ISDS’s Effect on Impact Investing: A Barrier to a Burgeoning Industry?

Discussion on the drawbacks of the current Investor-State Dispute Settlement (ISDS) regime are prolific and well-documented.[1] There has been little scholarship thus far on the effects of ISDS on the impact investment industry. Yet, it would be reasonable to find that the ISDS shadow is holding some states back from taking the necessary steps to spur domestic impact investment.

International investment is primarily governed by around 3,300 bilateral and regional investment agreements.[2] States enter into these agreements to catalyze foreign investment, and with that goal in mind, investors are typically given the right to bring a case against the state through ISDS arbitration if the investors’ treaty rights have been infringed.[3]

These provisions make foreign investors more confident that they would be given adequate recourse in the face of a dispute, especially in states with less robust legal regimes.[4] Investors can often bring a case via ISDS if the host state treats the investor unfairly, expropriates their investment, or acts contrary to the investor’s legitimate expectations about the investor’s future business activities.[5] Some arbitral tribunals have found too that a state would be prohibited from regulating in a way that negatively affected the investor’s bottom line.[6]

Parties can rarely be certain about what the outcome of an ISDS proceeding will be in advance. Different arbitrators are appointed for each case, and the arbitrators are not bound by precedent.[7] In fact, even when parties have agreed on the interpretation of a specific treaty provision, a tribunal has found the provision to have a different meaning than the parties’ understanding.[8] Moreover, if a party disagrees with the ruling, there is no opportunity for appeal even if the tribunal applied the law improperly or misunderstood the facts of the case.[9]

Lastly, these proceedings are expensive. Successful claimants are frequently awarded hundreds of millions of dollars, and even when a party prevails, they are still responsible for the proceeding’s fees, which average around $13 million U.S. dollars between both parties.[10] These costs would constitute a significant portion of many lower- and middle-income states’ budgets.[11] Concerns about going through this opaque and expensive process might be holding some states back from implementing the reforms needed to bolster the impact investment industry, even when the reforms would not violate any of their existing treaties.

Impact investing broadly describes when an investor invests with the intention of producing a positive social or environmental impact.[12] It is fiscally similar to standard investing in that there is still the expectation of a return.[13] Yet, with impact investing, the investor is choosing to receive that return from a business dedicated to generating societal benefit.[14] Many are excited about the potential of impact investing to breathe new private capital into initiatives that the public sector on its own lacks the means to fund.[15]

However, states’ existing legislation is not always amenable to these kinds of investments.[16] For example, there might be laws restricting the types of institutions investors can invest in or that prevent certain social enterprises from receiving impact investment funds.[17] Investors cite regulatory hurdles like these as key barriers to impact investments making up a greater portion of their portfolios.[18]

Additionally, catalyzing the impact investing industry often requires providing incentives to those who see impact investing as riskier than a standard investment.[19] For instance, the United Kingdom introduced its Social Investment Tax Relief in 2014, giving a 30 percent deduction to investors who made qualifying impact investments.[20] This is in line with the National Advisory Board on Impact Investing’s advice to the United States Congress that it should lower corporate tax rates for impact investments or allow impact investors to write off losses as charitable tax deductions.[21]

Yet, it is easy to imagine some states hesitating before changing their investment laws or enacting incentives akin to the United Kingdom’s Social Investment Tax Relief out of concern that the measures would violate an existing investment treaty. There is evidence too that regulatory reticence might be greatest in developing states. Scholars have found that even when the state was successful in an ISDS proceeding, a developing state delayed implementing reforms related to that case long after the ISDS proceeding ended.[22] The same was not true in developed states.[23]

Given the inadequacy of public financing to achieve the world’s social and environmental goals,[24] the global community should be clearing the path for impact investments to the greatest extent possible. ISDS could be a barrier to impact investment that is not being discussed enough. It is necessary to find a solution where the investor knows that they can receive adequate recourse in the face of a dispute, that does not infringe on current investors’ rights, and that gives states the confidence they need to open up the impact investing market. Whether reform is accomplished through UNCITRAL’s current efforts or through another international body,[25] finding a solution to these concerns could have widespread ripple effects in every sector that could use greater private funding.

  1. See e.g., Lauge N. Skovgaard Poulsen & Geoffrey Gertz, Reforming the Investment Treaty Regime: A ‘Backward-Looking’ Approach (Mar. 17, 2021),; Columbia Ctr. on Sustainable Inv., Primer on International Investment Treaties and Investor-State Dispute Settlement 4 (2021); Aaron Cosbey, Can Investor-State Dispute Settlement Be Good for the Environment?, Int’l Inst. for Sustainable Dev. (Apr. 12, 2017),
  2. Columbia Ctr. on Sustainable Inv., supra note 1, at 2.
  3. Id. at 2­–3.
  4. See Deborah Burand, Resolving Impact Investment Disputes: When Doing Good Goes Bad, 48 Wash. Univ. J. L. & Pol’y 55, 76 (2015).
  5. Columbia Ctr. on Sustainable Inv., supra note 1, at 3.
  6. Cosbey, supra note 1.
  7. Columbia Ctr. on Sustainable Inv., supra note 1, at 6.
  8. Id.
  9. Id. at 8.
  10. Id. at 7–8.
  11. Id. at 7.
  12. What You Need to Know About Impact Investing, Glob. Impact Investing Network, (last visited Mar. 26, 2023); Anna Katharina Höchstädter & Barbara Scheck, What’s in a Name: An Analysis of Impact Investing Understandings by Academics and Practitioners, 132 J. Bus. Ethics 449, 449 (2015).
  13. Glob. Impact Investing Network, supra note 12.
  14. Id.
  15. See e.g., Eur. Parl., Social Impact Investment: Best Practices and Recommendations for the Next Generation 9 (2020).
  16. See OECD, Social Impact Investment: Building the Evidence Base 47 (2015).
  17. See Eur. Parl., supra note 15, at 30.
  18. See e.g., The U.K. Dep’t for Work & Pensions, Growing the Social Investment Market: Update on SIFI Social Investment 20, 37 (2016).
  19. See OECD, supra note 16, at 47; Burand, supra note 4, at 85 (outlining the challenges investors face in the nascent impact investing industry). Many also argue that tax incentives should be provided to the social enterprises receiving the funding. See e.g., Gabriel A. Huppé & Mariana H. Silva, Overcoming Barriers to Scale: Institutional Impact Investments in Low-Income and Developing Countries 27 (2013).
  20. Information About SITR for Individual Investors, Get SITR, (last visited Mar. 26, 2023); OECD, supra note 16, at 48.
  21. Michael Etzel, New Regulations Boost Social Impact Investing, Stanford Soc. Innovation Rev. (Dec. 17, 2015),
  22. Carolina Moehlecke, The Chilling Effect of International Investment Disputes: Limited Challenges to State Sovereignty, 64 Int’l Stud. Q. 1, 2 (2020).
  23. Id. The chilling effect of ISDS proceedings varies among states within economic echelons. For example, Berge & Berger have found that the greater a state’s bureaucratic capacity, the more an ISDS proceeding will chill the state’s regulatory behavior. Tarald Laudal Berge & Axel Berger, Do Investor-State Dispute Settlement Cases Influence Domestic Environmental Regulation? The Role of Respondent State Bureaucratic Capacity, 12 J. Int’l Disp. Settlement 1, 25 (2021).
  24. See Eur. Parl., supra note 15, at 9.
  25. See UNCITRAL, Rep. of Working Group III (Investor-State Dispute Settlement Reform) on the Work of Its Forty-Fourth Session, U.N. Doc. A/CN.9/1130 (2023).