21 September 2023

“Foreign investor diligence”, a new concept to hold investors accountable for damage in host countries

In her PhD thesis in International Law, Alessandra Mistura introduces a new concept, “foreign investor diligence”, as a tool to close the governance and accountability gap associated with foreign direct investment (FDI). To do so, she draws from social norms rooted in sustainable development to design a broad cartography of the standards of behaviour expected from foreign investors implementing FDI in the host state. Then, she identifies avenues to enforce those standards against foreign investors.

It will be increasingly difficult for investors to claim that there are no rules dictating how they should behave in the implementation of FDI. The rules are there; they might just have a social, rather than legal, nature. 

How did you come to choose your research topic?

The choice of the research topic happened quite organically for me. From an academic perspective, I started focusing on sustainability implications of foreign investment during my LL.M., and then again while I was working as a research assistant with the Columbia Center on Sustainable Investment. Afterwards, for a few years, I worked with an US-based NGO – the International Senior Lawyers Project – which provided legal assistance to governments in developing countries dealing with investment and commercial law issues. And there I really had an opportunity to gain a first-hand experience of the terribly detrimental impacts that poorly implemented investment transactions could have for host states, not just from a policy perspective but in very concrete and “human” terms. For example, investment projects that are implemented without taking into account social and environmental concerns might end up damaging communities’ lives, health and livelihoods, with very clear and concrete social costs. In another example, if you’re an under-resourced country with limited budgetary availability, being stuck in a long and costly investment dispute means that you might not have sufficient resources to pay for basic services for your citizens, like healthcare and education. When I started my PhD journey, I already had this very clear objective in mind, which was identifying criteria that could make investment transactions more aligned with sustainable development from the get-go and ultimately help maximising benefits and minimising costs. Of course, there were also multiple conversations with my supervisor, Prof. Jorge Viñuales, and my second reader, Prof. Zachary Douglas, to better frame and narrow down the scope of the research – for example by focusing on a specific investment sector, or how to design the methodology – and I feel their inputs, especially at the very beginning, have been a key factor in ensuring that I could carry out my research as smoothly as possible. 

Can you describe your research questions?

The thesis starts from the consideration that foreign direct investment (FDI) receives in academic literature, where it has produced many different, and often conflicting, narratives. Some see FDI as an essential source of capital for development that can enhance productivity in the host state, create new jobs, and establish spill-over effects through linkages with domestic supply chains and technology transfer. Others, instead, see FDI as detrimental to the host state. Critics note that, when not properly implemented by foreign investors, FDI can produce many adverse environmental, labour, and human rights impacts that ultimately end up curbing the host state’s development efforts. This is particularly true in certain sectors, such as extractives, where FDI projects can produce significant environmental (e.g., deforestation, air and water pollution, land degradation, excessive water usage) and social (e.g., displacement, loss of livelihoods, competing land uses) consequences throughout their lifetime. 

The critiques linked to the foreign investor’s behaviour are significant, as they relate to two main concerns that affect the implementation of FDI transactions. The first is a governance gap, meaning the inability of the existing legal framework to adequately capture and regulate a phenomenon as complex as FDI. The second issue relates to the accountability gap, meaning the lack of effective mechanisms to hold investors accountable for damage caused in the territory of the host state.

Against this background, and looking at the extractive sector, the research introduces a new concept, that of foreign investor diligence, to reconcile the different narratives surrounding FDI and respond to the following questions:

  1. How can we contribute to closing the governance and accountability gaps associated to FDI?
  2. To what extent can the development and application of a new concept of foreign investor diligence be useful to achieve this purpose?

More specifically, foreign investor diligence is an autonomous set of socially expected standards of conduct adopted by a “model” foreign investor in its relationship with stakeholders affected by its FDI activities in the host state to ensure alignment with sustainable development objectives.

How do you go about it, methodologically speaking? 

