Corporate Social Responsibility and International Investment Law: Tension and Reconciliation

Abstract

A host state’s pursuance of Corporate Social Responsibility (CSR) goals may lead to a violation of international investment law (IIL). This tension results from the imbalance between international economic regulation and social regulation of foreign investments. The paper explores the tension between IIL and CSR, analyses the recent practice of reconciling the tension through incorporating CSR provisions into investment treaties, and proposes to solve the tension through a more balanced interpretation of substantive obligations in international investment arbitration. The host state’s regulation of foreign investments to promote their social and environmental responsibilities may violate IIL in three aspects: First, the host state may violate the non-discrimination principle by differentiating between foreign investments having different social and environmental impacts. Second, the host state may violate the Fair and Equitable Treatment (FET) standard if the regulation on CSR issues has frustrated foreign corporations’ legitimate expectations at the time of investment. Third, the regulation in pursuit of CSR taken by the host state may constitute indirect expropriation if the measure has substantially deprived the value of foreign investments. As a response to these tensions, recent years have seen a new approach taken by Canada, Brazil and the EU of incorporating CSR provisions to investment treaties. Nonetheless, the effectiveness of these CSR provisions is questionable, as a result of the traditional role of foreign investors as third-party beneficiaries in investment treaties, the ‘soft law’ nature of CSR norms, and the unclear definition of CSR in these provisions. In conclusion, the paper proposes to harmonise the host state’s pursuance of CSR goals and IIL obligations by making a balanced interpretation of international investment obligations: First, in the discrimination assessment, the tribunal should take account of noneconomic factors of foreign investments in the determination of whether two investors suffering different treatments are ‘in like circumstances’, and should allow differentiation between investors to be justified by a legitimate CSR policy. Second, in the FET examination, the tribunal should strike a balance between the stability requirement under the FET standard and the evolving nature of the host state’s regulation on CSR issues. Third, in the expropriation analysis, the tribunal should take account of the host state’s sovereign right to regulate CSR in the assessment of whether a CSR measure constitutes indirect expropriation.