Investment Treaties as a Risk Allocation Tool

This policy brief by the International Institute for Sustainable Development (IISD) argues that international investment treaties should be reframed as public risk allocation instruments rather than merely legal tools. The authors contend that these treaties function as unpriced public insurance, shifting political and regulatory risks from private investors to host states, often without the safeguards or pricing mechanisms found in other de-risking tools. The brief recommends a systemic evaluation of treaties alongside other risk-transfer mechanisms to better align investment governance with public interest goals, particularly regarding climate transitions and sustainable development.

• Investment treaties function as a form of unpriced public insurance that reallocates political and regulatory risks from foreign investors to host states, often without requiring premiums, performance benchmarks, or prior vetting.
• Unlike other de-risking instruments such as export credit arrangements or development finance institutions, most investment treaties lack embedded safeguards for human rights, environmental sustainability, or policy coherence.
• The Investor-State Dispute Settlement (ISDS) mechanism converts political risk into significant financial liabilities, with damage awards that can be viewed by bond markets and credit rating agencies as contingent fiscal liabilities, particularly impacting developing countries.
• There is a risk of 'double recovery' or strategic arbitrage because investment treaties can overlap with other risk-mitigation tools, such as political risk insurance or contractual stabilization clauses, allowing investors to claim compensation from multiple sources for the same event.
• The brief recommends that policy-makers assess investment treaties as part of a broader risk governance strategy, terminating or revising those that duplicate other tools and integrating financial impact and distributional analyses into treaty reform.

APA

Ostřanský, J., & Schaugg, L. (2025). Investment Treaties as a Risk Allocation Tool. International Institute for Sustainable Development. https://www.iisd.org/system/files/2025-07/investment-treaties-risk-allocation-tool.pdf

Chicago

Ostřanský, Josef, and Lukas Schaugg. Investment Treaties as a Risk Allocation Tool. International Institute for Sustainable Development, 2025. https://www.iisd.org/system/files/2025-07/investment-treaties-risk-allocation-tool.pdf.

Wikipedia

{{cite report |last1=Ostřanský |first1=Josef |last2=Schaugg |first2=Lukas |title=Investment Treaties as a Risk Allocation Tool |publisher=International Institute for Sustainable Development |date=July 2025 |url=https://www.iisd.org/system/files/2025-07/investment-treaties-risk-allocation-tool.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{ostansk2025investment, author = {Ostřanský, Josef and Schaugg, Lukas}, title = {{Investment Treaties as a Risk Allocation Tool}}, institution = {International Institute for Sustainable Development}, year = {2025}, month = jul, url = {https://www.iisd.org/system/files/2025-07/investment-treaties-risk-allocation-tool.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }