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Investment Policy Blog

IIAs to date do not generally provide for obligations on investors. However, IIAs can play a role in promoting responsible investor behaviour by incorporating key elements of broadly accepted principles of corporate social responsibility.

See also Policy options for IIAs:

Article 7. Investor obligations and responsibilities

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Posted on May 22, 2012 UNCTAD
Investment promotion agencies (IPAs) have a role to play in identifying regulatory and administrative barriers to investment

IPAs have a role to play not only in identifying regulatory and administrative barriers to investment and in helping investors overcome those barriers, but also in pushing or leading efforts to break down barriers (e.g. by simplifying rules and procedures).

Andrea Saldarriaga [ Independent Consultant ] Posted on 14 June 2012, at 8:47 PM

One of the major contributions of the IPFSD at the international level is the identification of the need to rebalance the rights and obligations of investors and states in IIAs in order for these treaties to integrate a development dimension. This rebalancing requires that IIAs address expressly the relevance of investor’s conduct and establish, in particular investor’s obligations and responsibilities. What is the best way to do so? What is the role of CSR in this endeavour?
The use of CSR standards in the context of IIAs as a tool for dealing with investors’ responsibilities, poses in turn additional questions: What is CSR? Which are the relevant standards? How do non-binding standards interact with national policies, binding obligations and ISDS as provided by IIAs?
This rapidly growing area of CSR standards and initiatives that are increasingly shaping companies’ practices and investment decisions deserves closer attention by the investment community and I hope these and many more questions would be discussed in this blog.

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Federico Ortino Posted on 19 June 2012, at 4:33 PM

One challenge in using CSR as a tool to rebalance rights and obligations in IIAs is to identify which standards should be incorporate in IIAs (for example to limit the scope of IIAs' investment protection guarantees). In section 7 of the policy options for IIAs, several alternatives are provided including reference to certain 'universally recognized standards' or 'relevant CSR standards'. One question, is there any scope/usefulness for using (in addtional or instead) investors' own internal corporate responsibility policies/codes in IIAs?

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Alejandro Faya [ Ministry of Economy ] Posted on 20 June 2012, at 3:01 AM

Including CSR rules and standards into IIA’s (to date a rare approach) sounds appealing. However, policymakers should be clear on the fact that this is basically a matter of domestic policy. CSR is the type of content – the same applies for other issues such as promotion and cooperation – whose effective application depends on further material measures (often involving economic and human resources) taken by the Contracting Parties (besides signing the IIA). The contrary can be said in respect of the rules and standards that protect investors and their investments (Expro, FET, MFN, NT, freedom of transfers, etc).

In order to pursue a CSR policy, countries should, for instance, appoint a specific governmental office in charge of promoting CSR and, if that is the case, settling claims (e.g. “national contact point” under the OECD Guidelines of Multinational Enterprises). Political support, inter-governmental work and involvement and closeness to the business community are also crucial.

If one is to think that CSR may be used as a tool to rebalance the rights and obligations of investors and States under IIA’s, then the most appropriated way to do so would be to – rather than imposing obligations upon investors, a matter again of domestic law – condition the protection afforded under the fulfilment of certain conditions, including CSR-related behaviour. In that way IIAs could play a (subsidiary) role in promoting CSR, by establishing appropriate incentives to investors (they have to behave correctly if the want to benefit from the protection). It would be interesting to explore the specific legal vehicles to do this.

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Locknie Hsu [ School of Law, Singapore Management University ] Posted on 19 July 2012, at 10:42 AM

On the bright side, some progress has been made in specific areas. For example, in the Korea-US FTA chapter 5, Art. 5.5 provides for measures to be put in place for "Ethical Business Practices", to prohibit improper inducements to healthcare professionals in the supply of pharmaceutical products and medical devices. In the EU-Korea FTA, Art. 13.6 addresses CSR concerns. There is some indication therefore that such provisions are not taboo or impossible to include in trade/investment agreements.

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Andrea Saldarriaga [ Independent Consultant ] Posted on 28 June 2012, at 8:16 PM

Following Alejandro’s comment, it is important to highlight that CSR is one of the core principles of the IPFSD and therefore applies also to national policies on investment. The question is then one of coherence between national and international regulations in this respect.
Governments could introduce market rewards for responsible business conduct in key areas such as investment contracts and public procurement. This could be complemented by specific rules on access to dispute resolution mechanisms in the contract and in the treaties. It is important to be clear about the standards that would be used to evaluate business’ conduct so to avoid the risk of infringing expectations.
It is also interesting to consider in this context, the recent requirement for governments to adopt CSR policies. In particular, the European Commission adopted in October 2011 the new European policy on CSR. The Commission invites EU Member States to present or update their plans for the promotion of CSR. This seems a good opportunity to see how policies interact at the national and international levels.

