Sustainable development and sustainable development goals (SDGs) are gradually acquiring prominence beyond the realm of political discourse. Their express inclusion in recent international investment agreements (IIAs) is one example of this progressive change. According to those IIAs, foreign direct investment (FDI) is expected to contribute to sustainable development and the fulfilment of the SDGs. 

Since the adoption of the SDGs in 2015, around 224 IIAs have been concluded; nearly a third (31%) of those include provisions that address the SDGs directly. Some make it a pre-requisite of FDI that it contributes to sustainable development. Moreover, the importance of FDI to sustainable development was noted in the 2019 UN Global Sustainable Development Report, which recognised that increased national public spending alone would not be sufficient to achieve the SDGs and that private investment, including FDI, is crucial. 

Parallel to this trend, however, has been an expansion of investment screening laws and regulations around the globe. For example, the US passed the Foreign Investment Risk Review Modernisation Act in 2018 and the UK’s National Security and Investment Act came into force in January 2022. These laws have broadened the concept of national security and the range of sensitive sectors that require a request for approval for FDI. The energy and data infrastructure sectors now feature alongside more traditional areas, such as defence production.

In Australia, even agriculture has been designated as a sector protected in this way. The recent EU FDI Screening Regulation (Regulation [EU] 2019/452) of March 2019 aims at coordinating member states’ screening based on policy criteria of security and public order. Public health also features in the broader grounds for screening.

In light of COVID-19, some countries have raised their regulatory shield to prevent so-called ‘predatory buying’ of domestic assets of strategic importance, particularly of health infrastructure, by foreign investors. In this context, the EU has encouraged its member states to deploy their existing FDI screening mechanisms or, if they have none, to create them. India has also introduced restrictions to fend off acquisitions of its companies in defence, space and atomic energy.

The tendency to expand the notion of national security to include national interest and economic security is thus moulding new broader FDI screening regimes focused on more general considerations of an economic public order. 

These regimes will almost certainly have practical effects. So far, the most prominent examples of blocked FDI relate to defence or high technology, but the production of renewable energy is a further area in which governments have become more active in blocking investment. In 2012, US president Barack Obama stopped Ralls Corp, a US company that had been installing wind turbine generators made in China by the Sany Group, from building wind turbines close to a US Navy site on grounds of national security concerns. Ralls, which had four wind farm projects, challenged this decision through the courts, but the case was settled with the US government approving two new Sany windfarms generating 20 megawatts of wind power.

Last year, the US state of Texas, which has its own electric grid, blocked plans by Sun Guangxin — a Chinese billionaire who wanted to build a 15,000-acre wind farm — on national security grounds. The farm would have included 46 turbines near the US–Mexico border, and near Laughlin Air Force Base. In a similar vein, in 2016 the Australian Government blocked the sale of a 50.4% stake in Ausgrid, the country's biggest energy grid, to two Chinese companies on national interest grounds. 

Similar concerns were recently raised in Sweden where the government submitted a proposal suggesting tightening the rules for foreign purchases of Swedish assets against a backdrop of hundreds of millions of euros pouring into Swedish wind farms from the Chinese state-owned China General Nuclear Power Group.

In so far as the EU’s expansion of its screening regime is concerned, it will not only affect EU member states, but also countries that aspire to EU membership, such as Albania or Serbia. Such countries are expected to harmonise their laws with the EU regulatory framework as a condition of accession. That may cause a contraction in the FDI they receive in the mining, oil and green-energy sectors. 

These developments demonstrate a potential tension brewing between the increased prominence of sustainable development. This includes, among other things, access to affordable reliable, sustainable and modern energy for all as elaborated by SDG7 and the widening of the scope for refusing admission of FDI. The expansion of screening may also prove excessive and unnecessary, bearing in mind that once an investment is made, the host country retains the right to take measures at any time during the lifespan of that investment if it becomes apparent that it has become a threat to essential security or national interests. States have a sovereign right to regulate and a threat to national security is an established basis for intervening which is increasingly expressly incorporated in IIAs.  

Where does that leave sustainable development? Since the enhancement of screening rules is a relatively recent occurrence and the majority of the cases are typically resolved behind closed doors, it will take time for any adverse impact on the volume of FDI to become fully apparent. In the meantime, a narrower view on national security or interest, also taking into account the impact on sustainable development, may allow a better balance to be struck between the sovereign right of a state to regulate and the rights of investors. This would allow for a freer flow of FDI that, in turn, will contribute to the achievement of the SDGs and sustainable development. 

Klentiana Mahmutaj is a barrister in London and Independent Expert on the UN Expert Mechanism on the Right to Development. Views expressed here are personal.