ESG and investment treaties in Africa: a new substantive standard?

1 Introduction: today’s ESG standards

The foundation of the current ESG framework can be traced back to the Earth Summit held in Rio de Janeiro in 1992, where a coalition formed by political leaders, scientists, and non-governmental organisations sought to develop a global action plan focusing on the impact of human socio-economic activities on the environment.

The principles laid down by the Earth Summit have been pivotal in shaping the current ESG standards. The ESG framework now comprises a robust system of domestic and international laws, regulations, and soft-law instruments that are fundamental to sustainable and ethical business conduct.

Whether driven by legal obligations, reputational concerns, and/or financial benefits, the corporate sector has actively embraced the shift towards sustainability, with companies increasingly integrating ESG criteria into their business models and investment strategies. Their additional concerns include combating climate change (mitigation and adaptation), the safeguarding of the environment, human and labour rights (including within companies’ supply chains), and the avoidance of harmful business practices.

The ESG ecosystem has profound implications for international investments in developing and low-income countries, especially in Africa. With abundant natural resources, a need for sustainable development, susceptibility to climate change, and manifold social challenges, this unique and pressing set of circumstances needs to be tackled by local governments, with the support of developed countries and international investors.

The most recent example of this cooperation is the European Parliament’s consent to the ratification of the first sustainable investment facilitation agreement (SIFA), between the EU and Angola, which is expected to enter into effect shortly. Angola ranks as the EU’s sixth-largest African investment destination, having attracted 7% of the EU’s foreign direct investment in the continent with a total of €14.1 billion in 2021.

2 ESG clauses in international investment agreements

Bilateral investment treaties (BITs) and investment chapters included in plurilateral, regional, inter-regional, or, more broadly, multilateral preferential trade agreements are generally accepted as the most important instruments for the international protection of foreign investments. Dating back to 1959, when the first BIT was concluded between Germany and Pakistan before its entry into force in 1962, BITs have been regulating the treatment of foreign investment, providing a series of guarantees and protections for investors of one contracting state on the territory of the other contracting state.

In the 1960s, the highest number of BITs worldwide were signed by African countries, predominantly partnering with developed nations, according to the United Nations Conference on Trade and Development’s database on BITs. This trend has been consistently upheld, with a steady stream of investment treaties signed over the years, reflecting Africa’s enduring commitment to fostering a conducive atmosphere for foreign investment.

Fast forward over half a century, and the landscape of international investment agreements (IIAs) has evolved significantly, with more than 2,800 treaties signed globally as at 2022.

Reflecting contemporary concerns, many investment treaties signed by African states now include ESG-related clauses. These provisions vary widely, from preamble language that frames the importance of ESG factors to jurisdictional clauses that delineate the treaty’s applicability to ESG issues. They also encompass substantive obligations that clearly define the ESG duties of the contracting parties, and institutional arrangements empowering designated joint committees to consider and interpret ESG standards.

In October 2023, the ESG Subcommittee of the International Bar Association’s Arbitration Committee published a study on “ESG obligations in investment treaties” in its Report on use of ESG contractual obligations and related disputes, which examined ESG clauses within investment treaties. Data from the IIAs involving African countries reveals that the earliest text incorporating an ESG clause dates back to 2008. In its model BIT, Ghana not only included ESG principles in its preamble but also stipulated that investors shall comply with the labour, health, and environmental laws and regulations of the host state. The model BIT also presented an environmental carve-out for non-discriminatory measures taken by a host state, which prevents investors from arguing over indirect expropriation of investments affected by such measures.

Following Ghana’s lead, countries such as Benin, Nigeria, Senegal, and Morocco have signed BITs or incorporated clauses in their model BIT containing similar substantive ESG obligations.

Despite their varied wording, these substantive clauses consistently convey three key points:

• Foreign investment should not be encouraged through the relaxation of domestic health, safety, or environmental measures;
• Investors are encouraged to voluntarily embrace internationally recognised corporate social responsibility standards that encompass labour, environmental, human rights, community relations, and anti-corruption practices; and
• States maintain their autonomy to regulate ESG-related matters, which effectively exempts certain state actions from triggering the state’s investment protection duties under the treaty.

This last exception typically includes caveats, stipulating that the state’s measures must be necessary and non-arbitrary.

The Nigeria–Morocco BIT, signed in 2016 but not yet in force, is an example of a treaty containing stringent operational ESG standards for investments. These include the establishment of an environmental management system, adherence to human rights in the host state, compliance with core International Labour Organization standards, and, in some cases, a requirement to obtain certification equivalent to ISO 14001.

The treaty also aims to prevent investors from circumventing international environmental, labour, and human rights obligations.

Notably, the Moroccan model BIT, adopted in 2019, not only enshrines these ESG obligations but also introduces a requirement for foreign investors who wish to resolve their investment disputes through arbitration: the treaty bars investors from bringing investment claims if it is found that the investment was made through some form of corruption.

Lastly, the pioneering SIFA ratified in March 2024 between the EU and Angola sets out a framework for sustainable investment and mutual development between the parties, encompassing:

• A commitment to uphold environmental and labour laws and standards, without diluting, derogating from, or waiving them with the purpose of attracting foreign investment;
• A commitment to the effective enforcement of international labour and environmental treaties, including the Paris Agreement;
• The promotion of corporate social responsibility and responsible business practices; and
• The strengthening of bilateral cooperation on investment-related aspects of climate change and gender equality.

While the SIFA explicitly indicates that it neither creates nor modifies rules on the protection of established investors in the territories of the parties, or of their investments, or on investor–state dispute settlement (ISDS), its implementation is expected to streamline the process for attracting and expanding sustainable investments in Angola by facilitating the establishment and day-to-day operation of businesses for European investors.

3 Investors and ESG clauses: a new substantive standard?

SDGs, Targets, and Indicators in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 8: Decent Work and Economic Growth
• SDG 12: Responsible Consumption and Production
• SDG 13: Climate Action
• SDG 16: Peace, Justice, and Strong Institutions
• SDG 17: Partnerships for the Goals

2. What specific targets under those SDGs can be identified based on the article’s content?

• Target 8.8: Protect labor rights and promote safe and secure working environments for all workers
• Target 12.6: Encourage companies to adopt sustainable practices and integrate sustainability information into their reporting cycle
• Target 13.2: Integrate climate change measures into national policies, strategies, and planning
• Target 16.3: Promote the rule of law and ensure equal access to justice for all
• Target 17.16: Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Indicator 8.8.1: Frequency rates of occupational injuries, by sex and migrant status
• Indicator 12.6.1: Number of companies publishing sustainability reports
• Indicator 13.2.1: Number of countries that have integrated climate change measures into national policies, strategies, and planning
• Indicator 16.3.1: Proportion of victims of violence in the previous 12 months who reported their victimization to competent authorities or other officially recognized mechanisms
• Indicator 17.16.1: Number of countries reporting progress in multi-stakeholder development effectiveness monitoring frameworks that support the achievement of the sustainable development goals

SDGs, Targets, and Indicators Table

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Source: iflr.com

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