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Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues
No. 251  May 6, 2019

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])

The Washington Consensus promoted the liberalization of inward FDI regimes as a tool to advance development. Accordingly, governments have sought to attract as much FDI as possible, focusing on the quantity rather than the quality of FDI.

This strategy is becoming progressively more nuanced. While countries continue to seek to attract FDI in general, increasingly they focus on FDI that they consider particularly desirable for their economic development. While this is not new—many governments have targeted specific types of FDI in the past—a broader debate on how to define, and seek, quality investment is now underway. Indeed, even OECD members are discussing “FDI qualities”, and linking it to the concept of “sustainable FDI”: “commercially viable investment that makes a maximum contribution to the economic, social and environmental development of host countries and takes place in the framework of fair governance mechanisms.”[1]

Promoting sustainable FDI is particularly important, considering that the UN’s sustainable development goals (SDGs) have become the lodestar of international economic policy, and FDI can contribute to closing the SDG financing gap.
That FDI must contribute to host countries’ development is not new in international investment relations. Apart from referring to the protection of investors—which remains the focus of international investment agreements (IIAs)—the preambles of a growing number of agreements include specific references to sustainable development,[2] and some IIAs now contain specific provisions in this respect.[3] This is a beginning. The pressing challenge is to operationalize and firmly anchor this objective in the text of these treaties and their application, so that investment has indeed a substantial sustainable development impact. Options include:
  • The Salini criteria, sometimes used to define “investment” for the application of IIAs, can be a starting point.[4] While four of the Salini criteria are gaining acceptance (duration, substantial commitment of capital or other resources, expectation of gain or profit, assumption of risk), the fifth—contribution to the economic development of the host country—has received less attention. Moreover, accepting the Salini criteria is a matter for tribunals’ discretion; also, the criteria have been elaborated in relation to the ICSID Convention, and do not necessarily come into play in arbitrations conducted under other procedural rules. Still, they offer an entry point for tribunals that recognize the need for investment to contribute to sustainable development.
  • Beyond application, IIAs have generally been hesitant about requiring that covered investment must contribute to the development of host countries. This could indicate a hesitation to narrow IIAs’ protections, linked perhaps to uncertainty about the interpretation of what constitutes such a contribution. However, governments have indicated in many instruments the contributions they expect from investors, and investors have identified in many instruments the contributions they seek to make to host countries’ sustainable development—and there is considerable overlap concerning such “sustainable FDI characteristics”.[5]
  • IIAs could define “investment” explicitly by reference to the five Salini criteria—clarifying what investments would qualify as sustainable investment (or tribunals would have to do so). This, too, is tricky: the term “sustainable investment” is open to interpretation, but the sustainable FDI characteristics could help provide a way forward.
  • IIAs could allow governments to deny protection to investments that fall short of the sustainable investment definition, through a denial-of-benefits clause.
  • IIAs could allow governments to grant preferential treatment to investment that has certain sustainability characteristics (similar to using targeted incentives to invest in renewable energy), permit sustainability exceptions, make sustainability characteristics part of the “like circumstances” analysis for national treatment,[6] or focus investment facilitation preferentially on such investment. The last approach is particularly relevant, given the WTO’s structured discussion on investment facilitation for development.
  • Finally, incorporating binding references to corporate social responsibility (CSR) in IIAs can advance sustainable investment. References to such international CSR instruments as the OECD Guidelines for Multinational Enterprises import into treaties widely accepted provisions that encourage sustainable investment (relating to, e.g., environmental management, technology transfer, local capacity building). IIAs have begun to do so in the preambles and/or texts of treaties. For example, CETA’s Preamble encourages enterprises operating within the territory of the contracting parties or subject to their jurisdiction to respect internationally recognized CSR standards, including the OECD Guidelines. While often incorporated as soft law references to date, a growing body of work aims at expanding these references to hard law (in IIAs, domestic laws and international contracts), to enhance their impact. This CSR approach reflects a broader reorientation of IIAs, toward recognizing the responsibilities of investors in general.
Governments are intensifying efforts to attract sustainable investment. Operational IIA provisions favoring sustainable investment for sustainable development would support these efforts—to help achieve the SDGs. 
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Karl P. Sauvant ([log in to unmask]) is Resident Senior Fellow at the Columbia Center on Sustainable Investment, a joint center of Columbia Law School and the Earth Institute at Columbia University. The author is particularly grateful to Catharine Titi for her contribution to this Perspective, and he wishes to thank Howard Mann, Makane Moïse Mbengue and Armand de Mestral for their helpful peer reviews.
[1] Karl P. Sauvant and Howard Mann, “Towards an indicative list of FDI sustainability characteristics” (Geneva: ICTSD and WEF, 2017), p. 2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3055961 
[3] For example, the Morocco-Nigeria BIT.
[4] Salini Costruttori S.p.A. and Italstrade S.p.A. v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, para. 52.
[5] Sauvant and Mann, op. cit.
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Karl P. Sauvant, ‘Promoting sustainable FDI through international investment agreements,’ Columbia FDI Perspectives, No. 251, May 6, 2019. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Marion A. Creach, [log in to unmask].
Most recent Columbia FDI Perspectives  
  • No. 250, Qianwen Zhang, “The next generation of Chinese investment treaties: A balanced paradigm in an era of change,” April 22, 2019
  • No. 249, Andrew Kerner, “How to analyze the impact of bilateral investment treaties on FDI,” April 8, 2019
  • No. 248, Stephan W. Schill and Geraldo Vidigal, “Investment dispute settlement à la carte within a multilateral institution: A path forward for the UNCITRAL process?,” March 25, 2019
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/

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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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Karl P. Sauvant, PhD

Resident Senior Fellow

Columbia Center on Sustainable Investment
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
p(212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
wwww.ccsi.columbia.edu | t: @CCSI_Columbia

"Determining Quality FDI", "The State of the International Investment Law and Policy Regime", "Towards G20 Guiding Principles on Investment Facilitation for Sustainable Development", "Five Key Considerations for the WTO Investment-facilitation Discussions, Going Forward", "Arriving at Sustainable FDI Characteristics", "Putting FDI on the G20 Agenda", "International Investment Facilitation: By Whom and for What?", "Moving the G20's Investment Agenda Forward", "Emerging Markets and the International Investment Law and Policy Regime", "Sustainable FDI for Sustainable Development", "Towards an Investment Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!", "Towards an Indicative List of FDI Sustainability Characteristics", "The Next Step in Governance: The Need for Global Micro-regulatory Frameworks", and "The Evolving International Investment Law and Policy Regime: Ways Forward" are available at https://ssrn.com/author=2461782 and http://www.works.bepress.com/karl_sauvant/.

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