and developing local human resources and R&D; (iv) appointing nationals of the host state in manager-level and board-level positions within the investment undertaking; (v) promoting the transfer of technology, skills and know-how; and (vi) addressing economic and development disparities suffered by identifiable ethnic or cultural groups (Article 26). Such measures are all linked to the achievement of general sustainable development objectives, with explicit mention of the enhancement of innovation, productive capacities, and quality jobs in the host state. Notably, however, the Investment Protocol clarifies that relevant measures would still need to comply with protections on national treatment and most favoured nation treatment (Article 12).
The recourse to local content and performance requirements remains beyond the scope of the FDIQR principles. These explicitly recognise that, due to the risks inherent in local content requirements in terms of competitiveness and allocation of resources, states should prioritise alternative tools and measures to facilitate FDI’s linkages with domestic firms.
Investor obligations
Another way in which certain treaties in the IIA sample go beyond the scope of the FDIQR is through the incorporation of investor obligations. These have recently emerged in investment treaty practice as one of the tools to “correct” the inherent asymmetry affecting IIAs (Working Group on the issue of Human Rights and Transnational Corporations, 2021[7]). They also play a role in ensuring the sustainability of the investment, by requiring that the investor carry out relevant activities in such a way as to not cause damage to public interests concerning the protection of human rights, labour rights, or the environment.
Several treaties within the IIA sample include investor obligations. In some cases, these are drafted in merely declaratory terms, as it is the case for the Switzerland-Indonesia BIT (Article 14). The Brazil-Morocco CFIA (Article 13) adopts a stronger language, setting out a best effort obligation for the investor to contribute to the development of the host state, through adherence to specific standards of behaviour addressing, among others, respect for human rights, development of local capacity and human capital, anti-corruption, and non-interference in the host state’s domestic affairs. Lastly, the Investment Protocol to the AfCFTA provides for a long list of investor obligations, of both best efforts and of result, covering issues such as compliance with domestic law, human rights and labour standards, environmental protection, indigenous peoples’ rights, non-interference in the host state’s domestic affairs, anti-corruption, contribution to the host state’s development and corporate governance (Articles 32-39).
Investor obligations are seen as one of the tools available to correct the asymmetry associated with the traditional IIA system, effectively acting as counterpart for foreign investors’ protections granted through the relevant treaty (UNCTAD, 2018[8]). More generally, it has also been suggested that investor obligations could help foster positive investors’ conduct and contribute to improving the quality of the investment (IISD, 2018[9]).Both effects, however, remain subject to the possibility of effectively enforcing investor obligations in case of breach. However, the issue of enforcement has yet to find conclusive resolution. Theoretically, there are mechanisms (e.g. counterclaims) that could help enforce IIA-based investor obligations in investor-State dispute settlement (ISDS). For the moment, however, the issue of enforceability of treaty-based investor obligations remains merely theoretical, as ISDS tribunals have yet to address the matter. So far, when ISDS tribunals addressed breach of investor obligations, relevant legal basis was found in domestic law (e.g. Burlington v Ecuador and Perenco v Ecuador; Aven v Costa Rica) or international law (Urbaser v Argentina). The concept of investor obligations seems, in any event, to be less relevant for IIAs that do not include ISDS (such as the EU-Angola SIFA, the Brazil-Morocco CFIA, or the WTO IFD Agreement) and do not provide enforceable rights for investors.
The stocktaking analysis shows that provisions on sustainable investment included in the IIA sample address most of the FDIQR principles. Furthermore, in most cases, FDIQR principles and IIA sample provisions have a similar scope, both in terms of objectives to be achieved and specific policy instruments available for this purpose.
There are, however, areas where IIA sample provisions have a narrower scope compared to the FDIQR principles, thus offering opportunities for consideration of additional sustainable investment-related elements in an IIA context. These areas relate to the following:
FDIQR principle 1.d: Assessment and periodic review of FDI’s impacts on sustainable development.
FDIQR principle 2.b: Domestic alignment between investment and gender objectives.
FDIQR principle 4.a: Awareness raising on the role that stakeholders can play in supporting sustainable investment.
FDIQR principle 4.b: Investment promotion for sustainable development.
FDIQR principle 4.c: Investment facilitation for sustainable development.
FDIQR principle 4.e: Consideration of sustainability factors in investment decision making.
In all these cases, a strengthening of sustainable investment considerations in sustainable investment provisions in IIA could lead to the clarification of what treaty commitments ultimately entail, providing additional guidance as to what measures could be implemented at the domestic level. For example, they could contribute to defining what “investment facilitation” and “investment promotion” entail when directed towards harnessing sustainable investment. An additional integration of sustainable investment considerations could also result in a strengthening of parties’ co-operation in specific areas, especially to enhance parties’ ability to comply with relevant commitments.
References
[4] Genest, A. (2019), Performance Requirement Prohibitions in International Investment Law, Brill | Nijhoff, https://doi.org/10.1163/9789004392106.
[9] IISD (2018), Harnessing Investment for Sustainable Development: Inclusion of investor obligations and corporate accountability provisions in trade and investment agreements, https://www.iisd.org/system/files/meterial/harnessing-investment-sustainable-development.pdf.
[6] Nikièma, S. (2014), Performance Requirements in Investment Treaties, IISD, https://www.iisd.org/system/files/publications/best-practices-performance-requirements-investment-treaties-en.pdf.
[3] OECD (2022), FDI Qualities Policy Toolkit, OECD Publishing, Paris, https://doi.org/10.1787/7ba74100-en.
[1] OECD (2018), “Towards an international framework for investment facilitation”, OECD Business and Finance Policy Papers, No. 47, OECD Publishing, Paris, https://doi.org/10.1787/b82771dc-en.
[5] Stone, S., J. Messent and D. Flaig (2015), “Emerging Policy Issues: Localisation Barriers to Trade”, OECD Trade Policy Papers, No. 180, OECD Publishing, Paris, https://doi.org/10.1787/5js1m6v5qd5j-en.
[2] UNCTAD (2023), Investment Facilitation in International Investment Agreements: Trends and Policy Options, https://unctad.org/publication/investment-facilitation-international-investment-agreements-trends-and-policy-options.
[8] UNCTAD (2018), Reform Package for the International Investment Regime, https://investmentpolicy.unctad.org/uploaded-files/document/UNCTAD_Reform_Package_2018.pdf.
[7] Working Group on the issue of Human Rights and Transnational Corporations (2021), Human rights-compatible international investment agreements, https://documents-dds-ny.un.org/doc/UNDOC/GEN/N21/208/09/PDF/N2120809.pdf?OpenElement.