Environmental Issues in Investment Arbitration
In the past decades, foreign direct investment (FDI) has been an essential tool for developing countries to generate capital and contribute to the efficient transformation of resources. The report on global investment trends from the United National Conference on Trade and Development found that despite the sharp hit the global economy received at the beginning of the pandemic, FDI has served as one of the main ways to reduce the collateral damage of the pandemic in society through greenfield investment and higher inflows in the manufacturing and pharmaceutical industries, which has contributed to the slow recovery of the finances of developing economies and lessened the impact of recession.[1]
Likewise, one of the main features of FDI consists in the use of alternative dispute resolution methods such as international arbitration, since it assures the parties that in case there is an infringement of the BIT, there is the possibility to access an independent and impartial arbitral tribunal that has the required expertise to address the dispute and provide a final and binding award on the case. This allows the investor to elude national jurisdictions that could be biased and lack independence. Consequently, investment arbitration has been the preferred method of resolution of these types of disputes, as the investor does not have to file a claim before a court of the host state that could lack expertise, independence or impartiality or national law could make the enforcement impossible.[2]
The consent to investment arbitration is commonly given by the host states through international agreements of investment, including Bilateral Investment Treaties (BITs), Free Trade Agreements (FTAs), and Multilateral Investment Treaties (MITs). These instruments establish procedural and substantive provisions related to the protection of the rights of the investor and aim to promote foreign direct investment between states. Currently, there are a total of 2341 BITs in force which regulate the global flow of FDI, estimated in a value of $1.54 trillion as of 2019.[3]
Concurrently, due to the proliferation of investment worldwide, several cases have been raised to arbitral institutions like the International Centre for Settlement of Investment Disputes (ICSID), which has registered around 803 cases since 1972 regarding alleged breaches of BITs and FTAs.[4]
A topic of critical importance in this context is the issue of environmental protection in the context of expropriation disputes, which is part of the interrelation saga between investment arbitration and human rights. The distinct nature of the questions that arise and the extend of the damage they cause in regional communities have attracted considerable interest.
The central point of the debate lies in the need to balance the rights and protections of the investor with the regulatory power of the host state regarding its natural resources.[5] Issues pertaining to environmental concerns are generally raised by the State to justify actions or legislation adopted to address problems of air or water contamination, climate change, and environmental impact.[6]
Moreover, expropriation disputes that involve environmental claims differ in the fact that they tend to focus on technical scientific arguments, which sometimes are not given the appropriate relevance in the proceedings and constitute a challenge for the arbitrators to rule on the merits of the case.[7]
Furthermore, there isn’t a specific approach adopted by tribunals when dealing with environmental issues in investment arbitration and consequently, jurisdiction in the matter is contradictory.[8] This is evidenced in cases such as Santa Elena v Costa Rica,[9] which was one of the first disputes involving the protection of the environment and sustainable development. The case dealt with a series of expropriations that took place after the introduction of new legislation by Costa Rica to protect unique ecological sites. The tribunal established that “while an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus may be legitimate, the fact that the Property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid. The international source of the obligation to protect the environment makes no difference”.[10] Thus, the issue regarding the conservation of the environment wasn’t given value within the merits of the case and the tribunal treated dismissively the expropriatory measures classified under the public interest.[11]
Conversely, in the case Aven v Costa Rica,[12] the dispute involved a similar situation regarding expropriation caused by the breach of domestic environmental laws by the investors. During the development of the case, the tribunal provided a categorical importance to the issue of environmental damage and accepted the counterclaim from the state alleging damage on the biodiversity and ecological conditions, and after conducting a thorough analysis of the evidence, granted an order to repair damages caused by the activity of the claimants and asserted that “in effect, restoration of environmental harm has been upheld by international investment tribunals’’.[13]
Nevertheless, foreign direct investment and the protection of the environment don’t need to be on opposite ends of the spectrum and have the potential to support the same objective. This can be successfully accomplished through the enforcement of available instruments in international law, such as the specialized environmental rules for arbitration and conciliation of the Permanent Court of Arbitration, and the effective application of environmental protection clauses enshrined in most FTAs and BITs.[14]
Ultimately, the parties involved must balance their respective interests and align the importance of the conservation of the environment with the promotion of FDI in order to encourage social development and economic prosperity.
[1] United Nations, ‘Trade and Development Report 2020’ (UNCTAD) < https://unctad.org/webflyer/trade-and-development-report-2020> accessed 23 February 2021
[2]Lorenzo Cotula, ‘Democratising international investment law’ (2015) JSTOR <www.jstor.com/stable/resrep18064.6> accessed 23 February 2021
[3] UNCTAD, ‘Global foreign direct investment projected to plunge 40% in 2020’ (UNCTAD, 16 June 2020) <unctad.org/news/global-foreign-direct-investment-projected-plunge-40-2020> accessed 10 March 2021
[4] ICSID, ‘The ICSID Caseload – Statistics’ <icsid.wordbank.org/sites/default/files/publications/The%20ICSID%20Caseload%20Statistics%20%282021-1%20Edition%29%20ENG.pdf> accessed 10 March 2021
[5]Aditya Vora, ‘Environmental Disputes in Investor-State Arbitration’ (2016) vol. 46 Environmental Policy and Law <content.iospress.com/articles/environmental-policy-and-law/epl46203> accessed 23 February 2021
[6] Tamara Slater, ‘Investor-State Arbitration and Domestic Environmental Protection’ (2015) 14 wash. u. global stud. l. rev. 131 < https://openscholarship.wustl.edu/law_globalstudies/vol14/iss1/8 > accessed 10 March 2021
[7] Aditya Vora, ‘Environmental Disputes in Investor-State Arbitration’ (2016) vol. 46 Environmental Policy and Law <content.iospress.com/articles/environmental-policy-and-law/epl46203> accessed 23 February 2021
[8] Maria Fanou, ‘Environmental Considerations in Investment Arbitration: A Report of a ‘Topical Issues in ISDS’ Seminar’ (Kluwer Arbitration Blog 2019)<arbitrationblog.kluwerarbitration.com/2019/05/22/environmental-considerations-in-investment-arbitration-a-report-of-a-topical-issues-in-isds-seminar/ > accessed 23 February 2021
[9] International Centre for the Settlement of Investment Disputes Santa Elena v Costa Rica (2000) 39 ILM 1317
[10] International Centre for the Settlement of Investment Disputes Santa Elena v Costa Rica (2000) 39 ILM 1317
[11] Charles Brower, et al., ‘General Valuation Principles: The Case of Santa Elena’ (2005) SSRN <papers.ssrn.com/sol3/papers.cfm?abstract_id=1518133> accessed 23 February 2021
[12] International Centre for the Settlement of Investment Disputes Aven v Costa Rica (2000) 39 ILM 1317
[13] International Centre for the Settlement of Investment Disputes Aven v Costa Rica (2000) 39 ILM 1317
[14] Linda J. Allen, ‘The Environment and NAFTA Policy Debate Redux: Separating Rhetoric from Reality’ (2019) vol. 42:965 wm.&mary envtl.l.&pol’y rev. <www.wmelpr.com/wpcontent/uploads/2019/05/06_Allen.pdf> accessed 23 February 2021