Environmental Provisions in ASEAN’s Investment Agreements: The Need to Strengthen Member States’ Right to Regulate Environmental Issues
By Kim Anh Dao
Published on 4 April 2024
The Association of Southeast Asian Nations (ASEAN) holds a significant position in the international investment rule-making arena. Alongside treaties concluded by its individual members, ASEAN, as a unified entity, has been actively involved in various cross-regional investment agreements, including the ASEAN-Korea Investment Agreement (2009), the ASEAN-China Investment Framework Agreement (2009), the ASEAN-India Investment Agreement (2014), and the Regional Comprehensive Economic Partnership (RCEP) (2020). Despite this progressive landscape, ASEAN faces a critical challenge: balancing economic growth fueled by foreign investment with the imperative need for environmental protection. This post examines the often-overlooked environmental provisions within ASEAN investment agreements, particularly the ASEAN Comprehensive Investment Agreement (ACIA) and plurilateral agreements (with partners). It highlights that although environmental provisions have been increasingly incorporated, their vague or narrow wording does not provide adequate regulatory space for ASEAN Member States to enforce environmental measures. Furthermore, it presents recommendations to address this issue in future treaties, aiming to secure a balanced approach between promoting investment and protecting the environment.
The Need to Address Environmental Concerns in ASEAN’s Investment Agreements
In recent years, the balance between economic development and environmental protection has become a pressing issue for ASEAN countries. Many studies indicate a correlation between foreign direct investment and environmental degradation in several ASEAN countries, including notable increases in carbon dioxide emissions. Public outcry over environmental disasters, such as the 2016 Vietnam marine life disaster caused by a Taiwan-invested steel corporation, has led to large-scale campaigns against the company’s operations. There have also been public protests in Myanmar and Cambodia due to serious concerns over the environmental risks associated with Chinese-invested energy infrastructure projects. This growing environmental consciousness, coupled with ASEAN’s commitment to global initiatives and its pledge under the Paris Agreement, places a spotlight on the need for environmental regulation in the realm of foreign investment.
ASEAN’s Environmental Provisions: Trends and Effectiveness
An analysis of ASEAN investment agreements reveals a trend towards integrating environmental provisions. Of the 15 plurilateral International Investment Agreements (IIAs) of ASEAN, including both the intra-regional ACIA and 14 external plurilateral agreements, nine feature environmental provisions. These provisions fall into four categories: general exception clauses, provisions that preclude non-discriminatory regulation as a basis for indirect expropriation claims, environmental measure exceptions to National Treatment (NT), and provisions on tribunal’s power to request environmental reports in investor-state arbitration. The first three categories address substantive issues, while the fourth category concerns procedural ones, designed to aid tribunals in evaluating environmental evidence without altering the rights and obligations of the disputing parties. Consequently, this analysis will not delve into the fourth category in detail. Moreover, it is noteworthy that the simultaneous use of more than one environmental reference category in an IIA is common. For example, the 2014 ASEAN–India Investment Agreement refers to environmental issues in three separate provisions: general exceptions (Article 21); exceptions to national treatment (Article 3.5); and clauses precluding nondiscriminatory regulation as the basis for indirect expropriation claims (Article 8.9).
These provisions, however, are often vague or narrowly worded, significantly limiting their effectiveness in preserving states’ rights to regulate environmental issues. For instance, general exception clauses, the most commonly used environmental provisions in ASEAN investment agreements, are often modeled after WTO agreements and have been analysed as failing to fully address the nuances of international investment laws. These clauses typically have a Chapeau setting out conditions for adopting exceptional measures, along with a list of exceptional policy purposes. The Chapeau sets a high standard to invoke exceptions, which apply only to non-discriminatory measures that are neither adopted arbitrarily nor used as disguised restrictions on investment. These stringent conditions imply that an environmental measure meeting all criteria is unlikely to contravene IIA treatment principles. This limits the applicability of the general exception clause in the defence of host states in their disputes with foreign investors. Moreover, the exhaustive list of exceptions employed in the provision only covers measures to protect animal or plant life and conserve exhaustible natural resources, which are specific elements of the environment, but may not encapsulate the broader, evolving concept of environmental protection and climate-change related issues (p. 76). Due to such restrictions, there is also concern that general exception clauses may be interpreted as being against states’ interests by narrowing the flexibility in regulating domestic issues that states can enjoy under legal doctrines developed in ISDS case law, such as the police power doctrine.
Apart from general exceptions, other environmental provisions in ASEAN IIAs tend to address environmental issues solely in the context of specific treaty provisions, such as indirect expropriation or the NT principle. However, research by the OCED has demonstrated that environmental measures taken by host states may allegedly breach various IIA provisions. These allegations prominently feature breaches of the fair and equitable treatment (FET) provision, alongside claims of indirect expropriation, direct expropriation, and violations of other provisions such as full protection and security, national treatment, or Most Favoured Nation (MFN) treatment. For example, denying permit extensions for investment projects due to environmental concerns may lead to FET breach claims (see eg Tecmed v Mexico), while the rejection of permits for fossil fuel extraction could result in direct expropriation claims (see eg Lone Pine Resoources Inc v Canada). In addition, following the Netherlands’ cessation of coal-powered energy, investors filed claims against the State for breaching various obligations under the Energy Chater Treaty, extending beyond FET and indirect expropriation, to include breaches of the obligations not to impair investments through unreasonable measures and to ensure constant protection and security. These instances highlight that environmental provisions, when narrowly tied to specific treaty provisions, are inadequate in defending state measures aimed at environmental protection. This further underscore the complex interplay between environmental protection and IIA obligations, highlighting the need for more robust and comprehensive provisions that adequately address the evolving environmental concerns within the ASEAN region.
