UNCTAD’s Investment Policy Framework for Sustainable Development: Potential and Issues

The United Nations Conference on Trade and Development (UNCTAD) has released its Investment Policy Framework for Sustainable Development (IPFSD)[1]. UNCTAD characterizes it by saying it emphasizes “a balanced approach between the pursuit of purely economic growth objectives …, and the need to protect people and the environment,” and underscores the interests of developing countries in investment policymaking.

This article engages in an independent assessment of the IPFSD from the standpoint of those two claims. The IPFSD comprises three parts: Core Principles; guidelines for national investment policies; and options for policymakers negotiating international investment treaties. Only the first and the last are assessed in this article.[2]

Core Principles for Investment Policymaking

Among the Core Principles that the IPFSD attempts to convert collectively and individually into policy guidelines, Principle 2 features a welcome call for policy coherence. Unfortunately, it fails to give some guiding norm for subordination; for example, that in case of conflict, it is the sustainable development and human rights commitments undertaken by a country that should prevail over investment commitments.

Principle 4 is about dynamic policymaking: “Investment policies should be regularly reviewed for effectiveness and relevance and adapted to changing development dynamics.”

This principle is an exciting contribution to the current debate on international investment rules. It provides grounds for encouraging that investment treaties be subject to automatic and periodic review. The need to adapt investment policies to incorporate what is learned through their implementation tends to be absent in international investment agreements that, once subscribed, are hard to renegotiate. Even in the limited instances that theoretically allow for renegotiations, these tend to be subject to insurmountable obstacles.

On the other hand, two Principles are especially problematic. Principle 7 on openness to investment, states: “In line with each country’s development strategy, investment policy should establish open, stable and predictable entry conditions for investment.” Principle 8 states: “Investment policies should provide adequate protection to established investors. The treatment of established investors should be non-discriminatory.”

Now, sustainable development is defined as development that “meets the needs of the present without compromising the ability of future generations to meet their own needs.” The assumption cannot be automatic that, a priori, a regime of openness to FDI (with some exceptions) today will not compromise options required for future generations to meet their needs. The ability of a regime to serve sustainable development will depend on the particular configuration of regimes and mixtures between domestic and foreign in a given country.

The adoption of openness as a principle does not coexist comfortably, either, with the interests of developing countries that UNCTAD claims to defend. The notion of open trade responds to the theory of comparative advantage, elaborated having in mind trade in goods. Regardless of where one stands on the benefits of open trade, extending such arguments to open investment is not a straightforward proposition.

In the case of Principle 8 on protection to established investors, again, there is no reason why non-discrimination should be consecrated as a principle, rather than an exception to be allowed in cases where investment can prove to fit into the sustainable development strategy and generate positive impact.

Tensions between Principle 4 and principles 7 and 8 are also bound to emerge; the latter call for a predictable and stable entry framework may limit the scope for examination and “dynamic policymaking.” Indeed, taken to the extreme, a highly stable entry framework will be logically one that does not allow any kind of learning from experience.

Principle 5 is on balanced rights and obligations: “Investment policies should be balanced in setting out rights and obligations of States and investors in the interest of development for all.”

Thus the principle reaffirms the need to strike a balance and move away from the manifestly unbalanced system of investment treaties and regimes in force today.

Principle 6 is one to welcome: “Each country has the sovereign right to establish entry and operational conditions for foreign investment, subject to international commitments, in the interest of the public good and to minimize potential negative effects.“

UNCTAD goes as far as saying that regulation is not just a State right but a necessity. However, the phrase “to minimize potential negative effects” is a weaker option than “to avoid” such effects altogether. It is also ambiguous whether “subject to international commitments” intends to include non-investment commitments (such as human rights, for instance) or only international investment commitments—in which case this part of the sentence would cancel out what is good in the right to regulate.

International Investment Agreements: Policy Options

The IPFSD recognizes that the space for many recommendable national policy measures will be constrained by the clauses in international investment agreements. It aims, therefore, to offer guidance for countries negotiating such treaties. In this regard, the IPFSD distinguishes three levels of challenges: strategic, design of provisions in agreements, and multilateral consensus building.

At the strategy level, UNCTAD looks at pros and cons of IIAs. It chooses a cautious “can” to refer to IIAs alleged ability to promote investment, and warns that IIAs may become “largely a vehicle for the protection of interests of investors and home countries without giving due consideration to the development concerns of developing countries.” It further asserts that, on average, existing treaty provisions are heavily skewed in this way.

The IPFSD also recommends watching for the interactions of international agreements. For example “commitments made to some treaty partners may easily filter through to others through most-favoured-nation clauses.”

On the design of provisions in IIAs, the IPFSD offers welcome support for several approaches that, in many cases, had been first developed by civil society.

