• Challenges and goals: Crucial need for effective finance mobilisation to unlock climate and ESG success
• Solo struggle… Why do multinational development banks cannot impact clean energy investments alone?
• Investment influx for a greener tomorrow: unleashing potential of Investment Promotion Agencies in the sustainable development

It took more than four decades and countless debates, beginning with the 1972 Stockholm conference, the inaugural international gathering focused on environmental issues, to the 2015 Paris Agreement, to identify a cooperative and inclusive approach to combatting climate change. Significant strides have been made since then, including increased climate awareness manifested in national commitments to reduce greenhouse gas emissions. Additionally, technological advancements geared toward sustainable solutions have helped reduce investment costs, leading to the mobilisation of climate finance through national pledges supporting both mitigation and adaptation efforts, particularly in developing countries. Now, the pressing question arises: what impact has been achieved in the journey from those early days to the latest COP28 – UN Climate Change Conference?

Green financing: Navigating challenges and unresolved issues for climate change

With the latest COP28 and an in-depth look towards the future, notable advancements have been made, yet a multitude of challenges persists. The urgency to address climate change has only intensified. A key, unresolved issue is the effective mobilisation of finance to support climate-related and other environmental, social and governance (ESG) goals.

According to the International Renewable Energy Agency (IRENA), a cumulative investment of US $150trn by 2050 is required for the energy transition to achieve the aspirational target of capping global average warming to 1.5 degrees Celsius. This equates to an annual investment of US $4.7trn, significantly higher than the US $1.3trn invested in 2022. Developing countries face a more challenging situation, given that the overall funding requirements for their energy transition surpass those of developed nations by a significant margin. This disparity is mainly due to the inclusion of crucial infrastructure components, such as power grids, transmission lines, storage, and energy efficiency. UNCTAD’s latest World Investment Report estimates that developing countries need an annual investment of US $1.7trn, however, only a third of that amount was realised in 2022. Additionally, the developing world has attracted only around 20% of the global sustainable project finance deals in past three years.

The swift tightening of monetary policy since the beginning of 2022 has deepened financial challenges, leading to significant credit market volatility and increased spreads. Even the 10-year US government yields, which analysts regard as the risk-free rate for investment assessment, surpassed 5% for the first time since the global financial crisis. The impact of higher policy rates is inevitable on the cost of capital for clean energy investments in developing countries, which are in dire need of funding. Shouldering the burden of sustainable financing, multinational development banks (MDBs) could only provide roughly US $100bn climate financing annually. With the scarce funds and limited operating model and balance-sheet practices, it is evident that MDBs cannot handle this critical task alone. Additional and predictable financial resources are imperative to support the paradigm shift in climate action and effectively tackle the climate crisis.

Green FDIs: New frontiers for sustainable development

Foreign Direct Investment (FDI), a steady form of private investment, has emerged as a significant funding source for sustainable development projects. Despite data limitation challenges in measuring total green FDI, the staggering 22% annual growth rate observed in the value of renewable energy projects over the last decade underlines its substantial potential. According to data from fDi Markets, global capital investment in renewables amounted to US $369 billion in 2022, constituting 42% of the total greenfield investments. Global investments in renewables reached US $222bn in the first nine months of 2023, accounting for 24% of the overall FDI value. However, in comparison to the potential scale, these figures remain relatively modest. Therefore, to boost FDI in sustainable projects, innovative models must be implemented. Indeed, risk sharing mechanisms can be instrumental in narrowing spreads and reducing cost of borrowing, especially in developing countries. A study by Wavteq shows that nearly 7 out of 10 green FDI investors seek strategic alliances or joint ventures with local companies.

To stimulate private green financial flows, countries, particularly emerging ones, must address structural issues surrounding the investment climate. Various methods can be employed to promote green investments, including the development of climate information architecture encompassing disclosure standards and taxonomies. Additionally, enhancing financial engineering to create alternative investments that boost liquidity and diversification is crucial.

Catalysing green FDIs: 4 imperative keys for IPAs

Serving as crucial intermediaries between investors and policymakers, Investment Promotion Agencies (IPAs) play a pivotal role in bridging the financing gap for sustainable investments. As sustainability gains prominence, IPAs are increasingly recognising the importance of achieving sustainable development goals. A survey by OCO Global reveals that half of the global IPAs are actively developing strategies to comply with sustainable development goals. However, only one-third monitor the ESG impact of FDI projects, signalling an area for improvement in sustainability assessment practices.

To efficiently attract and facilitate green FDI, IPAs need to be proactive in their efforts. Key actions include:

• Assist national transformations by identifying and promoting bankable investment opportunities, while advocating for policy changes.
• Encourage climate innovation by directing investments towards ground-breaking technologies and businesses.
• Increase access to finance by implementing incentive and support mechanisms for long-term investments that align with both national and global sustainability goals.
• Raise awareness by addressing structural challenges, such as disclosure, transparency, and risk management, and promoting solutions.

By undertaking these initiatives, IPAs cannot only bolster their role in sustainable development, but also enhance the attractiveness of their regions for green FDI, contributing to a more sustainable and resilient global economy.