Tackling Climate Change Through Sustainable Investment: All in a Treaty?

The need to take climate action is a clear imperative for the states that agreed to the UN Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. If governments are to maintain their commitment to limiting global temperature rise to well below 2°C, they need to leave two-thirds of the world’s coal, oil and gas in the ground and foster climate-friendly and resilient investment. As the international community prioritizes investment for sustainable development, leaders can expect to face some barriers from fossil fuel investors. How do we align the international investment regime with the urgency to take climate action?

To accelerate the shift away from unsustainable investments to Paris/SDG-compatible investments, The Creative Disrupters—a team of international lawyers, economists, policy advisers and communications experts, including several individuals who work for the International Institute for Sustainable Development (IISD)—proposes the Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation. The Treaty, which is one of the winners of the Stockholm Treaty Lab contest, is structured around three building blocks:

demoting unsustainable investments;
promoting sustainable investments; and
ensuring a just transition to environmentally, socially and economically sustainable, climate-friendly and resilient economies and societies.

But how does the Treaty define what makes an investment sustainable or unsustainable? While strongly encouraging common approaches, the Treaty leaves those critical determinations to the states themselves. Each state designates—in Schedules incorporated as Annexes to the Treaty—economic sectors that meet either definition. This innovative approach is in line with the concept of sustainable development, which is highly context specific, and with the Paris Agreement, under which states submit commitments based on nationally determined contributions.

Demoting Unsustainable Investments

Currently, the international investment regime is ill-suited for staying in line with the SDGs and for limiting global warming to well below 2°C, for at least three reasons.

First, traditional international investment agreements focus on the protection and promotion of all types of investment, independent of their qualities, including from a climate perspective. The Treaty addresses this by:

providing no right to establishment of new unsustainable investments and circumscribed rights to expand unsustainable investments;
allowing and even encouraging states to discriminate between sustainable investments, which are to receive more favourable treatment, and unsustainable investments, which are to be discouraged and ultimately eliminated; and
imposing—on sustainable, unsustainable and non-classified investors and investments alike—obligations aimed at setting high and ever-increasing standards of environmental and social performance, including human rights and climate change considerations, coupled with accountability and dispute settlement mechanisms designed to ensure that investors and investments comply with such standards.

Second, the current investment regime makes it difficult for governments to adopt disruptive but necessary measures to address climate change because traditional treaties provide extraordinary protections to foreign investors. To address these problems, the Treaty:

clearly defines the scope of protection accorded to avoid expansive interpretations and sets out the conditions to access international dispute settlement;
replaces existing investment treaties and chapters to the extent of overlap and amends them so as to allow host states to deny benefits in case they are challenged in international arbitration in relation to an unsustainable investment;
moves away from the controversial, widely used and broadly interpreted standards of “fair and equitable treatment,” “full protection and security,” “legitimate expectations” and “indirect expropriation,” while protecting investors and investments against conduct that would breach internationally-agreed standards; and
removes all procedural rights for unsustainable investors and investments under the Treaty, subjecting them to the exclusive jurisdiction of domestic courts of the host state.

Third, traditional treaties fail to address the fact that many national governments have regulatory and incentive structures that do not reflect the need to scale back and disrupt unsustainable investment. The Treaty is innovative in this sense in that it:

commits states to enforcing their existing commitments under multilateral environmental agreements, to enforcing their existing environmental laws and to raising the level of ambition with respect to both;
provides procedural avenues for citizens to challenge states, investors or investments that have failed to meet their obligations under the Treaty;
commits states to agree on modalities and timelines for phasing out investment incentives to unsustainable investments;
obliges investors to undertake impact assessments, including consideration of environmental, social, human rights and climate change risks and impacts, with a baseline of internationally accepted standards and good practice.

Promoting Sustainable Investments

Sustainable investments are crucial for countries to maintain their commitment to climate change adaptation and mitigation all the while staying on track to achieving the SDGs by 2030. As it stands, not enough sustainable investment is taking place for the global community to meet its agreed climate change mitigation and adaptation objectives in line with the SDGs.

