Early Models: Certainty, Protection and Capital Security
The classical theory on foreign investment made it synonymous with development. The narrative was straightforward; investment were identified as the chief driver of development. Foreign investments provided a ready source for many developing nations, which often lacked adequate internal sources of investments. Chasing the dream, many developing countries adopted investment treaties (IIAs) which imbibed an investment first logic, offering an aggressive range of safeguards to foreign investment against arbitrary state conduct, including the possibility of adjudication of investment disputes before a neutral international arbitral tribunal. It was routinely presumed that the mere infusion of investment would guarantee uniform benefits to developing countries. The assumption being; more investment equals more growth, regardless of sectoral distribution, rights impact or ecological consequences. Hence the investment treaties paid little attention to balancing investment safeguards with adequate state oversight and regulation. The result was that most IIAs were silent on responsibilities of the foreign investor towards the host state.
Over time, this broad assumption was subject to serious scrutiny. The fallout of foreign investments, particularly the manner in which they were operationalised, often with scant or absent regulatory oversight, led to severe human rights and environmental consequences. As a result, foreign investment and its operations increasingly began to be assessed from a wide variety of non-economic vantage points including that of widening inequality, human rights, environmental responsibilities, labour issues, indigenous participation, resource governance or climate transition.
This re-evaluation resonates with Prof. Koen De Feyter’s work on development and economic governance, which questions growth centric models detached from social, environmental and distributive contexts. His emphasis on shared responsibility for development offers a key conceptual framework for engaging with international investment protection and adjudication framework that privileges protection of foreign investment while remaining indifferent to outcomes it may perpetuate, including inequality, social justice and ecological harm. As a result, the traditional investment-first approach will continue to remain normatively inadequate, until it accommodates key developmental responsibilities – human, social and environmental.
Criticism, Backlash and the Limits of One-Dimensional Protection
By the early 2000s, Investor-State Dispute Settlements (ISDS) and treaty protections came under pressure from civil society, policymakers and academia. The model was criticised for undermining regulatory autonomy and chilling domestic regulation, especially where States sought to take regulatory action based on public policy concerns, such as tighten mining concessions, water tariffs, product safety, forest protection or indigenous land safeguards.[1]
Specifically, four concerns shaped the backlash:
- Asymmetrical Obligations: IIAs bestowed enforceable rights on investors but imposed no similarly enforceable sustainability responsibilities. In other words, no duties were imposed on investors. Even in instances where corporate due diligence, labour standards and community consultation were included, they were done as aspirational expectations, rather than treaty obligations.
- Legitimacy Crisis of ISDS: ISDS came to be perceived as a mechanism that favours corporations over democratic governance, with claims challenging public health warnings,[2] waste regulation, chemical bans or indigenous cultural site protection.[3]
- Treaty Shopping and Structuring: Broad definitions of investment and investor nationality encouraged strategic corporate structuring, enabling claims by entities with tenuous local linkages.[4]
- Mere claims led to regulatory chill: States faced arbitration when adopting measures to protect water, forests, waste systems, wildlife or public health. Even unsuccessful claims strained budgets and discouraged regulatory ambition.[5]
States responded by terminating old treaties, recalibrating model Bilateral Investment Treaties (BITs), renegotiating investment chapters, and proposing permanent or appellate-style adjudication. South Africa reformed its investment regime,[6] India developed a revised model BIT,[7] several Latin American States reassessed their International Centre for Settlement of Investment Disputes (ICSID) participation,[8] and the European Union (EU) institutionalised court-like features for investment disputes.[9] A similar conclusion was reached across these geographies: development necessarily requires preservation of regulatory space. A balancing of interests of the foreign investor and the host states was critical for development to materialise.
