In its earlier publications, UNCTAD proposes to follow a two-part definition of green Foreign Direct Investment (FDI): 1) FDI in production of environmental goods and services (EGS) sectors; and 2) FDI in environmental-damage mitigation processes, i.e. use of cleaner and/or more energy-efficient technologies, such as low-carbon technologies.
Green FDI has the potential to greatly advance sustainable development. It is crucial for the enhancement of growth and innovation, through the quality of jobs it creates, and the development of human capital which further raises living standards.
At the 2015 United Nations Summit, world leaders made the decision to adopt the 17 Sustainable Development Goals (SDGs) as part of the 2030 Agenda for Sustainable Development.
However, COVID-19 pandemic has significantly slowed progress toward achieving these goals and intensified inequalities globally. The pandemic pushed an additional 124 million people into poverty in 2020 alone. Over 255 million jobs were lost, and the number of people suffering from hunger increased by approximately 132 million. Therefore, the need for green FDI has now become more pressing than ever, if we are to rebuild after the pandemic and attain the SDGs.
However, achieving the SDGs by 2030 is an expensive goal that requires significant investments in innovation, infrastructure and technology. Prior to COVID-19, UNCTAD estimated that developing countries’ SDG financing gap was 2.5 trillion USD per year. The impact of COVID-19 pandemic on investment levels has now further compounded the problem, causing the world to reverse its progress towards the SDGs in 2020 for the first time.
Green FDI as SDG financing tool
To achieve SDGs, green FDI can be channeled towards related sectors. FDI often makes a positive contribution to the host country’s economy through the transfer of money, knowledge, skills, and technology. Green FDI plays a positive role in the achievement of all 17 SDG goals, but it has the greatest impact on goal 8, “Decent work and economic growth” and goal 9, “Industry, innovation and infrastructure”
SDG 8: Decent Work and Economic Growth
A key benefit of FDI is the employment and economic boost it can provide to host countries. In turn, this will result in an environment that will be beneficial for companies, investors, and the overall economic growth of the region.
SDG 8 focuses on promoting inclusive and sustainable economic growth, as well as full and productive employment and decent work for all. Green FDI can be used to achieve this goal through the economic and employment boost it provides.
Country’s employment rate and the amount of FDI it attracts are directly correlated. Investment Monitor studied this correlation from 2003 to 2019, and the data showed that countries with decent employment rates received more FDI projects than those with low employment rates.
In addition to creating standards for investing in host countries similar to those in developed markets, green FDI encourages investment into sustainable industries.
SDG 9: Industry, innovation and infrastructure
Major FDI advantage includes the exchange of knowledge, technology and skill that occur in areas it would not otherwise be possible. Consequently, education and human capital sectors of host country are enhanced.
SDG 9 focuses on building a resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation. FDI has been a driving force for technological innovation within host countries, but these innovations are often associated with environmental pollution. However, green FDI is changing this, with initiatives that are focused on sustainable industries and industrialization.
Green FDI promotes investment in sectors that are aligned with the achievement of the SDGs. According to Investment Monitor, Investments in agriculture, climate action, technology and services are some areas that could provide the needed growth to meet the targets for SDG9. FDI initiatives promoting green investment opportunities are targeted towards sectors like electric vehicle manufacturing, renewable energy, modular housing, and the emerging green 3D print manufacturing industry.
Green FDI plays a vital role in achieving the Sustainable Development Goals, and its role goes beyond SDG8 and SDG9. The enhancement of growth and innovation that creates quality jobs and develops human capital can aid in ending inequality, decreasing the number of people under poverty line or under risk of starvation, as well as increasing health and wellbeing of citizens.
The benefits of Green FDI are evident, and host countries are increasingly seeking to find more green investors. To do this many governments are finding new ways to become attractive destinations for sustainable investment.
The most popular incentives used by host countries to attract new investments are fiscal FDI incentives. There are many common tax incentives related to FDI, and more that are being introduced specifically for green FDI – these tax advantages are often a large motivator towards an investors choice to go green. The EU and North American countries serve as good example for green FDI attraction. But these incentives are not only in developed countries, but they are also especially encouraged in developing countries that could benefit the greatest from the effects of green FDI.
At 2020 World Economic Forum, the World Trade Organization (WTO) provided five suggestions for initiatives that developing countries specifically should adopt to both make to boost sustainable development.
1. Creating a supplier database with sustainability as a factor. That means taking into account not only traditionally vital information such as business’s production capacity, goods and services offered and contact information, but also information regarding the sustainability of domestic supplier operations such as the environmental protection and carbon offset activities, the social impact of the operations and information on their supply chain management.
2. Adopting ‘silent yes’ mechanisms to eliminate barriers to investment because of the time it takes to obtain approval. The use of “silent yes mechanisms” could be considered after a certain period of time has passed without any concerns being raised about their application.
3. Adopting risk-based approaches to administrative approvals with low-risk investments to be approved at an expedited rate.
4. Creating ‘investment alert’ mechanisms for any investment complaints or concerns raised to be caught early on – before it negatively impacts the investment appeal.
5. Providing greater support to investors that contribute to sustainable development.
Overall, several African, Latin American, and Caribbean countries have already implemented Green FDI initiatives based on the WTO suggestions, some of which are already proving to be successful. And when the war ends, Ukraine can also encourage green FDI inflows to make a sustainable future possible.
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