Foreign Direct Investment (FDI) is set to rebound in 2021 and even jump back to pre-pandemic 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 purely 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 increasingly frames the activities of international EDOs (economic development organisations) in the pursuit of ‘Green FDI’. In response to the pandemic, some economic development organisations have either launched a new 2020-2025 strategy or updated their existing one with green growth as a common theme.
There is, however, a lack of transparency with regards to the deeper vision and agenda of many EDOs regarding the real green impact of their investment projects. Measures such as the total number of jobs, CAPEX and a vague linkage to what are considered green technologies, provide information about the sustainable impact of a so-called ‘green’ FDI project. But this leaves a serious risk of ‘greenwashing’ that will benefit marketing campaigns and ride the current wave of the green economy, without being specific about what this entails.
The impact on trade
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 more than doubling over the past six months, moving above €50 per tonne, plus 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 decarbonise 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 can’t be the end of the discussion around green 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.
The need for consistent standards
There is no doubt that we will see many more investments in ‘green factories’ and their supply chains, but EDOs and economic development professionals are making their own assumptions 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 the level of sustainability and contribution to the green economy. The same goes for the assessment of an EDO’s strategic orientation or corporate supply chains.
However, the EU taxonomy – first published in June 2020 and currently being discussed with the EU member states before becoming law – could 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.
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 the flow of money.
- Policy makers and EDOs should further define their green FDI attraction strategies to help companies and investors know whether their investments and activities really are green.
- If EDOs are already advanced in greening their activities, or need to do more to achieve sustainability, they can assess and evaluate with their existing investors.
- EDOs can differentiate and profile themselves 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 to more powerful location marketing and FDI attraction.
How OCO Global can help
The OCO Global team is experienced in supporting corporate and public initiatives develop more sustainable and carbon neutral supply chains. We’ve supported 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.
We’re excited to play a role in shaping the future of sustainable FDI and our experts are on hand to address the issues you face. Get in touch to learn more about how we can support you.