Right of the Host State to Regulate the Environment and Investment Protection - A Changing Landscape

Abstract

The increase in investment flows is one of the newest challenges in the pursuit of sustainable development. Generally, investors establish their operations in countries that have less stringent environmental regulations to reap maximum benefits from the investment. It has been estimated that a 1% increase in foreign direct investment contributes to a 0.04% increase in environmental pollution. In response to this challenge, countries have revisited and re-framed their Bilateral Investment Agreements (BITs) in a manner to balance the host state’s regulatory power concerning its commitments to protect the environment with investment protection. Accordingly, environment-related language has been used by different states within the BITs to preserve the regulatory power of the host state. Such language can be identified mainly in seven ways; i) referring to the environment in preambles of BITs, ii) reserving policy space for the regulation of environment in general, iii) reserving policy space for environmental regulation for the specific subject matter, iv) exceptional clause to indirect expropriation, v) none-lowering environmental standards to attract investments, vi) environmental matters and investor-state disputes and vii) general promotion of progress in environmental protection and cooperation. The effect of each way is different and therefore, this research purposes to explore the legal implications of each way by highlighting the most appropriate method to incorporate environmental concerns in the texture of the BIT.