Sustainable Development enters the treaty architecture
Sustainable Development (SD), most visibly articulated through the 17 SDGs, is a key instrument to bridge this gap, and is therefore increasingly viewed as a central organising principle of international investment governance. Such convergence prompted treaty reforms on the scope, balance, and purpose of IIAs, aimed at aligning economic, societal and environmental priorities. New generation IIAs increasingly embed SD through binding treaty language.[10] This evolution can be broadly grouped into the following design innovations:
- Affirmation of right to regulate: new generation IIAs expressly recognise the States right to regulate for a variety of public policy concerns, including health, environment, biodiversity, indigenous rights, cultural heritage, consumer safety, and climate transition.[11]
- Categorical Exceptions: several IIAs include clear exceptions enabling states to pursue non-discriminatory sustainability measures without violating investment protections guaranteed to foreign investors.[12]
- Limited understanding of investment guarantees: modern treaties tend to narrowly define guarantees such as Fair and Equitable Treatment (FET) to include due process, denial of justice and manifest arbitrariness, thus curbing investor claims that might otherwise penalise bona fide sustainability regulation.[13] Similarly, legitimate non-discriminatory measures (including for protection of environment) do not constitute compensable expropriation, even when commercial value is affected.[14]
- Articulating specific investor obligations: IIAs include clauses that require investors to contribute to SD.[15] A more calibrated approach is to include a reference to corporate social responsibility, supply chain due diligence, labour responsibilities and environmental norms, in an effort to shape interpretive expectations even when not fully enforceable.[16]
- On a more comprehensive level, one has also witnessed IIAs incorporate an entire section on investment and SD.[17]
Balancing in Practice
Recent arbitral practice also indicates a shift towards a balance focused on achieving sustainable foreign investment. Tribunals now tend to pay greater attention to:
- Balancing investors rights with the states right to regulate: particularly for measures that are scientifically justified or aimed at meeting public interest objectives including environmental protection and public health.[18]
- Due diligence obligations and social license to operate: tribunals increasingly acknowledge that investors cannot carry on operations in defiance of the social license to operate. Foreign investors have to comply with host state laws including ones related to Environmental Impact Assessments (EIAs), consultation, indigenous consent processes, and social impact assessment, to ensure its investment is ‘legitimate’.[19]
- Using SD as interpretative context: the increased use of SD and its elements to give hue to interpretation of various guarantees such as FET.[20]
- Rise of environment and human rights counterclaims.[21]
However, recent research indicate that explicit references to SD in arbitral decisions remains marginal and fragmented, with tribunals often treating the concept as peripheral rather than integrative.[22] As a result, advances seen in treaty drafting sphere (integrating SD into IIAs), remains limited in the adjudication practice. Interestingly though, foreign investors have started to embrace the SD agenda, making increasing use of notions of SD and sustainability in their submissions.[23]
Conclusion: Trade-Offs and Reform Directions
The United Nations Department of Economic and Social Affairs (UNDESA) and United Nations Conference on Trade and Development (UNCTAD) in their 2025,[24] World Economic Situation and Prospects, clearly highlights fragile global recovery post pandemic, with numerous nations remaining burdened with high debts. In such a situation foreign investment has a critical role to play in financing SD. This reality shapes how international investment regulation framework understands the role and responsibilities of foreign investment. While initial IIAs prioritised certainty and protection, they did so by hyper-focusing on investment protection to the exclusion of all other considerations. Recent times have witnessed a sharp and definite movement away from this stance, with both treaty language and arbitral practice accommodating other, often competing, concerns particularly those relating to environmental, labour and human rights. These and similar developments indicate that SD is increasingly being embedding within the ambit of international investment law, in recognition of the broader principle that legitimacy of foreign investment necessarily rests on its meaningful engagement with and contribution to SD in all its manifestations.
[1] Michael Waibel, Asha Kaushal, Kwo-Hwa Chung and Claire Balchin, ‘The Backlash Against Investment Arbitration: Perceptions and Reality’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash Against Investment Arbitration (London: Kluwer Law International, 2010). <https://commons.allard.ubc.ca/cgi/viewcontent.cgi?article=1193&context=fac_pubs>
[2] See Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v Oriental Republic of Uruguay (ICSID Case No ARB/10/7) Award (8 July 2016)
[3] UN Human Rights Council, Report of the Special Rapporteur on the rights of indigenous peoples: Impact of international investment agreements on the rights of indigenous peoples UN Doc A/HRC/33/42 (11 August 2016) para 26;
[4] Julien Chaisse, The Treaty Shopping Practice: Corporate Structuring and Restructuring to Gain Access to Investment Treaties and Arbitration (2015) 11 Hastings Bus L J 225, 245.
