Climate foreign direct investment: Here’s everything you need to know

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Kimberley Botwright, Head, Sustainable Trade, World Economic Forum, Matthew Stephenson, Head, Investment Policy and Practice, World Economic Forum

• Foreign direct investment (FDI) aligned with climate goals is key to supporting developing countries in their climate adaptation and mitigation efforts.
• But climate FDI flows remain below their potential so the World Economic Forum has developed a guidebook to help facilitate such investments.
• Here we ask thought leaders in the field why climate FDI is so important and how it can be invaluable in tackling the impact of global warming.

It is well known that large volumes of climate finance are urgently needed. At last year’s United Nations climate gathering – COP27 – governments recognized that investments of $4-6 trillion are needed per year for a global transformation to a low-carbon economy.

Developing countries, meanwhile, require about $5.8-5.9 trillion to implement their pre-2030 climate commitments. Many now also face growing climate impacts and must raise adaptation funds.

Foreign direct investment (FDI) has a role to play in meeting these needs – we call this “climate FDI” or in other words, investment that is aligned with and supportive of climate goals.

However, climate FDI flows currently remain below their potential in many developing economies. That can be for a range of reasons, either linked to investor concerns unrelated to climate, or sector-specific where projects are capital intensive or offer long-time horizons for a return on investment, among other reasons. Furthermore, FDI does not necessarily bring climate or other benefits, which is why specific policies and measures may be needed.

Guidebook to facilitating climate foreign direct investment

To address these challenges, we spent 12 months consulting a broad community to develop a guidebook for investment authorities onfacilitating climate FDI. These investments must be appropriate for the needs of the host state, helping them to meet their climate goals, and equally considerate of local social, environmental and economic concerns.

The Guidebook on Facilitating Climate FDI suggests four categories of measures that can be implemented through public-private collaboration. These include aligning investment authorities’ strategies with climate action and ensuring appropriate de-risking tools; developing domestic supplier databases with sustainability dimensions for investors to search; matchmaking between multinationals’ climate commitments applicable to the country and investable projects; and advancing legal provisions for climate FDI facilitation.

As a next step, work is under way with investment authorities in Brazil and Namibia to roll out several measures and learn from this experience. We hope to expand work with additional countries in due course.

As we launch this next phase of work, we asked several thought leaders in our community to share their views on why climate FDI is so important right now:

‘Climate FDI stands at the forefront fo the battle against climate change’

Ismail Ersahin, Executive Director, CEO, World Association of Investment Promotion Agencies (WAIPA)

Climate foreign direct investment stands at the forefront of the battle against climate change. The faster we realize and embrace the potential of climate FDI, the faster we will be able to address the trillions of dollars funding gap to transition to a carbon-neutral world.

The triple planetary crisis is real and urgent and is exacerbated by widespread poverty. While climate FDI is rising and taking the centre stage in the realm of FDI, moving forward, it will be instrumental in achieving a win-win for all people, the economy and the planet.

Given the constant efforts of investment promotion agencies (IPAs) in collaborating with governments and investors alike, they are playing a critical role in advising and supporting the investment strategies of nations and regions to foster a legacy of green prosperity and sustainability. Moreover, their direct interactions with investors solidify their pivotal position in shaping the future landscape of climate FDI.

‘Climate FDI could help industries develop new technologies’

A. Burak Dağlıoğlu President, Investment Office of the Presidency of the Republic of Türkiye

As a committed signatory to the Paris Agreement, Türkiye is taking ambitious steps to accelerate the green transition of its economy, decrease its emissions by 41% until 2030, and become carbon neutral by 2053. One of the most important instruments in combating the negative effects of climate change is FDI.

Türkiye has strong industries that are well-positioned to benefit from the transition to a low-carbon economy in mid-high tech and high-tech manufacturing sectors such as automotive, machinery, chemicals, aviation and pharmaceuticals. Climate FDI could help these industries to develop new technologies and processes that would make them greener.

Considering its strategic location, growing economy, generous incentive packages and skilled workforce, Türkiye is one of the best destinations for climate FDI and offers vast investment opportunities to international investors.

By investing in Türkiye, international investors can tap into these opportunities and strengthen their footprint in the region. As the Investment Office of Türkiye, we are always with international investors before, during and after their investments.

‘We need to further explore how climate FDI can support adaptation measures in Africa’

Saliem Fakir, Executive Director, African Climate Foundation

FDI has a critical and urgent role to play in helping close the substantial climate finance gap in Africa, as countries on the continent are already experiencing the impacts of climate change.

Proactive investments are needed now to both help African countries effectively manage their exposures to climate change-related physical risks and enable them to adopt new green technologies and thus prevent risks of high transition costs and stranded assets in future.

Climate FDI can help bring not just funding but also access to expertise, operational practices and climate risk awareness – with potential knock-on impact on entire sectors as it can create an environment in which domestic companies need to consider mitigation and adaptation measures in order to remain competitive.

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For these benefits to materialize, though, we need to further explore how climate FDI can support adaptation measures in Africa (given the current predominant focus on mitigation projects) and facilitate public-private engagement on the development of policies and initiatives that can help scale up climate FDI.

‘Closing the financing gap means attracting private return-seeking capital’

Anmay Ditman, Senior Investor and Portfolio Manager, BlackRock Inc.

