Global FDI Retreats, But New Project Announcements Show Bright Spots
Global foreign direct investment (FDI) declined by 12 per cent in 2022, to $1.3 trillion. The decline was mainly a result of lower volumes of financial flows and transactions in developed countries. Real investment trends were more positive, with growth in new investment project announcements in most regions and sectors. FDI in developing countries increased marginally, although growth was concentrated in a few large emerging economies. Inflows in many smaller developing countries were stagnant, and FDI to the least developed countries (LDCs) declined.
Industry trends showed increasing project numbers in infrastructure and industries that face supply chain restructuring pressures, including electronics, automotive and machinery. Three of the five largest investment projects were announced in semiconductors, in response to global chip shortages. Investment in digital economy sectors slowed after the boom in 2020 and 2021.
Investment project numbers in energy remained stable, allaying, for now, fears of a reversal of the downward trend in fossil fuel investment due to the energy crisis. Oil majors are gradually selling fossil fuel assets to private equity firms and smaller operators with lower disclosure requirements, calling for new dealmaking models to ensure responsible asset management.
The SDG Investment Gap Widens Despite the Growth of Sustainable Finance
International investment in sectors relevant for the Sustainable Development Goals (SDGs) in developing countries increased in 2022. Infrastructure, energy, water and sanitation, agrifood systems, health and education all saw increased project numbers. However, compared to 2015 when the SDGs were adopted, progress is modest.
A review of investment needs at the midpoint of the 2030 Agenda for Sustainable Development shows that the investment gap across all SDG sectors has increased from $2.5 trillion in 2015 to more than $4 trillion per year today. The largest gaps are in energy, water, and transport infrastructure. The increase is the result of both underinvestment and additional needs.
The growing SDG investment gap in developing countries contrasts with positive sustainability trends in global capital markets. The value of the sustainable finance market reached $5.8 trillion in 2022. Sustainable funds had positive net inflows while traditional funds experienced net outflows. Sustainable bond issuance also continues; it has grown five-fold over the past five years. Key priorities for the market are increasing exposure to developing countries and addressing greenwashing concerns.
Developing Countries Need Vastly More Support to Attract Energy Investment
International investment in renewable energy has nearly tripled since the adoption of the Paris Agreement in 2015. However, much of this growth has been concentrated in developed countries. More than 30 developing countries have not yet registered a single utility-sized international investment project in renewables. The cost of capital is a key barrier for energy investment in developing countries. Bringing in international investors in partnership with the public sector and multilateral financial institutions significantly reduces the cost of capital.
Most developing countries have set targets for the energy transition in nationally determined contributions. Only about one third have translated those targets into investment requirements, and few have developed the asset specifications that are needed to design targeted promotion mechanisms and to market bankable projects. As a result, many developing countries use generic fiscal and financial incentive mechanisms that are less effective for the promotion of energy transition investment.
De-risking support to lower the cost of capital for energy transition investment in developing countries must be vastly expanded. More technical assistance should be available for investment planning and project preparation. International investment agreements need accelerated reform to expand policy space for climate action and to strengthen investment promotion and facilitation provisions. This report puts forward an Action Compact for Investment in Sustainable Energy for All with recommendations for national and international investment policies, global and regional partnerships, financing mechanisms and capital market involvement.
Global FDI Retreats, But New Project Announcements Show Bright Spots
Global foreign direct investment (FDI) declined by 12 per cent in 2022, to $1.3 trillion. The decline was mainly a result of lower volumes of financial flows and transactions in developed countries. Real investment trends were more positive, with growth in new investment project announcements in most regions and sectors. FDI in developing countries increased marginally, although growth was concentrated in a few large emerging economies. Inflows in many smaller developing countries were stagnant, and FDI to the least developed countries (LDCs) declined.
Industry trends showed increasing project numbers in infrastructure and industries that face supply chain restructuring pressures, including electronics, automotive and machinery. Three of the five largest investment projects were announced in semiconductors, in response to global chip shortages. Investment in digital economy sectors slowed after the boom in 2020 and 2021.
Investment project numbers in energy remained stable, allaying, for now, fears of a reversal of the downward trend in fossil fuel investment due to the energy crisis. Oil majors are gradually selling fossil fuel assets to private equity firms and smaller operators with lower disclosure requirements, calling for new dealmaking models to ensure responsible asset management.
The SDG Investment Gap Widens Despite the Growth of Sustainable Finance
International investment in sectors relevant for the Sustainable Development Goals (SDGs) in developing countries increased in 2022. Infrastructure, energy, water and sanitation, agrifood systems, health and education all saw increased project numbers. However, compared to 2015 when the SDGs were adopted, progress is modest.
A review of investment needs at the midpoint of the 2030 Agenda for Sustainable Development shows that the investment gap across all SDG sectors has increased from $2.5 trillion in 2015 to more than $4 trillion per year today. The largest gaps are in energy, water, and transport infrastructure. The increase is the result of both underinvestment and additional needs.
The growing SDG investment gap in developing countries contrasts with positive sustainability trends in global capital markets. The value of the sustainable finance market reached $5.8 trillion in 2022. Sustainable funds had positive net inflows while traditional funds experienced net outflows. Sustainable bond issuance also continues; it has grown five-fold over the past five years. Key priorities for the market are increasing exposure to developing countries and addressing greenwashing concerns.
Developing Countries Need Vastly More Support to Attract Energy Investment
International investment in renewable energy has nearly tripled since the adoption of the Paris Agreement in 2015. However, much of this growth has been concentrated in developed countries. More than 30 developing countries have not yet registered a single utility-sized international investment project in renewables. The cost of capital is a key barrier for energy investment in developing countries. Bringing in international investors in partnership with the public sector and multilateral financial institutions significantly reduces the cost of capital.
Most developing countries have set targets for the energy transition in nationally determined contributions. Only about one third have translated those targets into investment requirements, and few have developed the asset specifications that are needed to design targeted promotion mechanisms and to market bankable projects. As a result, many developing countries use generic fiscal and financial incentive mechanisms that are less effective for the promotion of energy transition investment.
De-risking support to lower the cost of capital for energy transition investment in developing countries must be vastly expanded. More technical assistance should be available for investment planning and project preparation. International investment agreements need accelerated reform to expand policy space for climate action and to strengthen investment promotion and facilitation provisions. This report puts forward an Action Compact for Investment in Sustainable Energy for All with recommendations for national and international investment policies, global and regional partnerships, financing mechanisms and capital market involvement.
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