This contribution is part of our joint online symposium with the Völkerrechtsblog on the topic: “Tackling Human Rights, Environmental Protection and Business – A Multilevel Approach“
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A contribution from Mustafa Rajkotwala and Shamik Datta
International investment law is increasingly shaped by environmental imperatives, reinforced by the International Court of Justice’s July 2025 advisory opinion (ICJ Advisory Opinion) on climate change, which confirmed States’ stringent duty of due diligence to prevent significant climate harm, including through the regulation of private actors. Amid climate-driven policy shifts and growing scrutiny of international projects, a clear reform priority emerges: making environmental due diligence (EDD) a mandatory precondition for protection under investment treaties and investor–state dispute settlement (ISDS).
Limiting treaty protection to investors that comply with environmental norms and host-State laws enhances legal certainty and rewards responsible conduct. Grounded in corporate law principles, EDD recognises the governance duties of controlling investors to ensure compliance, and can be operationalised through treaty drafting, procedural safeguards, and institutional mechanisms. This article argues that integrating EDD as a binding precondition for treaty protection would transform international investment law from a system of one-sided investor privilege into a framework of reciprocal responsibility, aligning investment protection with global environmental and corporate governance standards.
The Current Asymmetry in Investment Law
The asymmetric structure of investor-State arbitration under investment treaties was originally intended to address the perceived disadvantage of foreign investors in host States, but has drawn mounting criticism as claims against regulatory measures have surged. Critics argue that the system’s “structural bias” over-empowers investors and undermines environmental protection, particularly as environmental disasters linked to investors’ conduct become more frequent. The imbalance arises from strong investor protections without corresponding environmental obligations, such as fair and equitable treatment, protection against expropriation, and access to ISDS. This lack of enforceable environmental obligations enables ‘regulatory chill’ when host States enforce environmental laws. Newer treaties such as the India-Kyrgyz Republic BIT and the Morocco-Nigeria BIT reference sustainable development, but largely in aspirational terms, leaving a gap in accountability.
Environmental Due Diligence as a Legal Condition
Investment tribunals are increasingly treating an investor’s compliance with environmental laws as a precondition for invoking treaty protection. This operates effectively as a jurisdictional or admissibility filter for investment claims. In practice, this means that if an investment is made or operated in violation of fundamental host-State environmental requirements, the investor may be denied access to treaty dispute mechanisms. Recent arbitral practice illustrates this trend. In Cortec Mining v. Kenya, the tribunal held that the absence of a required Environmental Impact Assessment rendered the mining license void ab initio under Kenyan law, and consequently outside BIT protection. The tribunal applied a proportionality test from Kim v. Uzbekistan, finding that environmental compliance requirements were of „fundamental importance“ and non-compliance constituted a „serious matter“ justifying denial of treaty protection. Critically, the tribunal emphasized that neither the BIT nor the ICSID Convention protects investments made in violation of significant host-State legal requirements, establishing that lawful establishment is an implicit prerequisite even absent express treaty language.
Such denial of treaty protection on the basis of ‘in accordance with law’ demonstrates that an investor’s compliance with the environmental laws of the host state may constitute a mandatory pre-condition for the investor to invoke treaty protection. Through this, investors who bypass EDD cannot claim treaty benefits. This position is reinforced by the above 2025 ICJ Advisory Opinion, which further confirms that States bear responsibility if they fail to require investors to meet climate obligations. This responsibility underscores the need for a treaty-based compliance filter incorporating EDD as legal pre-condition to invoke treaty protection.
Tribunals have also begun to enforce EDD through the admission of host-State counterclaims or defenses based on investors’ unlawful conduct. In Aven v. Costa Rica (Aven), the tribunal interpreted Article 10.11 of DR-CAFTA, a provision safeguarding the state’s right to enforce environmental measures, as effectively conditioning investors’ rights on compliance with environmental laws. On this basis, the tribunal asserted jurisdiction to consider Costa Rica’s environmental counterclaim, holding that it could not be accepted that a foreign investor would be immune from liability for environmental harm. A similar approach was followed in Urbaser v. Argentina and Burlington v. Ecuador as well, where counterclaims for environmental harm were allowed.
