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INVESTMENT ARBITRATION AND ENVIRONMENTAL PROTECTION: A CRITICAL LOOK?

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" the environment is not an abstraction but represents the living space, the quality of life and the very health of human beings, including generations unborn. "

This is not a statement issued by an environmental NGO, but a quote from an ICJ advisory opinion rendered in 1996. The Court went on to conclude that, at least in a transboundary context, States have a general obligation to ensure environmental protection within their jurisdiction and control. Having in mind the developments since 1996, and particularly several widespread global and regional actions to fight climate change and preserve the environment, one can undoubtedly conclude that environmental protection has only gained substantially more significance in the meantime.

In about the same period, the number of investment arbitrations also skyrocketed.

But, when one mentions investment arbitration and environmental protection in the same sentence, these two topics do not seem as complimentary notions. Roughly speaking, the ultimate purpose of investments (from the investor’s perspective, at least) is creating profits, the purpose of investment arbitration is resolving investment-related disputes, while the purpose of environmental protection is to preserve and restore the environment from various sources of pollution (including in particular the industrial ones). Unsurprisingly, as a result of these different purposes, when investment arbitration and environmental protection interact, this interaction is usually conflicting.

This article intends to briefly address how does this interaction occurs, and whether there is room for criticism of the current practice.

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1. Environmental protection as part of the state’s defense in investment arbitration

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When states first started entering into BITs, it is safe to say that they did not know how detailed could these relatively short documents become through investment arbitration practice i.e. how detailed and burdensome could their treaty obligations become. Yet, even in the early period of the development of international investment law, a number of states (e.g. Germany, USA, China etc.) have been known to introduce provisions aimed at preserving the state’s authority to take actions necessary for the protection of the environment and/or public health. While rudimentary, such provisions could be seen not only in preambles of BITs, but in substantive provisions as well.

Yet, then came investment arbitrations – one after another. And states were becoming more and more aware of the peculiarities of the system of investment treaty protection – including in particular limitations in exercising their regulatory powers. Many investment arbitrations have been initiated due to the states’ measures aimed (or claimed to be aimed) at environmental protection. To put it simply, in almost all cases involving the issues of environmental protection – such protection was not complementary with investment protection and was not invoked by the investors. Investor claimed that their rights have been infringed under the BIT, while the states stipulated that their measures were justified and reasonable in light of the need to protect the environment. Some tribunals have accepted this line of defense and some have not, mostly depending on the specific circumstances of each case. But, importantly, there seems to be a general consensus that states.

A notable example is the case of Clayton v. Canada, where the investor was refused to proceed with its marine quarry project, after a joint review panel determined that „it is likely to cause significant adverse environmental effects that […] cannot be justified in the circumstances“, and invoked, inter alia, „community core values“ as a basis for its decision. The tribunal ultimately determined that Canada was liable for the breach of the legitimate expectations of the investor, having in mind the encouragements and representations made to the investor regarding the project. But, what was particularly striking is the fact that the tribunal considered that the investor had no reason to expect that “community core values” would be a crucial factor in the environmental review procedure.

So, has the tribunal gone too far? A strong dissenting opinion was issued by Prof. Donald McRae, who pointed out that the majority decision is not only an intrusion into the way an environmental review process is to be conducted, but also an intrusion into the environmental public policy of the state i.e. its domestic jurisdiction. One cannot ignore the valid reasons pointed out by Prof. McRae, especially in light of the fact that the exact content of environmental review is not defined in international law. For instance, the ICJ has determined that conducting an environmental impact assessment is an obligation under “general international law”, but has not delved upon how exactly should this assessment be conducted. Rather, the Court referred primarily to domestic law as a reference point to define the scope and content of such assessment. Therefore, looking from this perspective, assessing that an environmental review conducted by a state is arbitrary because of the domestic criteria it used in the review, might seem as possibly going too far.

But, on the other hand, there must be a red line which stop states from invoking environmental concerns as justification for their bad faith actions. The test for this might be obvious: if genuine environmental concerns have motivated certain actions i.e. if these realistic concerns were the actual basis for an action in line with domestic procedures – arbitrariness might well be an intrusion into the domestic jurisdiction and policy. Of course, the investor might still be entitled to damages depending on assurances received from the state prior to the pertinent actions – and this is also one of the things that the majority in Clayton advanced.

