This November will see an African country – Egypt – assume the COP presidency, when it hosts COP-27 in Sharm El Sheikh. This will provide a particularly timely reminder of the pressing need to develop and implement effective policies in Africa to tackle climate change, and serve as a prompt to governments (both in Africa and the wider world) to take concrete measures to protect the environment.
At the same time, however, there also remains the urgent need for further energy and infrastructure development in Africa, and the need for foreign direct investment to support it. While it is hoped that such needs can be reconciled with the imperative to take action to address climate change, there is the potential for tensions to arise. This is certainly evident in the field of investment protection.
Investors responsible for the substantial, and still growing, foreign direct investment in Africa often seek the support of the legal protections afforded by the network of over 500 investment treaties involving one or more African countries which are currently in force. Investment treaties not only require host States to afford certain protections to foreign investments, but they importantly also create an effective mechanism for investors to bring claims against governments directly before investment tribunals, in the event that those protections are breached.
But what exactly are investment treaties? And how can foreign investors benefit from the legal protections laid down in investment treaties, especially at a time when governments are increasingly tightening environmental regulations in response to climate change concerns?
What are investment treaties?
An International Investment Agreement – IIA – is a type of treaty concluded between two or more States that addresses issues relevant to cross-border investments, usually for the purpose of the promotion, regulation and protection of foreign direct investment.
IIAs bind contracting host States to afford certain standards of protection to foreign investors – either companies or individuals. These standards include protection against expropriation, commitment to provide fair and equitable treatment and full protection and security, as well as guarantees of non-discrimination vis-à-vis nationals of the host State and foreign nationals from other States.
IIAs can be divided into two broad categories: (1) treaties between two States that deal with the protection and promotion of investments – i.e., Bilateral Investment Treaties – BITs; and (2) other Treaties with Investment Provisions – TIPs – involving two or more States—mainly multilateral treaties—that address additional matters such as Free Trade Agreements. The great majority of IIAs are BITs.
How can investors operating in Africa benefit from investment treaties?
A distinctive feature of IIAs is the presence of dispute resolution mechanisms, offering a means to investors to enforce the standards of protection granted under those treaties. Most BITs (and some TIPs, such as the Energy Charter Treaty – ECT) confer on foreign investors the right, if protections are breached, to bring legal proceedings against the host State – directly – before an investment tribunal.
These investment tribunals can take many different forms. However, the standard dispute settlement clause in a BIT usually allows an investor to bring a claim before an investment tribunal constituted under the auspices of the World Bank’s International Centre for Settlement of Investment Disputes – ICSID – or in accordance with the arbitration rules of an international arbitral institution.
Since the first ICSID case involving an African State in 1993, there have been more than 150 Africa-related investment disputes. African countries currently account for more than 25% of respondent States in all investment treaty cases registered before ICSID.
The impact of environmental and climate-change-related policies in investment disputes
Traditionally, investment treaty arbitration in Africa has centred on sectors such as construction and infrastructure, mining, and oil and gas. Projects in these areas are particularly sensitive and susceptible to environmental issues.
With growing levels of concern about climate change and energy transition globally, it is expected that “green” measures, aimed at tackling climate change, will increasingly be adopted by African States. This is anticipated to be an area where a tension between the protection of investors on the one hand, and the power of States to regulate and uphold policies in accordance with international directives on the other, may arise.
This has already been observed in certain countries outside Africa, where governments have found themselves being sued by foreign investors in the wake of adopting “green” measures. Germany, Spain, Canada and the Netherlands serve as examples; each has recently enacted bills to accelerate energy transition and to meet international commitments—for example, by banning the mining of certain chemical elements (e.g., uranium), by abandoning the use of certain types of energy (e.g., nuclear) and by decommissioning power plants that burn fossil fuels (e.g., coal and natural gas).
For instance, the 2015 Paris Agreement led the Netherlands to pass a law in 2019 prohibiting the use of coal in the production of electricity; since then, at least two foreign investors have brought investment arbitrations against the Netherlands, claiming that their investments have been negatively impacted as a consequence. The relationship between international investment law and climate change measures is also apparent in the numerous renewable energy disputes that have been brought against Spain, Italy and Czech Republic under the ECT.
While no African country is a signatory of the ECT – which explicitly identifies the goal of enhancing investment in renewable energy and recognises the challenges of climate change – a number of recent African BITs have expressly addressed environmental concerns, with a view to alleviating the aforementioned tensions. For instance, the Nigeria-Morocco BIT (2016) allows host States to regulate and enforce environmental laws without constituting a treaty breach.
What should investors do?
There is a long way to go before the global economy completes the switch away from fossil fuels to sustainable and environmentally friendly energy sources – this is true in Africa as much as anywhere else. The need for this transition is, however, pressing. In the meantime, investors will be concerned to ensure that the transition takes place in a manner which protects investments, and respects the international commitments given by States in relation to them.
While existing IIAs may confer protections, investors should be aware that States are under increasing pressure – and are indeed subject to new international obligations in the wake of the Paris Agreement – to reshape their environmental regulations. Going forward, we may increasingly see provisions in IIAs exempting States from liability if a governmental act (which may in other circumstances give rise to a treaty breach) was taken for environmental purposes, along the lines of the provisions in the Nigeria-Morocco BIT (2016).
The line between respecting investment protections and preserving States’ right to regulate (especially on climate issues) is an increasingly a fine one, and it will require careful navigation in the years to come.
Kwadwo Sarkodie and Rachael O’Grady are partners and Marcelo Richter is an associate at Mayer Brown International LLP.