Strengthening Environmental Provisions in ASEAN Investment Agreements
As previously illustrated, despite the integration of environmental considerations into ASEAN’s IIAs, they fall short of preserving the necessary regulatory space for ASEAN Member States to effectively manage the environmental impacts of foreign investments. The general exception provisions within ASEAN’s IIAs are overly vague and the other types of environmental provisions are narrowly confined to specific obligations within the IIAs, rendering them insufficient in defending environmental measures in investor–State disputes. To strengthen the legal effectiveness of environmental provisions, it is advisable to consider the incorporation of two specific types of environmental language concurrently. The first is to utilise a preambular reference to emphasise the significance of environmental protection in achieving IIAs’ overall objectives. This is one of the most common practices for making environmental references in IIAs, particularly those concluded by Canada, Japan, Turkey and Colombia. Although preambles do not entail parties’ obligations, preambles can be useful in interpreting vague provisions under IIAs, aiding arbitrators in applying the IIA’s ambiguous clauses to environment-related disputes (see e.g. Siemens v Argentina or Eco Oro v Colombia).
The second strategy is to include right-to-regulate provisions in IIAs, a practice increasingly adopted in modern agreements. These provisions, as illustrated by Article 9.16 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), affirm the state’s inherent right to regulate environmental matters, a principle progressively recognised by investment tribunals. By emphasising the state’s right to regulate within IIAs provisions, these clauses aim to ensure that commitments to investment protection do not undermine AMS’s ability to adopt environmental protection measures. This approach also grants a state the discretion to set the levels of environmental regulations it deemed within its national context, aligning with the typical characteristics of ASEAN, where the diversity of members is widely recognised.
However, right-to-regulate provisions are not without their limitations, particularly in terms of guidance on compensation issues. This was notably evident in the Eco Oro v Colombia case, where the tribunal, in a divided and controversial decision, interpreted the environmental provision of the Canada – Colombia FTA (Article 2201(3)) as merely permissive. The article ensured that a Party is not barred from adopting or enforcing environmental measures but did not exempt States from the obligation to compensate for losses resulting from such measures. The tribunal suggested that if the Contracting Parties had intended for Article 2201(3) to allow for regulatory actions without liability for compensation, they would have articulated this intention more explicitly. This case serves as a practical examination of the effectiveness of right-to-regulate provisions and urges states to meticulously draft these clauses in their IIAs.
Despite these challenges, a well-constructed right-to-regulate provision can significantly enhance its legal significance. ASEAN States might draw inspiration from from the 2019 Model BIT of the Belgium-Luxembourg Economic Union (Article 1), which which directly addresses the potential conflict between domestic environmental regulations and obligations under IIAs or the 2019 Investment Protection Agreement between the EU and Vietnam (EVIPA) (Article 2.2), which connects the right to regulate with the authority to modify or introduce environmental laws and regulations. Furthermore, Draft Provision 12 on the ‘Right to Regulate’ discussed in UNCITRAL Working Group III represents an ambitious approach. It not only requires tribunals to accord a high level of deference to the international law principle that grants States the right to regulate in the public interest but also seeks to exclude from investor–State arbitration any claims against measures enacted by states for environmental protection.
Conclusion
The integration of environmental provisions in ASEAN investment agreements represents a step towards sustainable development. However, their current form—vague or narrowly focused—limits their effectiveness in preserving the state’s right to regulate environmental issues. As ASEAN continues to attract foreign investments, ensuring these do not compromise environmental integrity is imperative. Future agreements should adopt a more robust and comprehensive approach to balance economic development with environmental sustainability effectively. This post suggests two recommendations for AMS to consider. First, including environmental references in the preambles could serve as an essential interpretive tool for arbitrations, especially in resolving environment-related disputes. Second, incorporating a right-to-regulate clause would ensure that IIA commitments do not compromise the legitimate right of AMS to adopt and enforce domestic environmental regulations. However, employing these provisions entails risks and demands careful drafting, underscoring the importance of learning from tribunals’ pratical interpretations in real-world cases, as well as from ongoing efforts in IIA modernisation and reform.
Kim-Anh Dao is a Lecturer in Law at the Law Faculty of Foreign Trade University (FTU) in Hanoi, Vietnam. She earned her bachelor’s degree in law from Foreign Trade University and her master’s degree in business law from the University of Adelaide, Australia. Currently, she is pursuing her Ph.D. in international law at Korea University. Her research interests include international investment law, ASEAN law, and international dispute resolution. Prior to joining FTU, she served as an in-house legal counsel at VinGroup, a leading multi-sector corporation in Vietnam, where she advised on commercial contract negotiations and investment projects. She can be contacted at anhdk@ftu.edu.vn.
This blog post was adapted from her article in the Journal of East Asia and International Law, ‘Environmental Provisions in ASEAN Investment Agreements: Reserving Member States’ Right to Regulate Environmental Issues‘.