The transition to a low carbon economy is going to transform the global economy, driving a massive reallocation of capital. At BlackRock, we believe that this presents a historic investment opportunity across a variety of sectors, including power, transportation and industry.

Global power needs are expected to grow significantly in the coming decades, with much of that coming from emerging markets that are experiencing rapid population growth, rising incomes and rapid urbanization.

This means that achieving an orderly and fair transition to a low carbon economy would require many of these developing markets to meet their growing energy needs through a significant expansion in renewable power generation capacity.

There is currently a significant gap in financing available, which can be a major barrier for developing markets to meet their power generation demands, as well as to global climate goals.

With governments unable to meet funding needs alone, closing the financing gap means attracting private return-seeking capital. Innovative solutions, public-private partnership, and significant de-risking will be required to drive the investment needed in these markets.

‘Changing the North-South divide on climate is an urgent task’

Rami Rafih, Managing Director & Partner, Boston Consulting Group (BCG)

There are many complexities to mobilizing the trillions of dollars needed for climate adaptation and mitigation in developing countries, which have contributed the least to global warming but are suffering most from it.

Meeting this need will require innovative mechanisms and multiple types of capital, some of it public but most of it private, including foreign direct investment across sectors impacting – or impacted by – climate change.

In developed countries, strong flows of climate or green FDI have supplemented large pools of domestic capital in financing the transition. But few developing countries have gotten a significant share. Changing this North-South divide is an urgent task. Strategies promoting stronger flows of this type of capital into emerging markets will help bridge it.

‘The world urgently needs to identify proven and promising pathways for climate FDI’

Radhika Thakkar, Vice President, Corporate Affairs, Sun King

While emerging and frontier markets are home to 67% of the world’s population, they draw a mere 16% of clean energy investment worldwide. If these markets continue to be overlooked, the world will struggle to make sufficient progress on reducing CO2 emissions, despite impressive local climate action efforts.

Even leading climate-focused investors often lack the expertise, data and tools to make market-driven investments in climate-aligned opportunities within emerging and frontier markets.

The world urgently needs to identify proven and promising pathways for climate FDI. Sun King and its investment partners, for example, have been developing new financial tools for investors to invest in Africa’s off-grid solar sector.

Take Sun King’s recent sustainable securitization transaction, a common tool in developed markets but only fairly recently deployed in an emerging market context. While this type of mechanism is commonplace in the United States and Europe, it is under-leveraged in emerging markets and only recently utilized in the green energy sector.

If climate FDI continues to be concentrated on known, developed market opportunities, while neglecting to invest in proven, profitable, high-impact green businesses in emerging markets, the world will fall short of meeting our climate commitments.

Surfacing proven investment tools that offer returns and impact and closing information asymmetries can mobilize climate-focused investments in emerging markets at the scale and pace the climate crisis necessitates.

‘Attracting climate FDI is going to be critical to drive clean tech’

Henry Loewendahl, Senior Consultant to fDi Intelligence, Financial Times Limited

Data from fDi Markets from the Financial Times shows that renewable energy and related projects became with the world’s leading industry for Greenfield FDI in 2019. In Q1 2023 over one-third of global greenfield FDI was in clean tech related sectors. The growth of electric vehicles and related supply chains means that 40% of global greenfield FDI is likely to be climate related in 2023.

Attracting FDI is going to be critical to drive clean tech; investment will mainly be an FDI rather than domestic investment play. Governments and their IPAs must therefore strengthen their investment attraction programmes and need to think globally in terms of where to attract the investment from.

Discover

What’s the World Economic Forum doing about climate change?

Climate change poses an urgent threat demanding decisive action. Communities around the world are already experiencing increased climate impacts, from droughts to floods to rising seas. The World Economic Forum’s Global Risks Report continues to rank these environmental threats at the top of the list.

To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is essential that businesses, policy-makers, and civil society advance comprehensive near- and long-term climate actions in line with the goals of the Paris Agreement on climate change.

The World Economic Forum’s Climate Initiative supports the scaling and acceleration of global climate action through public and private-sector collaboration. The Initiative works across several workstreams to develop and implement inclusive and ambitious solutions.

This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions to transitioning to a low-carbon, climate-resilient economy. CEOs use their position and influence with policy-makers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.

Contact us to get involved.

We are entering a new industrial revolution based on clean technologies and new advanced information technologies, which offer huge potential for locations globally to attract FDI and drive economic development, while at the same time fighting climate change.

‘Climate FDI can help developing countries scale renewable energy investment’

Martin Dietrich Brauch, Lead Researcher, Colombia Center on Sustainable Investment

According to UNCTAD, developing countries received $544 billion in renewable energy FDI in 2022—still far short of the $1.7 trillion they need per year in renewable energy investment. If appropriately governed, climate FDI can help developing countries scale renewable energy investment, expanding access to affordable and renewable energy, avoiding fossil fuel dependence, and contributing to global efforts to reduce greenhouse gas emissions.

Climate FDI can also support developing countries to build climate-resilient infrastructure and adapt to climate impacts.

Overhauling the international investment protection and arbitration regime in favour of international governance mechanisms geared toward facilitating climate-aligned, sustainable investment will be essential in unlocking the potential benefits of climate FDI for developing countries.