Research Handbook on Sovereign Wealth Funds and International Investment Law
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Research Handbook on Sovereign Wealth Funds and International Investment Law

Edited by Fabio Bassan

Research on the role of sovereign investments in a time of crisis is still unsatisfactory. This Research Handbook illustrates the state of the art of the legal investigation on sovereign investments, filling necessary gaps in previous research. Current focus is based on investment flows and trends, grounded in economic scenarios and objectives. Conversely, investigations from a legal standpoint are still few, namely disregarding the host states’ concerns about sovereign investments goals and tools. Hence, most of the many relevant drivers that affect current sovereign investments, be they FDI or portfolio investments, remain unexplained. This book investigates the juridical foundation of sovereign investments and extends our frontier of understanding.
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Chapter 12: SWFs and environmental protection

Francesco Munari


The author analyses the relationship between SWFs and the environment from different viewpoints. Even if in principle much can be said on this topic, so far not much can be observed in practice. This, however, helps the author to outline a series of issues that may well become more and more relevant in the future, clearly depending on the nature of the investments carried out by SWFs or SOEs (portfolio or foreign direct investments). First, there is analysis of how SWFs might be used to improve environmental protection. It is maintained that the surging of SWFs may provide new impetus for a more efficient and modern contribution to environmental protection, not only looking at SWFs as optimal vehicles for SRI, but also considering that SWFs’ investment horizon is generally inter-generational and aimed at maximising returns for future generations, these characteristics being common to the environmental protection principles. Furthermore, SWFs can mobilize and implement resources fostering the environment more efficiently than inter-State development cooperation schemes. In this direction, some practice can be witnessed of SWFs caring about environmental protection in their investment philosophy as well as expressing compliance with international environmental principles, as happens for Norwegian SWFs; additionally, they show an enhanced transparency in respect of environmental issues for the benefit of interested stakeholders, which again is in the direction of ‘greening’ SWFs’ activities. Yet, from the perspective of an institutional investor, the issue concerning the return on capital cannot be omitted: it is pointed out that, according to recent reports, the ROI in ‘green economy’ sectors seems still lower than in other ones, this making less probable a direct synergy between SWFs and the environment. On the other hand, other reports show a growing awareness concerning the investment implications of environmental depletion, and a future diminution of attractiveness for investments in some kind of assets or in some regions due to climate change. It is hence suggested that all these elements should be put together in order to work out best practices aiming at increasing ‘green investments’ by SWFs; to this end, convergences should be implemented with already existing fora and NGOs linking investments and climate change; positive would be also a bolder stance by SWFs to structure their charters and governance rules and investment practices with a view to introducing more clearly environmental protection as a policy or at least a guideline for the SWF concerned. While recognizing that hard law instruments are unrealistic, a more ambitious programme proposed by the author is anyway that of creating a network among SWFs and international (economic and financial) institutions active in environmental protection, such as the World Bank and the GEF, and of trying to connect SWFs’ activities with existing instruments such as payment for ecosystem services (PES) projects, or access-and-benefit-sharing agreements (ABS). Consistently with the Rio+20 results, advocating the involvement of non-State actors for environmental protection, SWFs could also play a role to achieve the goals set out by the UN and its agencies, in particular UNEP, and should be used to implement those strategies: for instance, linking the UNEP Green Economy Initiative (GEI) to the financial and economic resources that SWFs can mobilise. The second part of the chapter investigates the opposite scenario, i.e. whether specific rules are needed to avoid SWFs misusing their powers in a way detrimental to the preservation of the environment. To this end, it is primarily observed that, looking at relevant hard law rules, MEAs and generally environmental treaties are much less focused than IIAs and BITs in respect of both the shaping of precise rights and duties and the establishing of dispute settlement mechanisms. The author, however, contends that the above works prima facie detrimentally for the environment in case of a dispute where an investor’s interests (including an SWF or an SOE) must be balanced with environmental legal standards, arguing that not necessarily investors’ interests prevail in domestic and international environmental law. This said, the following main themes are then investigated: first, whether SWFs and SOEs should be treated differently from other investors, especially in respect of ‘environmental liabilities’ that they may incur; second, whether rules limiting foreign investments for the purposes of protecting the environment exist or should be enacted. In respect of the first issue, it is denied that SWFs and SOEs can be identified as State organs under relevant international legal principles on State liability: therefore, the assessment of a potential State liability for a breach of environmental provisions contained in MEAs or other environmental treaties by either an SWF or an SOE is impossible under international law. This does not exclude that, in given circumstances, an SWF or an SOE might be considered under the ‘effective control’ of a State for the purposes of international State responsibility. The author however points out that, as long as SWFs comply with the GAAP-Santiago Principles, this risk should be excluded from a normative point of view. Yet, in this second scenario, implying a behavioural test, a factual analysis is also required: therefore, in case the activity of a SWF or a SOE may be considered as infringing environmental rules, one should further investigate whether these bodies have in fact carried out their investment as investors or as public authorities, i.e. whether their behaviour has a rationale consistent with “market viz. investment criteria” or with a sovereign policy decision. To this end, useful to this purpose can be the test adopted in the EU legal system to qualify – for instance in State aids – actions by State enterprises or entities as falling or not within some prohibitions EU law establishes in respect of Member States, requiring the State to act as a ‘private investor in a market economy’. Should a breach of international environmental law be ascertained, the sanctions for this should be individuated under relevant provisions of MEAs or, more probably, under the general provisions contained in the Vienna Convention on the Law of Treaties, including, in certain instances, erga omnes liabilities. This said, this theoretical construction has several shortcomings. In this vein, it is suggested that, in order to properly address environmental goals when dealing with SWFs or SOEs as investors specific clauses in relevant IIAs or BITs should be established: the author comments on the existing practice in this field (concerning investors generally considered, and not necessarily SWFs or SOEs), touches upon the possible improvements that should be made in respect of relevant dispute settlement mechanisms, and draws final conclusions on its implications for environmental protection.

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