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Lone Wandahl Mouyal [ Law Faculty - University of Copenhagen ] Posted on 25 June 2012, at 10:34 PM

Including CSR standards into IIAs is tempting yes, I agree, but I also agree that there is a considerable risk of undermining the concept of CSR. There are two important reasons for this:
1) A wide range of definitions of CSR can be found. What I find as an important common denominator is the emphasis on ‘voluntariness’. Enunciating a catalogue of CSR standards will basically work as a checklist for companies and discourage companies to go even further.
2) An important factor of the concept of CSR is to understand CSR not as a fixed goal but rather as a methodology towards managing risks (retroactively) as well as part and parcel of strategic business activities (proactively). CSR is a holistic way of thinking or in other words; ‘a set of glasses’ to be worn by company owners, leaders, stakeholders, employees etc. IIAs with explicit CSR standards might risk emphasizing CSR as a final and static goal, rather than CSR as a means to achieve sustainable development.
Hence, giving a list of relevant CSR standards in an annex as suggested in 7.1.3 might even have a negative impact on CSR.

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Alejandro Faya [ Ministry of Economy ] Posted on 20 June 2012, at 6:48 PM

I light of arbitral jurisprudence, I would think that a mere general reference to "compliance with domestic law" is not enough. The rule should be implicit in any case. Stronger and more precise language would be require to make clear that a tribunal lacks jurisdiction in certain circumstances.

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Federico Ortino Posted on 20 June 2012, at 11:46 AM

I agree with Alejandro regarding the 'subsidiary' role that IIAs could play in promoting CSR: these standards would only operate to deny investors' protection under the relevant IIA. In order to press this issue forward, I would like to emphasize section 7.1.1, which identifies as one option the following: "Require that investors comply with host State laws [and] Establish sanctions for non-compliance [such as]: - deny treaty protection to investments made in violation of the host State law; - deny treaty protection to investments operating in violation of those host State laws that reflect international legally binding obligations (e.g. core labour standards, anti-corruption, environment conventions) and other laws as identified by the Contracting Parties." Is this option workable, particularly linking it with host State law? Would a general reference to host State law be to vague? Would a 'direct' reference to internationally legally binding obligations be more appropriate?

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elias peter [ ministry of east african cooperation ] Posted on 20 July 2012, at 5:11 PM

the question as to whether corporate social responsibility to become an integral part of the IIA is a great move. the question of concern is, how can this be mandatory. since currently is perceived as if it the with of the investor

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elias peter [ ministry of east african cooperation ] Posted on 23 July 2012, at 12:36 PM

Thanks Dolores for your reply and reference on how corporate social responsibility can be a mandatory in the IIA. the policy issue around this move is that, developing countries need to have a single voice in this respect because every country tend to bid for IIA as the way attracting more FDI. some of the critical element are ignored, especially when it comes to issues related to the benefit of such investment to host country. this is the challenge that need basically to be addressed. take an example here in Tanzania where our Investment Act provide for 100% capital repatriation. why this just to attract more investor, but when you analyses on the host country point of view this is not well come provision.

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Dolores Bentolila [ Graduate Institute of International and Development Studies ] Posted on 23 July 2012, at 12:13 PM

This could be done either by providing in the treaty that the protection afforded therein will be denied in case of CSR abuses or by allowing host State's counterclaims or defences on CSR abuses. An example of these mechanisms can be found in the 2006 draft partnership agreement between the EU and PAC. Check this link: http://www.bilaterals.org/IMG/doc/new_investment_chpt_EU-PAC.doc

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Stefan Mandelbaum [ King's College London ] Posted on 08 August 2012, at 5:01 PM

I definitely share the ‘conceptual concerns’ brought forward by Lone Wandahl Mouyal, and would like to further the argument a little bit. Apparently, the task is not to invent, compose, proclaim or to implement CSRs at an international level, as it is not the case that a multi- or transnational foreign investors is not a subject to (at least) some standards (this is the underlying rational of a formulation like: The investors shall “observe applicable CSR standards” (see section 7.1.3 of the policy options for IIAs)). On the contrary, I would like to emphasise that the remaining problem is to 'justify' the application of desired “universally recognized standards” or “relevant CSR standards” to a specific case, i.e. an individual corporate (mis)-conduct. Using law as at tool to further public interest, may it be in the form of state contracts like IIA, bears always the possibility of politicisation. Hence, the issue here comes down to a valid justification of standards, or, as concerns legal proceedings, to 'reasons of equity'.

