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Developing countries face $4 trn investment deficit meeting SDGs – UNCTAD

Developing countries face $4 trn investment deficit meeting SDGs – UNCTAD

There is an investment deficit of about $4 trillion yearly required by developing countries in their quest to achieve Sustainable Development Goals (SDGs) by 2030, says a new report from the United Nations Conference on Trade and Development (UNCTAD).

UNCTAD’s World Investment Report 2023 reveals that this gap has risen from $2.5 trillion per year in 2015, when the SDGs were adopted, indicating that the investments required are not coming in as expected.

The report shows that global foreign direct investment (FDI) fell 12 percent in 2022 and analyses how investment policy and capital market trends impact investment in the SDGs, particularly in clean energy.

It highlights that developing countries need renewable energy investments of about $1.7 trillion each year but attracted only $544 billion in clean energy FDI in 2022.

Although investments in renewables have nearly tripled since 2015, most of the money has gone to developed countries.

Therefore, the report calls for urgent support for developing countries to enable them to attract significantly more investment for their transition to clean energy.

It proposes a compact setting out priority actions, ranging from financing mechanisms to investment policies, to ensure sustainable energy for all.
that developing countries face as they work to achieve the Sustainable Development Goals

Total funding needs for the energy transition in developing countries are much larger and include investment in power grids, transmission lines, storage, and energy efficiency.

Rebeca Grynspan, UNCTAD Secretary-General, said: “A significant increase in investment in sustainable energy systems in developing countries is crucial for the world to reach climate goals by 2030.”

Below are some of the insights presented in the report:

The report proposes a compact setting out priority actions ranging from financing mechanisms to investment policies to enable developing countries to attract investments to build sustainable energy systems.

On financing, the report calls for the de-risking of energy transition investment in developing countries through loans, guarantees, insurance instruments, and equity participation by both the public sector (through public-private partnerships and blended finance) and multilateral development banks.

Also, partnerships between international investors, the public sector, and multilateral financial institutions can significantly reduce the cost of capital for clean energy investment in developing countries.

UNCTAD also emphasises the need for debt relief to offer developing countries fiscal space to make the investments necessary for the clean energy transition and to help them attract international private investment by lowering country risk ratings.

Renewable energy investment growth slows

The report shows that the growth of investment in renewable energy slowed down in 2022 as international project finance deals declined.

Although total international investment in renewables has nearly tripled since 2015, in developing countries the growth rate has exceeded GDP growth only marginally.

The report also finds that energy companies among the top 100 multinationals are divesting fossil fuel assets at a rate of about $15 billion per year.

But a key concern is that private (non-listed) buyers, which include mostly private equity funds, often have lower or no emission-reduction goals and weaker climate reporting standards. This calls for a new model of climate-aligned dealmaking, the report says.

$4 trillion annual investment gap for global goals

The report says the investment gap across all sectors of the Sustainable Development Goals (SDGs) has increased to more than $4 trillion per year from $2.5 trillion in 2015.

The most significant gaps are in energy, water, and transport infrastructure. The increase is the result of both underinvestment and additional needs.

Read also: Record renewables growth fails to reduce global fossil fuel share

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.

Global investment flows fall due to overlapping crises

Global foreign direct investment (FDI) declined by 12 percent in 2022, to $1.3 trillion, after a strong rebound in 2021 following the steep drop induced by COVID-19 in 2020, the report showed.

The decline was mainly a result of lower volumes of financial flows and transactions in developed countries. The slowdown was driven by overlapping crises: the war in Ukraine, high food and energy prices, and debt pressures.

The fall in FDI flows was mostly caused by the financial transactions of multinational enterprises in developed economies, where FDI fell by 37 percent to $378 billion.

The global environment for international business and cross-border investment will remain challenging in 2023. Geopolitical tensions are still high. Recent turmoil in the financial sector has added to investor uncertainty.

UNCTAD expects downward pressure on global FDI to continue in 2023.

Regional investment trends

FDI flows to developed economies declined, and developing countries accounted for two-thirds of global FDI in 2022, with Latin America and the Caribbean experiencing a significant increase. FDI inflows in the least-developed countries fell by 16 percent.

The FDI increase in developing countries was unevenly shared. Much of the growth was concentrated in a few large emerging economies.

Recommendations

To fix the situation, the report proposes a Global Action Compact for Investment in Sustainable Energy for All. It contains a set of guiding principles covering the three objectives of the energy transition: meeting climate goals, providing affordable energy for all, and ensuring energy security.

It puts forward six action packages covering national and international investment policymaking; global, regional, and South-South partnerships and cooperation; financing mechanisms and tools; and sustainable financial markets.

The first action package is the establishment of national investment policies by reorienting general investment incentives to consider emissions’ performance, customising investment promotion mechanisms for energy transition investment, and strengthening the capacity of investment promotion institutions to attract energy transition investment.

Another option is to leverage international investment policies. This includes mainstreaming sustainable development as a core objective of IIAs, prohibiting the lowering of environmental standards as a means to compete for investment, strengthening the promotion and facilitation dimension of international investment agencies, and reforming them to make them investor friendly.

The third action package involves setting up global partnerships that can serve as a one-stop shop for sustainable energy investment solutions, technical assistance, and capacity-building, as well as promoting partnerships to support groups of vulnerable economies with specific energy transition needs, such as least developed countries and small island developing states.

The fourth action package involves setting up and supporting regional industrial clusters and regional value chains in new strategic energy transition sectors and leveraging regional economic cooperation in sustainable energy infrastructure development. It also includes factoring in the promotion of energy transition investment in regional trade, investment, and industrial cooperation agreements.

The next set of actions recommended maximising the lending and de-risking capacity of development finance institutions (DFIs), their focus on catalysing energy transition investment, and their weight in countries with low access to electricity. Also leveraging private-public partnerships, in combination with DFIs, to lower financing costs for private investors and turn projects into fiduciary assets for institutional investors.

The final set of actions recommended is making capital markets drivers for sustainable financing. This can be achieved by ensuring adequate standards, disclosure requirements, and monitoring capacity to eliminate greenwashing, expanding requirements to private markets to minimize risks in the process of fossil fuel asset sell-offs and expanding coverage of carbon markets, and exploiting the cross-border impact potential of voluntary carbon markets.