Foreign direct investment (FDI) is critical to achieving sustainable development in developing countries. As a source of capital it has in the last two decades completely eclipsed official development assistance and is now between one-third and one-half of all private investment in developing countries. But without the right policy framework, FDI can also pose risks to sustainable development.

The North American Free Trade Agreement (NAFTA) is the first regional or multilateral investment agreement to grapple with this. The negotiations focused mainly on promoting sustainable investments. Where the environment was considered, the focus was mainly on enforcing environmental laws and assuring that NAFTA would not lead to creating so-called pollution havens or a general "race to the bottom" for environmental standards.
But what received little attention during these negotiations was the scope and interpretation of the investment protection provisions contained in NAFTA's Chapter 11, and how they related to environmental protection by the host state. The past few years' experience demonstrates, however, that this is critical. The investor protections provided in NAFTA's Chapter 11 have been used repeatedly to challenge environmental laws and administrative decisions that have negative economic impacts for foreign investors. As a consequence, the provisions designed to ensure security and predictability for the investors have now created uncertainty and unpredictability for environmental and other regulators, impacting on broad range of public values and threatening to determine the public perception of the entire agreement.