What can also be concluded from investment arbitration practice is that the wording of the BIT has sometimes played a crucial role in that regard. Naturally, if a treaty allows the state to freely take actions necessary to protect the environment, the state’s position will be much easier in case it undertook such measures (albeit it already has certain rights and obligations with respect to environmental protection under general international law). The treaty language might even dissuade the investor from submitting a claim at all. That is why we can see a trend of inclusion of numerous environmental protection provisions when drafting newer BITs (now contained in preambles and clauses on free transfer, expropriation, right to regulate, denial of benefits. The Netherlands Model BIT went as far as to even require the arbitrators to have knowledge in environmental and human rights law (something that the PCA has recognized through its specialized rules as well). And this trend should be commended since it can make a crucial difference in practice. On the one hand – investors will be more cognizant of and in fact ensure environmental protection while making and realizing their investments. On the other hand – if the investors nevertheless do not do so, states will have more freedom in doing everything necessary to ensure protection of the environment.

All in all, while the decision obviously depends on the specific circumstances of the case, environmental protection has been recognized as an effective line of defense of states in investment arbitration (and with a good reason). The discussion mostly revolves around regulatory powers. Whether the entire case law may generally be satisfactory is impossible to tell. What can be said is that there is a trend showing more and more understanding for state’s actions taken in furtherance of environmental protection goals. In a way, environmental protection has been seen as equally (or even more) important than investment protection. But, as the S.D. Myers tribunal rightfully noted “environmental protection and economic development [i.e. investment protection] could and should be mutually supportive”.

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2. Environmental protection as a basis for the state’s attack

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Counterclaims were not often raised in investment treaty arbitration (the first was raised in the Genin case in 2000), and they were generally unsuccessful for a long period. However, the first known counterclaim that was awarded was based on breaches of environmental law (Burlington v. Ecuador). Thus, environmental protection was apparently crucial in breaking the ice and opening a very important door which basically turned investment arbitration from a one-way to a two-way procedure. Whether the number of environmental counterclaims will rise in the future remains to be seen, but one cannot deny that the development of environmental counterclaims can only have positive effects to the already heavily rocked trust of states in the investment treaty arbitration system. Even when looking from the aspect of an investor, the possibility of such counterclaims may help as an incentive for taking due care of the environmental protection while developing their investments. Thus, the decision in Burlington is definitely a positive development for the world of investment arbitration.

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3. Environmental protection as a basis for the investor’s claim

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As already noted, environmental protection is not always something which is in conflict with investment protection. On the contrary, some investments actually have environmental protection as their purpose (or one of the purposes). In that regard, investors were known to rely on environmental laws and regulations while making and realizing their investments. However, due to the state’s alleged breach of or failure to enforce environmental laws and regulations, investors claimed breach of the relevant BITs (e.g. Allard v. Barbados, Energo Zelena v. Serbia). Hence, although it might seem unusual on a first glance, in those cases both the investors and the environment were supposedly at a loss due to the states’ actions or failures to act. These situations are rare examples of how investment arbitration is activated in favor of environmental protection. Of course, arbitral tribunals are not expected to impose certain environmental obligations upon the state outside of any legal framework. Investors in the cited cases actually invoked domestic legislation that was not complied with by the state (although one could also imagine invocation of specific international obligations in that regard as well). We are yet to see whether any more controversial awards might arise in this respect. Hopefully, these examples will motivate states to promote and protect investments that protect and help the environment.

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4. Impact of investment arbitration proceedings on the environment

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Last interaction between investment arbitration and environmental protection is the carbon footprint that all of these proceedings have each year. Needless to say, the carbon footprint of a legal procedure is not something which typically comes to our minds when discussing the global warming and climate change. While this effect might seem trivial on a prima facie basis, the negative effects are actually far from trivial, and are the closest and the most direct interaction between investment arbitration and environment protection. The surprisingly negative affects of even one “medium-sized” arbitrations have been revealed by recent case studies.

Luckily, the leaders of international arbitration have taken significant steps in that regard, and the arbitration seems to be moving rapidly towards becoming a paperless and generally more digital process (especially since the COVID-19 era). The only “criticism” that can be addressed in that respect is that we should have done this sooner – the deadline to complete these environmental pledges is yesterday.

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5. Conclusion

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There is likely a consensus in saying that the world is not working hard or fast enough to save the environment, and the investment arbitration community is no exception to this statement. Investment tribunals are showing an increasing understanding of environmental issues, and newer investment treaties are introducing the necessary language that should enable states to undertake environmental protection actions much more freely. But the investment treaties already in force are largely remaining unmodified, causing a fear amongst states that their actions will face investment arbitration retaliation. Things cannot move forward in tghis regard without the wide consensus of the states – in particularly investment-exporting states whose nationals had the most to benefit from investment arbitration thus far. In the meantime, investment arbitration practice is moving in a good direction, and should remain cognizant of the general international law concerning the environment in their decisions. Awareness has certainly been raised, and steps have been made towards establishing environmental protection as one of the prime goals of investment arbitration. However, much is still ahead of us, and we are still moving too slow.