In evaluating the investor state dispute settlement (ISDS) system, and the numerous reform proposals circulating, it is worth remembering that the entire history of ISDS is quite recent. Almost all concluded cases have been decided in the last fifteen years.Footnote ¹ And even within the last ten years, there have been notable changes in the types of cases that are brought, the size of damages both claimed and awarded, and tribunals’ interpretations of key provisions. So current discussions about reform are a timely and appropriate stock-taking of the ISDS mechanism, and whether its use has met the aims and objectives of the system, and with which outcomes and impacts.

As the number of cases has increased and more states have faced disputes, we have seen a corresponding increase in concern about both the procedural aspects and the substantive effects of ISDS, from a wide array of stakeholders that includes states, investors, counsel, arbitrators, and the public. This growing concern has indeed driven some reforms, of both international investment agreements (IIAs) themselves, as well as the rules that govern disputes. In terms of the treaties, these reforms, where implemented, have taken the form of narrowed scopes of protections, joint interpretive statements, more explicit right to regulate provisions, and more filter mechanisms and exclusions that narrow the jurisdiction of arbitrators. Some states have determined that ISDS—at least in its current form—is itself contrary to the national interest, or has led to outcomes that are, so have taken steps to terminate their treaties altogether.

Meanwhile, several of the arbitral institutions have focused on procedural reforms to ISDS, revising or working to revise their rules and governing framework. Most notably, the UN Commission on International Trade Law (UNCITRAL) amended its rules to make disputes more transparent,Footnote ² and several institutions have attempted to address concerns around arbitrator conduct and conflicts, non-party submissions, controlling costs, and other procedural concerns.

Several other multilateral fora have also become focal points for discussions of reform: the UN Conference on Trade and Development (UNCTAD) has its roadmap for reform,Footnote ³ the Organisation for Economic Co-operation and Development (OECD) has supported governments’ critical analysis of how the system has been used and of the costs and benefits of ISDS,Footnote ⁴ and now UNCITRAL has undertaken a substantial mandate to assess the problems with ISDS and how they could be addressed.Footnote ⁵

In order to contextualize and assess these various reform processes and proposals, it is advisable to take a step back to consider the original objectives of ISDS and IIAs more generally, and to evaluate reform efforts against the features and objectives of the system as a whole.

First and foremost, IIAs are premised on the idea that investment flows contribute to economic development. Even the earliest treaties recognize this; the first bilateral investment treaty (BIT) between Germany and Pakistan in 1959 explains in its preamble that the parties entered into the agreement based on an understanding that it was “likely to promote investment … and to increase the prosperity of both the states.”Footnote ⁶ The primary objective of investment treaties is not to protect or promote investment as an end goal, but rather as a means to provide for economic development. This is an important distinction to make and premises the value of IIAs on the assumption that granting certain protections to foreign investors will increase the quantity and quality of foreign direct investment (FDI), which will in turn provide for the ultimate economic development of both states.

Other oft-stated objectives of IIAs include the depoliticization of conflicts between home and host countries, the promotion of good governance reform, and strengthening of the rule of law, particularly in host states.Footnote ⁷

Therefore, a basic starting point for critically evaluating the current system and considering reforms is to evaluate whether these objectives are being met. Notably, the extensive empirical and anecdotal evidence about whether IIAs have promoted new investment—or are a significant consideration for investors in making an investment—is inconclusive at best.Footnote ⁸ In contrast, treaties may shape how investors structure investments that would or are already being made, especially as law firms are advising clients to structure investments to benefit from treaty protections.Footnote ⁹

We also now recognize that not all investment contributes to development. While foreign investment is critical to meeting development needs, many investments have major social and environmental impacts, and/or have no development benefits in the host country; the extent to which an investment contributes to a host country's development depends entirely on the type and activities of the investment, on the laws and policies in place to realize those benefits and mitigate harms, and on the tools that governments have to implement those.

So as a starting point, one could say that at least the important goal of attracting more and better quality investment to achieve sustainable development is not necessarily being met through these treaties and ISDS, and certainly needs to be approached with more nuance.Footnote ¹⁰

The ability of ISDS to deliver on the other goals is similarly unclear. With respect to depoliticizing disputes, evidence shows that having a treaty with ISDS does not seem to influence whether or not an investor's home state is likely to place diplomatic pressure on—or take adverse diplomatic action against—the host state in connection with an investor-state dispute.Footnote ¹¹ And in terms of strengthening rule of law: ISDS removes disputes from domestic legal and administrative systems, limiting their ability to strengthen and develop domestic law, particularly regarding the very important and sensitive balance between private rights and public responsibility and/or sovereignty.

Proponents of ISDS argue, at least in part, that foreign investors are discriminated against—by policymakers and by domestic courts—justifying extra protections for foreign investors and an international means of resolving disputes. One might expect, therefore, that many ISDS cases would be based on either discriminatory conduct on the basis of nationality and/or lack of due process in local courts. But in practice, those two types of cases make up only a tiny fraction of ISDS cases. This is not to say that investors do not face corruption or delays in local courts, but it does not seem from the cases that companies are addressing those concerns through ISDS. And indeed, to the extent that concerns about the local courts are valid, we ought to find better ways to address those insufficiencies, not least because they affect all stakeholders (not just foreign investors) and also because bypassing courts and administrative processes on important policy questions and legal issues has such major consequences and is at the heart of much discontent with the system.

Currently, ISDS appears to be largely used as a system of supranational administrative law for foreigners to secure legal determinations and compensation they otherwise would not, and arguably should not, have been entitled to. Indeed, the root of states’ and others’ increasing concern about ISDS is that a much greater percentage of cases are challenging measures taken in good faith and that may be important from a public policy perspective. Challenged actions include:

• • Regulations to protect the environment or public health, for instance by issuing moratoria on certain types of extractive investments or issuing compulsory licenses for life-saving drugs;Footnote ¹²

• • Revocations of permits or licenses in cases of investor misconduct;Footnote ¹³

• • Measures taken in response to grievances or security threats of local citizens—or measures not taken to protect an investor from a country's citizens;Footnote ¹⁴ and

• • Measures to ensure that host countries benefit from investments, through fiscal or other economic linkages.Footnote ¹⁵

So, not only are the original objectives not being met, but the ways in which the mechanism is being used is in fact undermining the original objective of harnessing investment for development.

A meaningful reform effort should be against the backdrop of the original objectives and further updated for our shared twenty-first century global goals. Investment has a critical role to play in achieving the sustainable development goals, so we should begin by asking ourselves how international treaties can facilitate that contribution. What are the limiting factors impeding the types of investment state parties would want to encourage, or states’ ability to harness benefits and limit harms, and what are the appropriate policy tools for overcoming those limits?

Reforms that just address some of the (albeit not insignificant) procedural critiques of the system—relating, for instance, to cost, conflicts, arbitrator qualification and selection, and participation of third parties—miss this bigger picture, and will likely not resolve the core concerns about ISDS.