In the face of a climate crisis, renewable energy investment has become an urgent global need. However, as per the World Investment Report 2023, developing countries are struggling to meet their renewable energy investment needs, which are projected to be around $1.7 trillion per year, yet they only secured $544 billion in 2022.
The Urgent Call for Renewable Energy Investment
The United Nations Conference on Trade and Development (UNCTAD) has issued an urgent call to action. They're seeking to bolster support to developing countries in attracting substantial investments towards their transition to clean energy. According to the World Investment Report 2023, released on 5th July, there's been a significant growth in international investment in renewable energy since the Paris Agreement in 2015. Still, this growth is primarily centred in developed countries.
There's a broader context to this problem. Investment needs for energy transition in developing countries extend beyond renewable energy, incorporating power grids, transmission lines, storage, and energy efficiency. UNCTAD Secretary-General, Rebeca Grynspan, has stressed the importance of a significant increase in sustainable energy systems investment in these countries to achieve global climate goals by 2030.
The Compact for Sustainable Energy Investment
The report proposes a compact that outlines priority actions, including financing mechanisms and investment policies. This compact aims to assist developing countries in attracting investments necessary for building sustainable energy systems. The report emphasizes de-risking energy transition investment in these countries using loans, guarantees, insurance instruments, and equity participation of both the public sector and multilateral development banks.
International Partnerships for Financing
There's a call for international investors, public sector partners, and multilateral financial institutions to form partnerships, lowering the cost of capital for clean energy investment in developing countries. Debt relief is also highlighted, which can offer developing countries the fiscal space to invest in clean energy transition and attract international private investment.
The growth of investment in renewable energy saw a slowdown in 2022 due to a decline in international project finance deals. Although the total international investment in renewables has almost tripled since 2015, growth in developing countries has only marginally outpaced GDP growth.
Concerns have been raised over energy companies among the top 100 multinationals divesting fossil fuel assets at a rate of about $15 billion per year. The private buyers, often private equity funds, tend to have lower or no emission-reduction goals and weaker climate reporting standards. Therefore, the report calls for a new model of climate-aligned dealmaking.
An Increased Investment Gap and FDI Flows Decline
The investment gap across all sectors of the Sustainable Development Goals (SDGs) has risen to more than $4 trillion per year, from $2.5 trillion in 2015. The biggest gaps exist in energy, water, and transport infrastructure. This increase is due to both underinvestment and additional needs.
FDI flows have declined by 12% in 2022, to $1.3 trillion. This decline can be attributed to lower volumes of financial flows and transactions in developed countries due to overlapping crises, such as the war in Ukraine, high food and energy prices, and debt pressures. The drop in FDI flows was predominantly caused by financial transactions of multinational enterprises in developed economies.
The global environment for international business and cross-border investment in 2023 remains challenging due to geopolitical tensions and financial sector turmoil. UNCTAD anticipates continued downward pressure on global FDI in 2023.
Regional Investment Trends in Renewable Energy Investment
FDI flows to developed economies declined, with developing countries accounting for two-thirds of global FDI in 2022. The FDI growth in developing countries was uneven, with the increase mainly concentrated in a few large emerging economies. FDI inflows in developing countries in Asia remained flat, while flows to Latin America and the Caribbean increased significantly. However, FDI flows to structurally weak and vulnerable economies declined. Learn more about the investment flows to different regions here.
The World Investment Report 2023 underscores the urgent need for increased investment in renewable energy in developing countries. Bridging the investment gap is vital for these countries to make the necessary transition to clean energy, ultimately contributing to the global fight against climate change.
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