Jens Manke – 03 Aug, 2021 European Perspective

Foreign Direct Investment (FDI) is set to rebound in 2021 and even jump back to pre-Covid levels in 2022. This optimism is based on GDP growth (+5.8%) and trade forecasts (+8%) according to recently published reports by UNCTAD and OECD. While these pure economic projections provide enough of a playground for economic development practitioners, COVID-19 has furthermore accelerated the overall tendency of businesses to consider sustainability in investment decisions. Recent reports by UNCTAD, EY and fDi Intelligence highlight the unprecedented surge of “green” investment projects with record numbers of FDI and employment creation. So, while FDI in 2020 drastically declined, finance for sustainable development substantially increased with considerable output in job creation.

Consequently, this trend is increasingly framing the activities of international economic development organizations in the pursuit of “Green FDI”. In response to the pandemic, some economic development organisations (EDOs) have either launched a new 2020-2025 strategy or updated their existing one with green growth as a common theme. Nevertheless, there is still a lack of transparency with regards to the deeper vision and agenda of many EDOs regarding the real green impact of those investment projects. Still, measures such as the total no. of jobs, CAPEX and a vague linkage to what is considered as green technologies, provide information about the sustainable impact of a so-called “green” FDI project. But this leaves a serious risk of “greenwashing FDI” that will benefit marketing campaigns and ride the current wave of the green economy, without being too specific on what this exactly entails.

There is no doubt that large-scale manufacturers and industrial players are feeling increasing economic pressure to tackle their immense carbon footprint. As part of the EU’s wider efforts to become the first continent in the world to be carbon neutral by 2050, the European Union’s carbon market was set up in 2005 and is Europe’s flagship climate policy tool, limiting emissions from around 10,000 installations in the power sector and manufacturing industry. With EU carbon prices that have more than doubled over the past six months, moving above €50 per tonne and ambitions of an expansion of the EU Emission Trading scheme, there is already a debate around “carbon leakage” and companies being forced to relocate their installations out of Europe. 90% of business executives in Europe consider environmental sustainability as a driving force in their investment decisions, including manufacturing and industrial companies (Source: EY Attractiveness Survey 2021).

Leading manufacturers and industry consortiums are already implementing initiatives to decarbonize their production and logistics. Good examples in Europe are the current investments in hydrogen technology by leading industry players such as Royal Dutch Shell in Rotterdam or the joint development of a regional hydrogen hub by German manufacturing players STEAG and ThyssenKrupp, in North-Rhine Westphalia. Some companies have even started to assess their global supply chain on carbon neutrality such as Volkswagen and its supposedly 100% CO2-neutral balance sheet production of the electric car ID.3. While considering these investments as excellent examples of “green FDI”, this cannot be the end to the discussion around green sustainable supply chains and sustainable investments. There is constant disagreement and ongoing debate regarding parts of the energy storage supply chain such as battery production and recycling, amongst others.

For everyone in economic development and international business there is no doubt that we will see many more investments in “green factories” and their supply chains. But the truth is, EDOs and economic development professionals are making their own assumption when designating investment projects or strategies as “green” and their approaches vary widely. The absence of enforceable standards on evaluating the real extent of “green” in an investment strategy or project raises the need for a more thorough classification of FDI into e.g. “light”, “medium” or “dark” green investment projects according to their level of sustainability and contribution to the green economy. The same applies for the assessment of an EDO’s strategic orientation or corporate supply chains.

The EU taxonomy – first published in June 2020 and currently discussed with the EU member states before becoming law – is supposed to be an important enabler to scale up sustainable investment and to provide appropriate definitions to companies, investors, and policymakers on which economic activities can be considered environmentally sustainable. The taxonomy is expected to create security for investors, protect private investors from ‘greenwashing’, help companies to plan the transition, mitigate market fragmentation and eventually help shift investments where they are most needed.

A couple of key take-aways and reflection points for investment professionals:

  • A lack of clarity on what can be classified as a climate-friendly investment is one of the major obstacles stopping money flowing into that area
  • Policy makers and economic development organizations are supposed to further define their green FDI attraction strategies to help companies and investors to know whether their investments and activities are really green
  • EDOs can assess and evaluate with their existing investors if they are already advanced in greening their activities or need to do more to achieve sustainability
  • EDOs can differentiate and profile themselves even better with targeted measures around the sustainable impact of attracted investments.
  • The EU taxonomy could provide a basis for further strategy elaboration and definition of criteria for sustainable investment
  • This will build up credibility leading into a more powerful location marketing and FDI attraction

The OCO team is excited about supporting corporate and public initiatives in this regard. Our experts are at hand to address the corporate supply chain to identify new suppliers for a sustainable and carbon neutral international supply chain. We also support government institutions and EDOs in designing impactful sustainable strategies, mapping out the potentials in the green economy to create sustainable ecosystems and attract the right players. Get in touch if you want to learn more about our approach to “Green FDI”.