As the global economy shifts towards sustainability, investment Treaty arbitration increasingly stands at the intersection between economic protection and environmental preservation, as States are asserting their sovereign right to regulate in pursuit of legitimate public welfare objectives, particularly in the environmental sphere, while foreign investors continue to rely on the stability and predictability guaranteed by international investment treaties.
The mechanism that may be able to reconcile these competing dimensions is the carve-out clause. Carve-out clauses serve to delineate the boundaries of arbitral jurisdiction by excluding specific subject matters, most often related to public policy or environmental regulation, from investor-State dispute settlement. Their growing inclusion in modern investment treaties reflects an emerging consensus: the protection of foreign investment cannot come at the expense of a State’s ability to act in the public interest. Instead, the international investment regime must adapt to the broader imperatives of climate governance and sustainable development.
Investment treaties traditionally placed investor protection at the forefront, often constraining State regulatory autonomy. Yet, as global awareness of environmental risks deepened, several landmark disputes exposed the tensions inherent in this model. Cases such as Methanex v. United States and Vattenfall v. Germany demonstrated how environmental and energy policies could trigger claims of indirect expropriation or unfair treatment, even when such measures pursued legitimate ecological objectives. In response, carve-out clauses emerged as a safeguard, preserving the right of States to regulate without fear of liability.
These clauses can take various forms. Some establish an absolute carve-out, fully excluding environmental or public policy measures from arbitration; others adopt a conditional approach, limiting exclusion to measures adopted in good faith and without discrimination. A third, interpretative model does not remove jurisdiction altogether but instructs tribunals to interpret investment protections in light of States’ environmental and social obligations. Regardless of formulation, the objective remains the same: to protect regulatory space while maintaining investor confidence through legal clarity.
Portugal’s treaty practice provides an illustrative example of this evolving landscape. Across its extensive network of bilateral investment treaties, Portugal has traditionally prioritized investor protections such as fair and equitable treatment, safeguards against expropriation, and national treatment. However, carve-outs for environmental or social regulation have rarely featured in these instruments. One notable exception is the Portugal–Ivory Coast BIT of 2019, which, although not yet in force, expressly preserves, on Article 6, the State’s right to regulate in pursuit of legitimate policy objectives, including environmental protection. This development signals a gradual incorporation of sustainability considerations into Portugal’s investment treaty policy, consistent with broader European trends.
At the EU level, this evolution is more advanced. The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, as well as the EU–Vietnam Investment Protection Agreement, explicitly recognizes the right of States to regulate for environmental and social purposes. These treaties represent a deliberate effort to rebalance the investment regime, embedding public interest considerations into its architecture. Portugal, as an EU Member State, is aligned with this shift, supporting the ongoing reform of the investor–State dispute settlement system through the establishment of a permanent investment court that prioritizes transparency, legitimacy, and coherence.
The challenge, however, lies in the balance between sovereign autonomy and the need to preserve a stable investment environment. Carve-out clauses contribute to this equilibrium by defining, rather than limiting, the reach of arbitral jurisdiction. They provide certainty to both States and investors by clarifying that measures genuinely aimed at protecting the environment, public health, or human rights fall within the legitimate scope of State action. Yet their effectiveness depends on precise drafting and consistent interpretation by arbitral tribunals. Ambiguities in language can undermine their purpose, leading to inconsistent jurisprudence and uncertainty for both sides.
Ultimately, carve-out clauses represent a significant evolution in the philosophy of investment law. They reflect a growing awareness that economic development and environmental protection are not opposing values but mutually reinforcing objectives. By carving out regulatory space for environmental measures, States reaffirm that sovereignty in the twenty-first century entails not only the right to regulate but also the responsibility to protect global commons. In this sense, carve-out clauses are not merely technical devices—they are expressions of balance, restraint, and foresight, anchoring investment arbitration within the broader framework of sustainable governance.