Investment Treaties as a Risk Allocation Tool

The document argues that investment treaties function as 'unpriced public insurance' that shifts political and regulatory risks from private investors to host states. Unlike other de-risking tools like political risk insurance or blended finance, treaties often lack pricing mechanisms, performance benchmarks, or environmental and human rights safeguards. This creates an asymmetrical regime where host states face substantial downside risks and contingent fiscal liabilities, which can be exacerbated by large investor-state dispute settlement (ISDS) awards. The authors recommend that policy-makers assess treaties alongside other risk-allocation tools, terminate redundant agreements, and coordinate across finance ministries and development banks to prevent 'double recovery' and ensure transparent risk sharing.

• Investment treaties operate as a form of public insurance that transfers political and regulatory risks from foreign investors to host states without requiring premiums or performance benchmarks.
• Unlike other de-risking instruments such as export credits or political risk insurance, investment treaties generally do not include safeguards for human rights, environmental sustainability, or policy coherence.
• The investor-state dispute settlement (ISDS) system converts political risks into financial liabilities, with damage awards often including speculative future income, which credit rating agencies may view as contingent fiscal liabilities for developing countries.
• There is a risk of 'double recovery' or strategic arbitrage when investment treaties are layered over other risk-mitigation tools, such as political risk insurance or contractual stabilization clauses, for the same risk event.
• Investment treaties create a public subsidy because they provide enforceable compensation to investors without a pricing mechanism, unlike public guarantees or insurance schemes.

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} }