International commitments on climate‐friendly investment liberalisation: A green straitjacket?

Abstract Meeting the objectives of the Paris Agreement will require considerable capital mobilisation. International investment agreements (IIAs) govern and promote financial flows. However, their alignment with international climate objectives has, thus far, either been non‐existent or insufficient. In this context, the present article examines whether investment liberalisation disciplines—through binding pre‐establishment national and most‐favoured‐nation treatment—can be designed to harness climate‐friendly foreign direct investment (FDI) or whether they risk creating a green straitjacket that limits States' regulatory flexibility in managing the energy transition and adopting broader climate measures. Drawing on existing IIAs, model treaties and innovative frameworks such as the Agreement on Climate Change, Trade and Sustainability (ACCTS), the article demonstrates that while liberalisation provisions may selectively enhance access to FDI in climate‐friendly sectors, they impact the regulatory flexibility States need to manage the energy transition, including their discretion over ownership structures, domestic competition and industrial policy. The article concludes that climate‐friendly investment liberalisation should only be pursued under carefully circumscribed conditions, with States remaining aware of the policy trade‐offs it entails.