Introduction
Foreign investment has long been an important policy tool for countries seeking to transform their economies. The international investment regime—comprising treaties and institutions—has supported this objective by creating policies to attract and protect investment. For developing countries, foreign investment plays a particularly crucial role in alleviating poverty, generating employment opportunities, and fostering economic growth. It is also increasingly critical for advancing climate action.
However, this regime presents a double-edged sword. On the one hand, it can channel investment into projects that support the transition to green economies, such as renewable energy and low-carbon infrastructure. On the other hand, its structures and obligations can pose risks that constrain policy space and threaten the very transition it is meant to facilitate. For African countries in particular, navigating this tension has become a defining challenge in aligning investment policy with climate and development goals. In this blog post, I examine how African countries, through institutional innovation, are designing treaties to manage transition risks. I focus on the Investment Protocol of the African Continental Free Trade Agreement (AfCFTA) – hereafter the Protocol – to illustrate how member states have crafted provisions that explicitly address these risks.
Just transition risks
A major point of tension lies in the risk that the investment regime may undermine a just transition. Scholars have increasingly highlighted the threat posed by foreign investors in the fossil fuel sector who are suing governments over climate policies they claim jeopardise their investments. In a landmark study published in Science, Tienhaara et al. estimated that legal claims from fossil fuel investors could amount to as much as US$340 billion. This risk could be catastrophic, as it not only restricts governments’ domestic policy space but also saddles them with substantial financial obligations to foreign investors, especially in the fossil fuel sector.
For developing countries, transition risks are especially acute, as governments must balance the need to attract investment to tackle energy poverty with the imperative of advancing climate action. These risks are compounded by exposure to the powerful investor–state dispute settlement (ISDS) mechanism, which gives foreign investors legal standing to sue states. African countries are no exception. Crucially, the consequences could be catastrophic: ISDS awards can run into billions of dollars, posing a severe challenge for cash-strapped governments in the Global South that already face multiple competing policy priorities. This dynamic could exacerbate the risk of underdevelopment by straining the limited budgets of developing countries, which are forced to balance pressing policy needs with the obligation to pay significant ISDS awards.
Institutional innovation
While much of the debate has focused on diagnosing the transition risks posed by the investment regime—particularly through its ISDS mechanism—less attention has been paid to how governments are creatively addressing these challenges. African countries have sought to address these risks by embedding three key design elements into the Protocol: (i) creating synergies between foreign investment and climate action; (ii) carving out domestic policy space to advance climate action, even where this might otherwise breach the Protocol; and (iii) introducing flexibility through exceptions to key investment rules. I discuss each of these in turn.
To strengthen the synergy between foreign investment and climate action, the Investment Protocol includes a dedicated chapter on sustainable development, with specific Articles on how the investment regime can support climate objectives. Article 26 is particularly significant: it draws on the principle of Common But Differentiated Responsibilities (CBDR), which recognises that African countries have contributed the least to climate change and should therefore act in proportion to their responsibility and capacity. In line with this, the Protocol encourages investment in areas that advance climate action, such as greenhouse gas mitigation, adaptation to climate impacts, climate technology, special economic zones, and related policy measures. By embedding these provisions, the Protocol establishes climate action as a legitimate and integral policy objective of Africa’s investment regime.
Protecting domestic policy space
To directly address the risk of ISDS claims by fossil fuel investors—particularly those framed as indirect expropriation—the Protocol carves out domestic policy space that allows member states to pursue public policy objectives, including climate action, even where such measures might otherwise breach investment rules. Article 20(2) makes this explicit, clarifying that climate policies and related measures do not constitute expropriation. In doing so, member states have created a degree of insulation from ISDS claims based on indirect expropriation—the primary legal threat to a just transition. The fact that such claims have already been filed underscores that this is not only a theoretical but also a practical policy challenge, one that is being actively tracked and documented. By embedding this treaty protection, African member states have provided a measure of security for climate action and the just transition.
A third design element of the Protocol in mitigating transition risks is the flexibility it provides member states to depart from cornerstone rules of the investment regime—National Treatment (NT) and Most Favoured Nation (MFN)—through the use of exceptions. This flexibility is critical because climate action is primarily domestic, and the policies and measures it requires may otherwise contravene investment rules. To enable this, the drafters of the Protocol, through Articles 13(1) and 15(1), exempted climate-related measures from NT and MFN obligations, respectively. For example, the implementation of Nationally Determined Contributions (NDCs) is a domestic process that might necessitate privileging local investors to build domestic supply and value chains, such as in the electric vehicle sector. By carving out this flexibility, the Protocol recognises the practical demands of climate action and protects states’ policy space to pursue it.
Outstanding issues
While the Protocol is designed to serve as the overarching investment treaty, whether it fully addresses transition risks—particularly the threat of ISDS claims by fossil fuel investors—remains an open question. Many African countries have already concluded bilateral investment treaties (BITs) that offer little protection against such claims. It would therefore be valuable for scholars to examine the extent to which the Protocol mitigates these risks, which could prove catastrophic for African governments if they were required to pay substantial awards to foreign investors. Another unresolved issue is whether, and how, the Protocol complements wider efforts to reform the multilateral investment regime in ways that better support climate action. Some scholars have gone so far as to recommend that states reconsider their membership and support of institutions such as ICSID, warning that ISDS mechanisms could obstruct the realisation of a global just transition. What is clear, however, is that African countries have taken a bold step by designing a forward-looking Protocol that—if fully implemented—has the potential to mitigate the potentially catastrophic transition risks posed by the investment regime, especially those arising from ISDS claims brought by fossil fuel investors. It could therefore play a vital role in advancing a just transition for Africa.
