The world needs to support developing countries in attracting greater investment for their transition to clean energy, according to United Nations Conference on Trade and Development (UNCTAD).
In its World Investment Report 2023, the UNCTAD reveals that while international investment in renewable energy has almost tripled since the adoption of the Paris Agreement in 2015, a significant portion of this growth has been concentrated in developed countries.
According to the report, developing countries require approximately $1.7 trillion in renewable energy investments annually. However, in 2022, they only attracted $544 billion in foreign direct investment for clean energy. It is important to note that the total funding needs for the energy transition in developing countries extend beyond renewable energy projects and include investments in power grids, transmission lines, energy storage, and energy efficiency.
UNCTAD Secretary-General Rebeca Grynspan highlights the critical role of significantly increasing investment in sustainable energy systems in developing countries to achieve global climate goals by 2030. Supporting these countries in accessing adequate financial resources and technology transfer is crucial for accelerating the transition to clean energy and addressing climate change on a global scale.
Efforts to bridge the investment gap and promote sustainable energy in developing countries are essential not only for achieving climate targets but also for promoting inclusive and sustainable development worldwide.
COMPACT FOR SUSTAINABLE ENERGY INVESTMENT
The World Investment Report 2023 by UNCTAD proposes a compact that outlines priority actions to enable developing countries to attract investments for building sustainable energy systems. The report highlights several key measures to facilitate this process.
One of the suggested actions is the de-risking of energy transition investments in developing countries. Financial instruments such as loans, guarantees, insurance, and equity participation could help in achieving this. Both the public sector and multilateral development banks can play a role in providing support, including through public-private partnerships and blended finance arrangements.
Partnerships involving international investors, the public sector, and multilateral financial institutions are also encouraged. Such collaborations can help reduce the cost of capital for clean energy investments in developing countries, making them more attractive to potential investors.
Additionally, the report emphasizes the importance of debt relief for developing countries. By providing fiscal space, debt relief enables these countries to make the necessary investments in clean energy transition. It can also contribute to lowering country risk ratings, thereby enhancing their ability to attract international private investment.
RENEWABLE ENERGY INVESTMENT GROWTH SLOWS
The Report shows a slowdown in the growth of investment in renewable energy in 2022, specifically in international project finance deals. While the total international investment in renewable has nearly tripled since 2015, the growth rate in developing countries has only marginally exceeded GDP growth.
Furthermore, the report reveals that energy companies among the top 100 multinationals are divesting fossil fuel assets at a rate of approximately $15 billion per year. This divestment trend indicates a shift towards cleaner energy sources.
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
According to the Report, global foreign direct investment (FDI) experienced a decline of 12% in 2022, amounting to $1.3 trillion. This decrease followed a strong rebound in 2021, which came after a significant drop in FDI due to the COVID-19 pandemic in 2020.
Lower volumes of financial flows and transactions in developed countries primarily led to the decline in FDI. Several overlapping crises contributed to the slowdown, including the war in Ukraine, high food and energy prices, and debt pressures.
The decrease in FDI flows was largely attributed to financial transactions conducted by multinational enterprises in developed economies. FDI in these countries experienced a significant drop of 37%, amounting to $378 billion.
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 least developed countries fell by 16%.
- Unevenly shared FDI increase in developing countries. Much of the growth was concentrated in a few large emerging economies.
- In Africa, FDI fell to prior levels of $45 billion after anomalously high levels in 2021 caused by a single financial transaction
- FDI inflows in developing countries in Asia were flat at $662 billion but still accounted for more than half of global FDI.
- Flows to Latin America and the Caribbean increased by 51%, reaching $208 billion, the highest level ever recorded