For example, when looking at the renewable energy sector, there is a massive investment gap between current levels and what is needed to scale up renewables to a level where they can have significant and positive impacts on climate change mitigation. The International Energy Agency (IEA) argues that “low-carbon investments are not on track to meet climate change objectives,” with non-solar and wind investment falling “far short” of what is needed.

Sustainable investors look for clear signals that host governments have prioritized climate change mitigation and adaptation objectives and other SDGs and are reasonably constant and predictable in their policies and targets. While it is impossible and undesirable to guarantee long-term regulatory stability, the Treaty signals long-term commitment by:

committing states, in an instrument of international law, to encourage, promote and create favourable conditions for sustainable investments;
committing states to raise their levels of ambition with respect to the objectives of the Paris Agreement and the SDGs;
guaranteeing non-discriminatory treatment (national treatment and most-favoured-nation treatment) in like circumstances, a standard of treatment that eschews egregious behaviour by the host state, the right of transfers, among other rights; and
providing all investment-related stakeholders with access to a mechanism for dispute prevention and settlement.

Market failures may act as barriers to flows of sustainable investments needed to ensure the achievement of the goals under the Paris Agreement and the SDGs. In some cases, market incentives may eventually work to remove barriers to sustainable investments, but the urgency of the challenges we face often demands that governments intervene to help speed the rate and volume of flow of such investments. To encourage sustainable investments, the Treaty:

fosters state cooperation in support of sustainable investment and the adoption of policies and regulations in areas such as product energy efficiency standards, technical requirements for climate-smart infrastructure projects and de-risking of sustainable investments;
allows for various green industrial policy measures (local content requirements, local employment requirements, R&D requirements, training requirements), while limiting the quantum of support, requiring specific performance benchmarks and mandating sunset clauses; and
commits states to not launch challenges at the World Trade Organization (WTO) or national trade remedy cases against each other’s subsidies for sustainable investment.

Ensuring a Just Transition

With the ongoing energy transition, the Paris Agreement underscores the importance of ensuring the process is fair for all implicated workers and not leaving anyone behind in a changing economic landscape.

According to the International Labour Organization (ILO), a just transition should act as “a bridge from where we are today to a future where all jobs are green and decent, poverty is eradicated, and communities are thriving and resilient. More precisely, it is a systemic and whole of economy approach to sustainability. It includes both measures to reduce the impact of job losses and industry phase-out on workers and communities, and measures to produce new, green and decent jobs, sectors and healthy communities. It aims to address environmental, social and economic issues together.”

The Treaty supports the just transition by:

reducing the impacts of drivers such as climate change;
creating employment to replace lost jobs and ensure worker rights;
providing institutions by which those affected by investment-led transition could have a voice in the governance of investment and investors; and
fostering cooperation and efforts by states to manage the transition in such a way as to cushion the impacts on workers and citizens.

More specifically, the Treaty lays out a list of possible actions to ensure that the sustainable investment transition is just for all, ensuring meaningful employment for those whose jobs are lost in the process of change, underscoring transparency and accountability mechanisms throughout the transition and strengthening social safety nets.

A Treaty to Make Investment Work for the Climate and the SDGs

With its focus on climate-friendly and resilient investment, this Treaty is an innovative approach for governments looking to put their best foot forward on sustainable investment geared toward climate change mitigation and adaptation. Keeping the SDGs and the Paris Agreement at its core, it moves away from traditional investment treaties by establishing a balance of rights and obligations for both governments and investors, ensuring justice for communities and other stakeholders involved in or affected by investment projects.

Martin Dietrich Brauch, Team Captain of The Creative Disrupters, is an International Law Advisor at IISD.

The Creative Disrupters will present the Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation in New York City on September 28, 2018. Register here.

Learn more about the Stockholm Treaty Lab here.