IISD | 21 December 2018
Corporate social responsibility clauses in investment treaties
by Laurence Dubin
Corporate social responsibility (CSR) refers to practices and rules that companies, particularly multinational enterprises (MNEs), follow voluntarily to limit the negative social, environmental and other externalities caused by their activities. Originally based on the sovereign ethics of MNEs, CSR has since been structured by international institutions such as the OECD (with the OECD Guidelines for Multinational Enterprises) and the United Nations (with the Human Rights Council’s Guiding Principles on Business and Human Rights). These soft-law instruments have been developed alongside hard-law investment treaties, which, in turn, grant rights to foreign investors under international law.
In recent years, there has been a trend for investment law to take CSR into account implicitly or explicitly. Implicitly, it appears when the “non-socially responsible” behaviour of an investor is considered in investment arbitration in relation to conditions of admissibility or jurisdiction of arbitration tribunals. Explicitly, on the other hand, it appears in CSR clauses in investment treaties. The inclusion of CSR clauses in such treaties is a relatively new practice, and these clauses have not yet been subject to investment arbitration. There are at most some 30 CSR clauses in investment treaties and models or FTAs. These clauses may be categorized as follows.
1. A typology of CSR clauses in investment treaties
The first category includes clauses in which, at most, states encourage companies to self-regulate. The second category includes clauses in which the home and host states of foreign investors consider CSR to be within their own national competence. The third category, which is more recent, comprises clauses in which states explicitly require that investors comply with human rights or environmental obligations.
Clauses in the first two categories conceive CSR to be organized spontaneously by MNEs or by domestic laws (mainly host state laws). They can be described as indirect clauses since they create intermediate instruments for the regulation of business conduct by foreign investors, either through the spontaneous policies of MNEs or through host states’ domestic legal frameworks. In turn, clauses that impose on investors direct obligations concerning human rights, environmental protection or the international prohibition on corruption—categorized as direct clauses—oppose the primary objective of traditional investment law, which is to protect investors, and demonstrate the substantial reform movement in this area. Indirect clauses could remedy the widespread imbalance between overprotective international rights of foreign investors and the corresponding obligations of host states. They could also change the corporate duties of MNEs by converting CSR into enforceable international obligations on investors, making investment law a useful and unexpected lever to hold MNEs accountable.
2. Indirect clauses: A means of protecting the powers of host countries
Most CSR clauses are indirect clauses, framing CSR as a self-regulating technique that home and host states should promote. Most agreements to which Canada is a party contain this type of clause, including the Canada–EU CETA, currently under provisional application. Under the CETA, the parties agree on:
“encouraging the development and use of voluntary best practices of corporate social responsibility by enterprises, such as those in the OECD Guidelines for Multinational Enterprises, to strengthen coherence between economic, social and environmental objectives.”
These provisions do not change the corporate or ethical duties of companies into enforceable legal obligations in the context of dispute settlement proceedings. They merely reaffirm the voluntary nature of CSR, which remains a form of self-responsibility for companies that can, at most, be encouraged by states.
Some indirect clauses aim to go beyond the understanding of CSR as a voluntary corporate engagement, by urging states to adopt legislation to regulate the conduct of investors. This type of indirect clause can play a useful role in interpreting the content and scope of host country obligations in investment treaties. Indeed, the inconsistency of arbitration case law in the interpretation of certain standards of treatment can be detrimental to states’ positive obligations to protect human rights or the environment. Indirect CSR clauses could therefore justify or emphasize the restrictive interpretation of FET and, in particular, the protection of investors’ legitimate expectations. By explaining the intention of states to reinforce investors’ corporate responsibility, indirect clauses could help better define the scope of investors’ legitimate expectations.
3. Direct CSR clauses: A means of defining investors’ international obligations
Direct CSR clauses, in turn, aim to hold foreign investors responsible by defining the obligations that govern their activities. There are not many of them, simply because the primary objective of traditional investment treaties is to grant rights to foreign investors rather than impose obligations on them. This objective of investment treaties explains why direct clauses often use weak language. Article 24 of the Pan-African Investment Code (PAIC) uses conditional verbs (“should”) to encourage investors to comply with internationally recognized human rights laws while using imperative verbs (“shall”) in relation to combating corruption (Article 21). Similarly, Article 12 on CSR in the Argentina–Qatar BIT is limited to stating that investors operating in the territory of each state “should make efforts to voluntarily incorporate internationally recognized standards of [CSR] into their business policies and practices.”
When conditional verbs are not used, direct clauses can be relatively weak in substance. Some only recall one of the criteria of the Salini test, namely, that investors must contribute to the development of the host country. This is the case of Article 22(2) of the Draft Pan African Investment Code, entitled Corporate Social Responsibility:
Investors shall, in pursuit of their economic objectives, ensure that they do not conflict with the social and economic development objectives of host States and shall be sensitive to such objectives.
Furthermore, direct CSR clauses must often coexist with clauses relating to the compliance of the investment with the domestic law of the host country. Therefore, the Argentina–Qatar BIT, in addition to a direct CSR clause in Article 12, contains in Article 11 an obligation on investors to comply with domestic law. Another option is to combine the CSR clause and the obligation to comply with domestic law in a single provision. This is the case of Article 11 of the Brazil–Malawi Investment Cooperation and Facilitation Agreement (an investment treaty that is different from traditional BITs):
The investors and their investments shall develop their best efforts to comply with the following voluntary principles and standards for a responsible business conduct and consistent with the laws adopted by the Host Party receiving the investment : … b) Respect the human rights of those involved in the companies’ activities, consistent with the international obligations and commitments of the Host Party.