For instance, UNCTAD suggests that IIAs could balance State commitments with investor obligations, noting that “Legally binding obligations on companies and individuals are stipulated by national law but are absent in international treaties.” Arguably, if treaties stipulate rights to investors, they can and should also impose obligations on private parties.

In this context UNCTAD suggests that IIAs stipulate that investors should “comply with … national laws of the host State when making and operating an investment, and … at the post-operation stage.” The failure of investors to comply with their obligations could then be the basis for host States to make a counterclaim if sued in an investment tribunal. This is a good idea so far, but UNCTAD goes on to add investor compliance with national laws should be subject to such laws conforming to ”the host country’s international obligations, including those in the IIA.” If this latter condition is attached, it could easily cancel out what is achieved by adding such a clause.

UNCTAD’s recommendation that countries safeguard some policy space by “clarifying the scope and meaning of particularly vague treaty provisions such as the fair and equitable treatment standard and expropriation…” echo civil society concerns about excesses in interpretation of such provisions.

Noting that host countries have faced claims of up to US$114 billion, UNCTAD recognizes the burden on defending countries and the damage to policy space. Moreover, it recognizes that investor-state mechanisms have been used by investors in unanticipated ways, showing an increasingly blurred line between political risk and under interference on the one hand and legitimate domestic policies on the other.

Within the alternative clauses that treaties could include, UNCTAD reviews examples covering scope and definition, national treatment, MFN treatment, fair and equitable treatment, expropriation and investor–state dispute settlement.

When discussing the scope of IIAs, UNCTAD warns about the misuse of provisions on definition of investment, signaling the importance of carving out, for instance, government debt, portfolio investment, or areas of public policy and sensitive sectors. In regards to the problem of investors channeling complaints through legal entities based in the contracting parties, it argues such practice could be countered with provisions that only “genuine investors” from the contracting parties can benefit from treaty provisions.

UNCTAD says national treatment may need to be circumscribed by negotiators given that States may wish to afford preferential treatment to national investors for industrial policy or other reasons. And on MFN treatment, it highlights IIAs have started explicitly excluding dispute settlement issues and obligations undertaken in treaties with third parties from MFN obligations, in response to a number of investment tribunals that have construed MFN as allowing investors to invoke more favorable provisions of a treaty between the host State and a third country.

On the controversial issue of investor–state dispute settlement, the IPFSD recognizes flaws that have been displayed recently, such as inconsistent and unintended interpretations, unanticipated uses by investors, challenges against policy measures in the public interest, costly and lengthy procedures and limited or no transparency. Among the remedies it proposes “promoting the use of alternative dispute resolution (ADR) methods, increasing transparency of procedures, encouraging arbitral tribunals to take into account standards of investor behaviour when settling investor-State disputes, limiting resort to ISDS and increasing the role of domestic judicial systems, providing for the possibility of counterclaims by States, or even refraining from offering ISDS.”

The IPFSD makes suggestions on how to operationalize sustainable development objectives, along three —clearly not exclusive—cluster methods: adjusting existing provisions to make them more sustainable development friendly, adding new provisions and introducing special and differential treatment.

This section of the IPFSD is complemented by a 16-page table with very detailed set of options that for each of the areas typically covered under IIAs provides a spectrum of optional approaches. This portion cannot be considered a set of “good practices” because it is not really siding with any particular option. But their greatest merit as a contribution to the debate is that it places within the spectrum of valid options many that are rarely – if ever – considered by treaty negotiators.

For instance, parties to an IIA might opt for:

• not banning any performance requirement (4.9.4)
• incorporating exceptions for regulatory measures that aim to protect human rights or allow for prudential measures (5.1.4)
• specifying that only a narrow set of issues are subject to investor-State dispute settlement (or omitting investor–State dispute settlement altogether, naming host State’s domestic courts as the appropriate forum (6.2.4 and 6.2.6)
• mechanisms for joint interpretation of the treaty by the Parties in case of ambiguities (6.3.1)
• limiting remedies and compensations to ensure that the amount is commensurate with the country’s level of development (6.4.2)

The fact that these options are for the most part absent from existing North-South treaties is the realpolitik fact that most powerful countries have templates that are tabled on a take-it-or-leave-it basis. Moreover, in the trade-off between interests of investors and the sustainable development concerns of the host countries, the evolution of IIAs has a clear trend to being further skewed towards the former. In one place in the IPFSD, UNCTAD sounds a hopeful note in mentioning that investment treaties are evolving and cites the US recent review of its bilateral treaties template. But critics have noted how little the template has incorporated changes that favors interests of host countries.

Still, only policy advice to developing countries that encompasses all available policy options and their potential consequences as a basis for consideration by parliaments and citizen’s debate is the only hope for advancing paradigms for investment that truly supports sustainable development in the future.

Author: Aldo Caliari is the director of the Rethinking Bretton Woods Project at the Center of Concern.