Abstract
Investor–state dispute settlement (ISDS) is designed to encourage foreign investment by mitigating risks to investors. However, the use of ISDS provisions by MNEs also creates negative externalities for states’ efforts at sustainable development by provoking regulatory chill on enforcement of current and enactment of future regulation. We illustrate these externalities of the current arbitration system with four cases and other examples. We conclude with recommendations to policymakers for ISDS reform that will mitigate these negative externalities and promote sustainable foreign investment by redefining investments to include sustainable development criteria, including representation of third-party stakeholders, and creating accountability for investor obligation.
Highlights
Investor–state dispute settlement (ISDS) exists to protect the mutual interests of foreign investors and host states
To assess the weaknesses of ISDS in the context of sustainable development and find a solution in the interest of both sides, we examine four cases related to sustainable development regulation
To balance investor protection with the need for sustainable development, IIAs should define foreign investments based on investor obligations to minimum sustainability standards and according to the sustainable development goals of the host nation
Summary
Investor–state dispute settlement (ISDS) exists to protect the mutual interests of foreign investors and host states. It resolves a key strategic tradeoff for multinationals considering whether to engage in foreign investment. Host nations welcome foreign investment because it can facilitate their economic development, a priority for many developing countries. Foreign investment carries a significant risk of expropriation and discrimination, especially in less economically developed countries. ISDS is designed to encourage foreign investment by mitigating potential risks to investors and protecting against expropriation from host governments without due compensation. ISDS offers a legal opportunity for foreign investors to contest national regulations aimed at sustainable development and demand compensation on the grounds of expropriation and discrimination claims. The French Veolia filed a suit against Egypt for the minimum wage raise in Alexandria and the Canadian Methanex, a methanol producer, filed a suit against the US for an executive order issued by the governor of California to gradually remove a methanol-based gasoline additive in the state
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