These direct clauses demonstrate the difficulty that states face when imposing internationally recognized human rights obligations on investors without linking them to states’ own international commitments. Therefore, in the example of the clauses in Brazil’s treaties, if investors must respect human rights, this is only in the context of the international commitments and obligations undertaken by the host countries.
While direct CSR clauses are currently imprecise in their content regarding the international obligations of foreign investors, it could nonetheless be useful for host countries to invoke them when resolving disputes with foreign investors.
4. The potential impact of CSR clauses on host country counterclaims in ISDS
Several well-known arbitral awards have already considered that a foreign investor’s corrupt conduct or breach of host state laws can lead to either the dismissal of the case on jurisdictional grounds or to the inadmissibility of the investor’s claim. Thus, host countries have mechanisms—namely, objections to jurisdiction or to admissibility—allowing them, as a defence, to avoid their own responsibility by challenging the claimant investor’s socially irresponsible conduct (whether or not it characterized as such). CSR clauses could be a useful basis for counterclaims allowing host countries not to avoid their own responsibility but to actively hold investors liable.
This is because counterclaims allow host countries to react to the principal claims of foreign investors and directly challenge their wrongful conduct. Even so, counterclaims have not been very successful so far. The main obstacle to the success of counterclaims is the uncertainty as to whether host country obligations under international law can be enforced on foreign investors, as demonstrated in the Urbaser v. Argentina case. In this case, Argentina filed a counterclaim regarding the investor’s breach of the human right to water. The tribunal concluded that Argentina’s claim could not be accepted, as the human right to water created obligations for states only. However, the arbitrators considered that:
“the situation would be different in case an obligation to abstain, like a prohibition to commit acts violating human rights[,] would be at stake. Such an obligation can be of immediate application, not only upon States, but equally to individuals and other private parties.”
At first, such a negative obligation recalls one of the well-known CSR standards, the due diligence obligation requiring MNEs to “endeavour” not to violate human rights or pollute the environment. It could be imagined that, faced with a CSR clause in an investment treaty requiring investors to comply with this due diligence obligation, the arbitrators would have a useful tool to consolidate the establishment of an enforceable obligation on investors, as well as a useful basis for counterclaims.
If investors are aware of the risk of host countries successfully bringing counterclaims invoking their lack of due diligence, they could be dissuaded from initiating an arbitration proceeding in which they would have to justify their own conduct. Therefore, surprisingly, the link between the duty of due diligence (as described in a CSR clause) and investment law (through counterclaims) could help “significantly moralize the use of treaty-based arbitration.” Even more unexpectedly, investors could be held liable for breaching a due diligence obligation that is directly enforceable and that could ultimately impose on them an obligation to compensate the host country.
Laurence Dubin is Professor of International Law at the Sorbonne Law School. For a comprehensive view on the subject, see Dubin, L. (2018). RSE et droit des investissements, les prémisses d’une rencontre, Revue Générale de Droit International Public, 2018, vol. 4.
 For an overview of all the clauses, see the article by Monebhurrun, N. (2017). Mapping the duties of private companies in international investment law. Brazilian Journal of International Law, 2017, 14(2), 50–71, and by the same author but regarding Brazilian agreements only: Monebhurrun, N. (2017). Novelty in international investment law: The Brazilian agreement on cooperation and facilitation of investments as a different international investment agreement model. Journal of International Dispute Settlement, 8, 79–100. For a more general analysis of the obligations of foreign investors, see also Mbengue, M. M. (2017). Les obligations des investisseurs. In L. Dubin et aa. (Eds.), Colloque de Paris 8 Vincennes –Saint Denis: L’entreprise multinationale et le droit international (pp. 295–339) Paris: Pedone. Retrieved from http://pedone.info/site/wp-content/uploads/2017/05/Pr%C3%A9sentation-SFDI-2016-Lentreprise.pdf
 See also the preamble and article 22.3 of CETA, retrieved from http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/index_en.htm
 An interpretive trend in legitimate expectations can be seen, which tends to increase investors’ responsibility by at least being aware of the applicable legislation and anticipating regulatory changes.
 Economic Affairs Department, African Union Commission. (2016, December 15). Draft Pan African Investment Code, EA15660. Retrieved from https://au.int/sites/default/files/documents/32844-doc-draft_pan-african_investment_code_december_2016_en.pdf. See also article 14 of the Intra-MERCOSUR Investment Facilitation Protocol, retrieved from https://investmentpolicyhub.unctad.org/Download/TreatyFile/5548
 See Article 11 of the Brazil–Malawi Investment Cooperation and Facilitation Agreement here: https://investmentpolicyhub.unctad.org/Download/TreatyFile/4715
 See World Duty Free Company Limited c. Kenya, CIRDI case No. ARB/00/7, award, August 31, 2006. Retrieved from https://www.italaw.com/documents/WDFv.KenyaAward.pdf; Metal Tech Ltd c. Republic of Uzbekistan, CIRDI case No. ARB/10/03, award, October 4, 2013. Retrieved from https://www.italaw.com/sites/default/files/case-documents/italaw3012.pdf.
 See Urbaser and Consorcio de Aguas Bilbao v. Argentina, ICSID Case No. ARB/07/26, Award, December 8, 2016, § 1210, retrieved from https://www.italaw.com/sites/default/files/case-documents/italaw8136_1.pdf
 Gaillard, E. (2015). L’avenir des traités de protection des investissements. C. Leben (Ed.), Droit international des investissements et de l’arbitrage international, Paris, Pedone, 2015, p. 1040.