The definition of foreign investor diligence above ties directly in the methodology that the PhD thesis follows to harness this new concept to close the governance and accountability gap in FDI regulation. Specifically, the thesis follows a pre-eminently sociological approach. It starts from the consideration that, while FDI is an economic phenomenon, it still occurs among certain actors within a broader society – the investor, the host state, its population, and local communities. All of them can be considered an “investment community” that shares expectations and values regarding how FDI should be conducted, and which benefits may be reaped. Therefore, FDI can also be analysed as a specific social phenomenon rooted in certain key values. On this point, the thesis argues that sustainable development has altered how the investment community sees FDI. Sustainable development requires that any form of economic activity is implemented by attributing due regard to social and environmental considerations. As a social value shaping FDI, sustainable development impacts the content of social norms relating to FDI. These social norms embody the shared expectations about the behaviour that is called for in each situation, guiding social action and connoting what is desirable and appropriate for the investment community.

Following this approach, the thesis aims to outline the content and application of foreign investor diligence under two main components. First, it designs a cartography of standards of behaviour applicable to foreign investors in the implementation of FDI transactions in the extractive sector. In particular, the research maps the social norms enshrining standards of expected behaviours relating to FDI to determine the content of foreign investor diligence. Several sources can give rise to these social norms, but the analysis focuses specifically on three of them due to their ability to “codify” social expectations: (i) international instruments enshrining binding and direct obligations for foreign investors; (ii) international soft law instruments targeting corporate actors, and multinational enterprises in particular – since they are the most common form of foreign investors; and (iii) industry-specific standards and business practices. 

The research then looks at the avenues of actionability of the standards enshrined in foreign investor diligence, trying to identify ways to make it “actionable” against foreign investors. To do so, the research first identifies which among the existing judicial and non-judicial mechanisms – at the domestic and international levels – can be used as avenues for the actionability of foreign investor diligence. Then, it examines certain key legal concepts of general application, which can provide good “entry points” that allow foreign investor diligence to be considered within the identified mechanisms.

What are your major findings?

Concerning the first element of the research – that is, the cartography – the research finds that foreign investor diligence may contribute to closing the governance gap affecting the regulation of FDI. There is a significant amount of convergence among existing instruments and standards addressing investors’ behaviour, which – in turn – signals that the expectations imposed on investors are clear. First, there are negative expectations to “do no harm”, i.e., to avoid causing damage during the performance of FDI activities. Second, there are procedural expectations concerning the performance of human rights due diligence, the implementation of environmental and social management systems and impact assessments, and the definition of internal control mechanisms to prevent instances of corruption. Third, an additional category of expectations seems to be emerging regarding the foreign investor’s positive contribution to creating an environment in the host state conducive to sustainable development. Overall, this means that it will be increasingly difficult for investors to claim that there are no rules dictating how they should behave in the implementation of FDI. The rules are there; they might just have a social, rather than legal, nature. 

Concerning the second element – that is, avenues of actionability – the research finds that foreign investor diligence might contribute to closing the accountability gap. However, this potential is much more limited at the moment, as there is no perfect or optimal avenue for actionability. The best option is foreign direct liability litigation, although it has still many downsides (e.g., cases are time-consuming, costly, and require specialised knowledge). However, in the future, current developments in the fields of mandatory human rights due diligence and non-financial disclosure litigation, climate change litigation, and greenwashing litigation may provide additional avenues for the actionability of foreign investor diligence, potentially contributing to closing the persisting accountability gap.

What could be the social and political implications of your thesis?

I do believe this research is very topical and important, especially if we look at ongoing efforts in international fora to identify the sustainability characteristics of FDI. Ultimately, I hope it will provide new insights on standards of sustainability associated with FDI and add something new to the conversations on corporate accountability and the global efforts to recalibrate and re-balance foreign direct investment law. 

What are you doing now?

I am about to relocate to Paris to join the OECD’s Investment Division, where I will focus on the sustainability profiles of foreign direct investment. I really look forward to continuing to build on my PhD research in such a leading institution. 

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Alessandra Mistura defended her PhD thesis in International Law in June 2023. Professor Zachary Douglas presided over the committee, which included Adjunct Professor Jorge Viñuales, Thesis Director, and Professor Elisa Morgera, University of Strathclyde Law School, Glasgow, UK. 
The thesis is available to members of the Graduate Institute on this page of the Institute’s Repository.

Citation of the PhD thesis:
Mistura, Alessandra. “Foreign Investor Diligence: An Actionable Cartography for Sustainable Investment.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2023.

Banner image: Deemerwha studio/
Interview by Nathalie Tanner, Research Office.