What role do international organizations play in ESG adn investment treaties?
How global Investment Treaties Are Adapting to ESG Principles
Introduction
In 2025 and beyond,the intersection of global investment treaties and Environmental,Social,and Governance (ESG) principles represents a crucible in which international economic law is actively being reshaped. As cross-border investments increasingly affect climate change mitigation, social equity, and corporate governance, the question of how traditional investment treaties can or should incorporate ESG considerations has become one of acute practical and theoretical significance. In this context,the evolution of global investment treaties to encompass ESG principles not only reflects shifting normative expectations but also a recalibration of state sovereignty and investor protections within an interconnected global economy. This article examines how global investment treaties are adapting to ESG principles by exploring their historical trajectory, statutory foundations, interpretation of core legal tests, and recent judicial and arbitration trends that illustrate a palpable transformation.
International investment law, traditionally focused on shielding foreign investors from state expropriation and discriminatory treatment, is now confronting the imperative to reconcile investment protection with enduring development goals. This dual imperative is reflected in a growing body of multilateral and bilateral treaties that explicitly reference ESG in their text, as well as arbitral jurisprudence that increasingly weighs ESG-related state measures. The topic is discussed extensively in authoritative sources such as the International Institute for sustainable Development (IISD),which emphasizes the emerging trend of investment governance aligned with sustainability imperatives.
Historical and Statutory Background
The genesis of investment treaties predates any conscious engagement with ESG principles.The first wave of bilateral investment treaties (BITs), emerging prominently in the 1950s and 1960s, was squarely focused on safeguarding foreign capital against expropriation and discriminatory regulatory regimes, with scant regard for environmental or social considerations. These early treaties, typified by the 1959 U.S.-Argentina BIT framework, enshrined protections such as fair and equitable treatment (FET) and compensation for expropriation, largely divorced from broader public policy goals.
However, from the 1990s onwards-and especially with the increasing globalization of capital and recognition of sustainability issues-the policy rationale embedded within investment treaties began to subtly shift. The post-2015 period marked a critical juncture with the advent of the United Nations Sustainable Development Goals (sdgs), crystallizing environmental and social commitments internationally.
| Instrument | Year | Key Provision | Practical Effect |
|---|---|---|---|
| Energy Charter Treaty | 1994 | Article 19: Incorporates environmental protection considerations | First attempt to harmonize energy investment protection with environmental regulations |
| EU-Canada Comprehensive Economic and trade Agreement (CETA) | 2017 | Chapter 22: Explicit references to sustainable development and corporate social responsibility | Integrates ESG norms directly into investment dispute resolution framework |
| UNCTAD Model BIT (2012, revised 2015) | 2012/2015 | Pre-ambular and substantive provisions promoting CSR and environmental protection | Encourages treaty drafters to balance investor rights with public interest objectives |
This evolution is codified most notably in treaties like the CETA, which explicitly embed sustainable development in their core texts, marking a normative departure from earlier models that eschewed policy goals beyond pure investment protection. Similarly, the UNCTAD Model BIT revised in 2012 and 2015, introduced recommendations encouraging states to consider ESG impacts, signaling a growing alignment with global sustainability norms.
Core Legal Elements and Threshold Tests
The integration of ESG principles into investment treaties necessitates revisiting traditional legal elements and threshold tests conventionally applied in investor-state dispute settlement (ISDS). These elements include the notions of protected “investment,” the “fair and equitable treatment,” and the legitimate regulatory powers of host states, all of which must now be interpreted through an ESG lens.
Defining “Investment” and Its ESG Scope
The legal definition of “investment” within treaties traditionally focuses on tangible assets, intangibles, and economic contributions, as elucidated in Article 25 of the ICSID Convention. Increasingly, though, the scope of what constitutes an investment is under scrutiny to determine whether sustainable investments, or those adhering to ESG criteria, should enjoy protection. This scrutiny affects whether environmentally sustainable projects, social enterprises, or governance-focused entities can invoke treaty protections.
Notably, arbitral tribunals have debated the material contribution test (whether an asset contributes to the host state’s economy), which indirectly raises CSR and ESG considerations.For example, in Bear Creek Mining v. peru, the tribunal examined whether a mining concession involving controversial environmental impacts fell within the treaty’s protective ambit (ICSID Case No. ARB/14/21). Such adjudications influence how investments with ESG dimensions are legally framed.
Fair and Equitable treatment (FET) and ESG Compliance
The FET standard, a cornerstone of investment protection, is elegantly malleable, allowing arbitral tribunals to impose duties on states regarding transparency, non-arbitrariness, and good faith treatment. Integrating ESG principles into the FET analysis reflects an emerging jurisprudence recognizing that legitimate regulatory measures aimed at environmental protection or social welfare may justify state conduct traditionally seen as adverse to investors.
As a notable example, the 2021 UN International Law Commission Report reinforces the notion that regulatory actions pursuing public welfare-including ESG objectives-should not automatically constitute treaty violations absent bad faith or disproportionate impact. This approach is mirrored in cases such as Philip Morris v. Uruguay, where public health measures were upheld despite claims of investor harm (ICSID Case No.ARB/10/7).
State Regulatory Powers and the Police Powers Doctrine
traditionally, the police powers doctrine grants states the sovereign right to regulate within their territories to protect public health, safety, and welfare without owing compensation, even if such regulation affects foreign investors. In the ESG context, this doctrine gains renewed prominence, especially as states enact climate-related regulations or social protections that may impact investments.