By contrast, in cases where treaties lacked any hook for investor obligations, tribunals were reluctant to entertain such arguments. In Roussalis v. Romania, the tribunal observed that the Greece-Romania BIT only imposed environmental obligations upon states. Therefore, it refused counterclaims based on environmental protection. This shows that without express treaty provisions linking the investor’s duties to ensure environmental protection to counterclaims, ISDS remains limited in enforcing environmental responsibilities. Older treaties often defer to domestic law, allowing investors to claim protection despite ignoring obligations. This gap highlights the need to expressly link protection guarantees to responsible conduct.
Treaties Already Moving in This Direction
Modern investment treaties increasingly embed environmental compliance obligations, signaling a shift towards conditioning protection on responsible conduct. The Morocco–Nigeria BIT mandates impact assessments, compliance with host-State laws, and applies the precautionary principle. The Netherlands’ Model BIT ties protection to lawful and responsible conduct, references corporate social responsibility, and permits tribunals to consider non-compliance. India’s Model BIT restricts ISDS access to investments made in accordance with law, including environmental regulations. The Brazil–India BIT requires compliance with environmental, labour, and health laws, prohibits lowering standards to attract investment, and emphasises sustainable development. The AfCFTA Investment Protocol imposes duties to respect the right to a clean environment, requires impact assessments before and after establishment, and preserves regulatory autonomy. Collectively, these instruments mark a doctrinal shift toward EDD as a jurisdictional gateway. The next step would be about the conversion of aspirational provisions into binding preconditions.
Calibrating Obligations to Investor Presence
EDD obligations should be proportionate to an investor’s operational control and influence. Passive or minority investors should focus on transparency and oversight, while controlling investors must meet established international good practice standards to demonstrate compliance, rewarding those already committed to ESG and sustainability practices. Investors with operational presence, particularly through subsidiaries or local entities, must fully comply with host-State environmental laws and statutory fiduciary duties of care, skill, and good faith.
Multinational parent companies must maintain unified ESG governance systems to ensure subsidiaries meet environmental standards when seeking treaty protection This approach is supported by jurisprudence in domestic courts: in Vedanta Resources Plc v. Lungowe and Okpabi v. Royal Dutch Shell (UK), wherein parent companies were held potentially liable for harms caused by overseas subsidiaries when the parent exercised significant control over, or had special expertise in, the relevant operations. Likewise, in Union Carbide and Renusagar (India) arguments arose that foreign parent companies with knowledge of local risks have a duty of care to prevent catastrophic harm. This duty was held to include the parent company’s constructive knowledge over the environmental issues faced by the subsidiary.
Translating these principles to international investment law, a foreign investor that breaches environmental laws through its subsidiary should not be shielded by the corporate veil when seeking treaty protection. EDD as a treaty condition means that if the investment (including local corporate vehicles) violates environmental requirements, the investor’s claims can be barred.
This differentiated approach rewards those already committed to ESG and sustainability practices, and it addresses fears that stringent requirements might deter benign investments or overwhelm small stakeholders. By tailoring obligations, treaties can ensure that responsibility is commensurate with control: the greater an investor’s power to affect the host environment, the greater its duty to exercise that power cautiously.
Treaty Language and Arbitral Practice Must Align
Investment treaties must respect States‘ sovereign right to regulate on standards of environmental protection. To effectuate this principle, treaty clauses should be explicit:
“Only investments made and operated in accordance with the host-State’s law, including laws and regulations concerning the environment, labour, and public health, shall receive protection under this Treaty. An investor may not submit a claim if the investor or its investment is in violation of the host-State’s law.”
