Recommended Read: Green Foreign Direct Investment in Developing Countries

28/10/2017

In the latest of our “Recommended Reads” we direct you to a recent and rather alarming report on “green FDI” by the GreenInvest platform of the G20.

FDI flows in 2016 were roughly $1.75 trillion, of which around $1 trillion went into developing countries.  On the face of it, an impressive sounding number, especially because, as the report notes, “FDI is key [as] it generally represents real economic activities”.   As a result, “FDI is often coveted by recipient or “host” countries and can be an important channel for spurring and spreading the type of innovation and investment that is needed for environmentally sound economic growth and development.”

The alarming bit, however, is how little of this inward investment is actually directed to such activities.  For example, in 2015 “twice as much global FDI inflows went into the Cayman Islands (US$18 billion) and the British Virgin Islands (US$51 billion), than into all LDCs combined (US$35 billion). Inflows into Africa (US$54 billion) only just beat the British Virgin Islands.”  And most of the flows into LDCs went into resource-rich countries, presumably for extractive purposes of one kind or another ­– in 2015 “coal, oil and natural gas was the largest sector for global greenfield investments (i.e., new investments, as opposed to mergers or acquisitions), accounting for 16% of capital invested. [Meanwhile, though] 10% (or US$77 billion) of global greenfield FDI went into renewable energy projects in 2016 … more investment (16% of global greenfield FDI, or US$121 billion) still went into new projects for exploration and exploitation of fossil fuels.”

In light of this, the report sees an urgent need for a definition of “green FDI” and changes to policy and practice in order to promote these kinds of flows over potentially highly damaging “brown” flows.  Under UNCTAD’s current definition of green FDI (admittedly possibly too narrow), only 8% of flows were in this bracket.  Policies need to change at every level, the report says  – home and host country, and intergovernmental.  A particularly fruitful area could be the redrafting of investment treaties between countries. Technological advances such as fintech could help to bring about the necessary change.

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