The challenge lies in delineating the boundaries between legitimate regulatory action and indirect expropriation or unfair treatment. The OECD Guidelines on corporate Governance suggest the need for treaty language that clarifies state powers to impose ESG regulations without triggering arbitration claims, reducing investor uncertainty while promoting sustainability.
ESG Carve-Outs and Reservations in Treaty Drafting
A critical adaptation in treaty design has been the insertion of explicit ESG carve-outs or reservations, which exempt certain regulatory spheres from ISDS claims. These provisions balance investor protections with the imperative of states preserving policy space to enforce ESG objectives. For example, Article 9.5 of the updated United States-Taiwan Trade and Investment Agreement (2021) contains specific environmental exceptions limiting investor claims related to regulatory pollutants.
States including Chile, South Africa, and Norway have begun to adopt model BIT language with explicit ESG exceptions, a trend documented in UNCTAD’s Investment Policy Monitor.
Jurisdictional and Procedural Innovations reflecting ESG Adaptation
the substantive adaptation in treaty texts is complemented by jurisdictional and procedural innovations within investor-state adjudication forums. These innovations include the establishment of standing ESG committees, mandatory sustainability impact assessments, and enhanced transparency measures.Such procedural inclusions create both predictive clarity and legitimize the role of ESG in investor-state dispute resolution.
Institutional reforms in ISDS Tribunals
Arbitral institutions such as the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) have acknowledged the necessity of embedding ESG principles directly into rules governing ISDS. For instance, ICSID’s Rule Amendments in 2022 incorporate provisions encouraging arbitrators to consider the impact of state measures on sustainable development goals, marking a recognition that ESG is not peripheral but central to modern investment adjudication.
Further, the creation of an appellate mechanism as envisaged in the ICSID reform Agenda aims to provide consistency in the application of ESG-related treaty norms, addressing fragmentation and unpredictability which hinder effective ESG adaptation.
Mandatory Sustainability Impact Assessments (SIAs)
Some recent treaty models require investors or states to conduct rigorous SIAs prior to investment or regulatory decisions, thereby integrating ESG considerations at the earliest stages of dispute potential. The OECD’s guidance on SIAs underscores their critical role in early identification of ESG risks and conflict mitigation. These assessments also enhance the evidentiary basis upon which tribunals evaluate the merits of cases involving ESG considerations.
Transparency and Amicus Curiae Participation
Enhancing transparency around ISDS proceedings-traditionally criticized for secrecy-has been a key step towards anchoring ESG principles within international adjudication.Allowing third-party submissions from stakeholders such as environmental NGOs or affected communities gives depth to ESG issues beyond the litigation positions. The UNCITRAL Transparency Rules guide such participatory processes, reflecting treaty parties’ commitment to procedural inclusivity and socially responsible adjudication.
Implications for States, investors, and the Future Trajectory
the ongoing adaptation of global investment treaties to incorporate ESG principles has profound implications for states, investors, and the broader international legal order. For states, it embodies an enhanced ability to harmonize economic development with sustainability imperatives without forfeiting investment capital appeal. For investors, it signals a need to align business models with ESG standards to minimize risks of host state regulatory action and potential disputes.
Balancing Sovereignty and investor Protection
The evolving treaty norms challenge longstanding tensions between state sovereignty in promulgating ESG-compliant policies and investor protections underpinning international investment law. The legal architecture must carefully navigate these competing interests, as underscored by commentators like Dolzer and Schreuer in Principles of International Investment Law, maintaining a elegant equilibrium that avoids chilling legitimate regulatory activity while ensuring fair investor treatment.
Market Signaling and Responsible Investment Incentives
Explicit ESG provisions within treaties function as signals to the global investment community, incentivizing responsible investment practices and corporate governance reforms. The increasing number of ESG-linked arbitration clauses conveys that sustainability is no longer an ancillary ethical consideration but a contractual and legal imperative. This shift aligns with global investor trends documented by the UN Principles for Responsible Investment, which emphasize the financial materiality of ESG factors.
Prospective Developments in Treaty-Making
Looking forward, we may anticipate more comprehensive multilateral investment frameworks integrating ESG criteria, potentially linked to climate finance mechanisms and social justice goals enshrined in international legal orders. The ongoing negotiations at forums such as the UNCTAD Investment Facilitation Framework illustrate the commitment to embed ESG considerations systematically.
Conclusion
The integration of ESG principles into global investment treaties is not merely a topical addendum but a fundamental reconfiguration of investment law’s doctrinal and operational paradigms. This transformation reflects broader societal demands for sustainability, corporate accountability, and equitable economic development in an era facing environmental and social challenges of unprecedented scale. As treaties evolve to embed ESG considerations through textual innovation, jurisprudential reinterpretation, and procedural modernization, the international legal community is witnessing the emergence of a renewed investment regime-one that negotiates investor rights and state responsibilities within the matrix of sustainable development.
Practitioners and scholars must continue to navigate this dynamic landscape with nuanced understanding and pragmatism, as the boundaries of investment protection are redrawn to accommodate the imperatives of responsible global stewardship. The interplay of legal doctrine, economic incentives, and normative values ensures that global investment treaties will remain a vibrant field of legal innovation, responsive to the ESG challenges of the 21st century.