Such language mirrors existing models (e.g., Article 14 of the Iran-Slovak BIT), provides a jurisdictional filter, and incentivises good-faith compliance. Tribunals are increasingly open to such reasoning. In Perenco v. Ecuador, for instance, the tribunal – though deciding under older treaty terms – reduced the investor’s compensation after finding that Perenco’s own operations caused significant environmental damage in breach of domestic law. the tribunal deducted damages awarded to the investor after finding environmental damage. In Aven, discussed above, tribunals went so far as to refuse claims entirely due to the investors’ legal non-compliance. As more cases confront these issues (especially under modern treaties that contain express legality requirements), we can expect a more consistent jurisprudence to emerge. Over time, clear treaty text combined with arbitral precedent will solidify the norm that treaty protection is a privilege predicated on lawful, sustainable conduct.
- Jurisdiction and Admissibility Filters
Investment treaties should embed safeguards to exclude investors that breach EDD. Denial of Benefits clauses would allow States to refuse protection for serious violations, admissibility requirements would condition ISDS access on demonstrable compliance, and exhaustion of local remedies would address complex environmental or regulatory issues. These tools equip tribunals to bar bad-faith claims, align treaty protection with the 2025 ICJ Advisory Opinion, and prevent States from being held liable for unregulated investor harms.
B. Environmental Counterclaims
Authorising host-States to bring counterclaims for environmental harm reinforces accountability by ensuring investors bear full consequences. Tribunals should be empowered to hear such claims under domestic law, with treaties expressly incorporating principles like “polluter pays” and “contributory fault” to provide a clear legal basis.
Counterclaims can lead to set-offs or net liability for the investor, as seen in the Perenco v. Ecuador case, where Ecuador was awarded compensation for environmental damage caused by the investor. This approach balances investor rights with State claims, making ISDS a forum of mutual accountability that integrates environmental responsibility, consistent with the ICJ’s call for effective State action against private wrongdoers.
C. Implementation Challenges from a Corporate Governance Lens
Implementing governance duties consistently is challenging for multinational investors operating across jurisdictions with differing laws, enforcement capacities, and ESG expectations. Board-level oversight is emerging in some states, while others prioritise growth over due diligence, creating fragmented frameworks. Aligning global standards (such as OECD Guidelines for Multinational Enterprises, the IFC Performance Standards, and the UN Guiding Principles on Business and Human Rights) with local laws can operationalise these duties, supported by board training, peer learning, and independent ESG audits. The 2025 ICJ Advisory Opinion is likely to accelerate domestic reforms, as seen in India’s MK Ranjitsinh v Union of India, linking climate rights to corporate duties, and UK cases like ClientEarth v Shell and R (Finch) v Surrey County Council, which tie directors’ duties to climate risk management. Treaties could aid adaptation through technical assistance, phased implementation, and state–investor–organisation dialogues. Embedding stakeholder participation in risk assessments and enabling coordinated host–home State oversight would strengthen compliance, close gaps, and deter regulatory arbitrage.
Embedding EDD rebalances investor rights with corporate accountability, ensuring tribunals assess compliance as a prerequisite for claims and barring non-compliant investors. Conditioning treaty protection on EDD promotes responsible investment, filters out meritless claims, and reduces disputes by aligning investor rights with obligations to comply with host-State environmental laws and international sustainability standards. This shift reflects the 2025 ICJ Advisory Opinion’s emphasis on State responsibility for admitted investors’ environmental conducts and supports sovereign regulatory authority, global climate goals, and modern ESG standards. Effective implementation will require adaptable treaty provisions with periodic reviews to keep EDD standards aligned with scientific, technological, and societal developments.
Suggested Citation: Rajkotwala/Datta, Environmental Due Diligence as a Precondition to Treaty Protection: Reframing International Investment Law Through Corporate Governance Norms, jean-monnet-saar 2025.
DOI: 10.17176/20251110-093155-0
Funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) – Project No.: 525576645