[5] See Carolina Moehlecke, ‘Chilling Effect of International Investment Disputes: Limited Challenges to State Sovereignty’ (2019) 64 Int Stud Q 1.
[6] See John Mayer, South Africa’s Reformed Investment Regime as a Model for Developing Countries (2022) 25 Lewis & Clark L Rev 1247
[7] See P Ranjan and Pushkar Anand, The 2016 Model Indian Bilateral Investment Treaty (2017) 38 Northwestern Journal of International Law & Business 1 <https://scholarlycommons.law.northwestern.edu/njilb/vol38/iss1/1/>
[8] See Rodrigo Polanco Lazo, ‘Is There a Life for Latin American Countries After Denouncing the ICSID Convention?’ (2014) 11 Transnatl Dispute Manage 1 <https://www.transnational-dispute-management.com/article.asp?key=2037>
[9] See Hannes Lenk, An Investment Court System for the New Generation of EU Trade and Investment Agreements: A Discussion of the Free Trade Agreement with Vietnam and the Comprehensive Economic and Trade Agreement with Canada (2016) 1 European Papers <https://www.europeanpapers.eu/europeanforum/investment-court-system-new-generation-eu-trade-and-investment-agreements>
[10] Gudrun Monika Zagel, ‘Reform of International Investment Agreements and Sustainable Development: Contrasting the EU and Global South Approaches’ in Michelle Egan and others (eds), Contestation and Polarization in Global Governance (Edward Elgar Publishing 2023) 357, 364.
[11] Protocol to the Agreement Establishing the African Continental Free Trade Area on Investment (adopted 19 February 2023, not yet in force), art 24; Agreement between the Government of the Sultanate of Oman and the Government of Hungary for the Promotion and Reciprocal Protection of Investments (signed 2 February 2022, entered into force 24 October 2022) art 3.
[12] Investment Cooperation and Facilitation Treaty between the Federative Republic of Brazil and the Republic of India (entered into force on December 21, 2025) art 23
[13] Comprehensive Economic and Trade Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, of the other part (signed 30 October 2016, OJ L 11/23, 14 January 2017) art 8.
[14] Agreement between Canada and the State of Kuwait for the Promotion and Protection of Investments (entered into force February 19, 2014) art 10.
[15] Reciprocal Investment Promotion and Protection Agreement between the Government of the Kingdom of Morocco and the Government of the Federal Republic of Nigeria (signed 3 December 2016) art 3.
[16] United States–Mexico–Canada Agreement (USMCA) (signed 30 November 2018, entered into force 1 July 2020) ch 14 (Investment) art 14.17
[17] European Commission, EU–China Comprehensive Agreement on Investment: Agreement in Principle (European Union), Section IV <https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/china/eu-china-agreement/eu-china-agreement-principle_en>
[18] See Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia v The Argentine Republic (ICSID Case No ARB/07/26) Award (8 December 2016), paras 1210-1226.
[19] Bear Creek Mining Corporation v Republic of Peru (ICSID Case No ARB/14/21) Award (30 November 2017) paras 401–412.
[20] Philip Morris Brands Sàrl and Others v Oriental Republic of Uruguay (ICSID ARB/10/7) Award (8 July 2016) (recognition of state’s right to regulate to protect public health and its utilisation to interpret substantive protections).
[21] Burlington Resources Inc v Republic of Ecuador (ICSID Case No ARB/08/5) Decision on Counter-Claims (7 February 2017)
[22] Jean-Michel Marcoux, ‘The concept of sustainable development in investment arbitration: A disconnect from investment policymaking and international adjudication’ (2025) 38 Leiden J Int’l L 501, 520.
[23] Ksenia Polonskaya and Jean-Michel Marcoux, Signalling Virtue: Claimants’ Use of Sustainable Development in ISDS (Investment Treaty News, 26 December 2022) https://www.iisd.org/itn/2022/12/26/signalling-virtue-claimants-use-of-sustainable-development-in-isds-ksenia-polonskaya-jean-michel-marcoux/
[24] United Nations Department of Economic and Social Affairs (with UNCTAD & regional commissions), World Economic Situation and Prospects 2025 (UN 2025) Foreword p V; Executive Summary, page XIII <https://unctad.org/publication/world-economic-situation-and-prospects-2025>