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Stefan Mandelbaum [ King's College London ] Posted on 08 August 2012, at 5:11 PM

Picking up the initial questions, brought forward by Andrea Saldarriaga, two issues concerning legal theory arise: 1) What primary source implements a certain corporate standard of conduct? And 2) How to find and apply a criterion without imposing a standard on corporate conduct from outside? The former defines the applicable standards of a certain investor, the latter addresses a valid criterion according to which a particular problematic conduct can be measured against.
Ad 1: For an institutional theory, the question of corporate responsibility in any form is always mirrored by the question of a “corporate consciousness,” that is the actual, unreflected conduct of an investor as legal entity. This would include standards in every state in which the investor is actually active as an investor, while imposing an abstract “universal” or yet-to-be recognised “core standard”. That is to say: The only applicable (because immediate) standard is the actual standard of a corporation itself.
Ad 2: Certainly, to measure the investor’s performance against its own standards in a specific case points structurally towards Investor-State Arbitration. And indeed, it is advisable to delegate the question of which standards a corporation is inherently responsible for to arbitral tribunals. Hence, slightly redirecting the mapping of the problem at hand as already set out in the discussion by Federico Ortino: The task is to identify which standards should be incorporated in Investment Arbitration. It is only here where there would be a necessity of going back to contractual clauses in dispute settlement sections of IIAs, which would read as something along the following lines: ‘Arbitral tribunals shall consider standards of every state in which the investor is involved’. Such a clause, in my opinion, would do justice to the case at hand (the investor’s own standard), as well as ensure a high standard of CSR (transnational criteria).

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Stephan Schill [ Max Planck Institute for International Law ] Posted on 03 September 2012, at 8:23 PM

Much of the discussion in this forum has so far concentrated on corporate social responsibility and how it can be made part of IIAs. This would serve as a reminder to foreign investors about the importance of CSR. But it also creates dangers as regards legal certainty if host states do not at the same time implement CSR into their domestic law. What is more, one should not forget that host states are in the first place called upon to effectively regulate corporate conduct and sanction harmful corporate behavior independent of whether IIAs reference CSR standards or not (and besides, IIAs in their traditional form, that is without reference to CSR, would not prohibit CSR regulation under domestic law).
Anything else than emphasizing the need for CSR to be transformed into domestic law may create problems about legal certainty for foreign investors if they have to worry about complying not only with domestic law (which ideally imposes clear obligations on private economic actors) but also with the often much more ambiguous and imprecise CSR standards in IIAs in case domestic law falls short of such standards and IIA protection is conditioned on CSR compliance. After all, private economic actors are much more concerned about legal uncertainty than about complying with even onerous legal obligations as long as these are also complied with by their competitors.
If one is serious about including CSR standards into IIAs, one would need to include monitoring mechanisms for the implementation of these standards by host states into domestic law. The traditional dispute settlement mechanisms under IIA are not made for that; one would need an international administration or at least a reporting system instead. I wonder whether IIAs are made to serve as, or ready to be transformed into, comprehensive agreement for such global economic governance, that also impose obligations on foreign investors under relatively broad CSR standards, the interpretation of which by arbitral tribunals still stands to be tested, or whether compliance with international CSR standards by host states and foreign investors should not be sought through channels other than IIAs?

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Diane Desierto [ Peking University School of Transnational Law ] Posted on 14 October 2012, at 9:48 AM

I agree with Stephan that legal uncertainty would indeed increase if incorporating CSR standards with variant legal qualities as a qualifying criterion for investment treaty protection. Would the uncertainty be diminished, however, if the specific ESR treaties and soft law instruments referenced by CSR principles were themselves adopted as integral parts of IIAs? If I recall correctly, there's at least one Austrian BIT that specifically incorporates the European Convention on Human Rights as part of the applicable law to the agreement, although this has not been tested yet in concrete cases. Perhaps there is some scope for qualitatively focusing on the international instruments from which CSR standards derive their substantive content in the first place. At the very least, socially responsible investment (SRI) has moved on in the last decade beyond more ambiguous and debated standards to latch on to economic and social governance (ESG) factors that concretely derive from ILO treaties, ICESCR benchmarks, the UN Principles on Responsible Investment, among others. Empirical ESG risk assessments are being done more rigorously on a private (e.g. Risk Metrics' Sustainability Risk Reports) as well as public (e.g. Global Compact) basis. One certainly cannot say now that institutional and individual investors are unable to access information about the regulatory obligations of host States qua ESG matters. Integrating ESG treaties and instruments as part of an IIA simply makes it clear at the outset that all parties are informed of the scope of regulatory coverage and due diligence that they have to perform as part of the establishment of the investment.

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