Targeted policies key to boosting investment in climate change fight

29 Sep 2022

UNCTAD just released a Special Edition of the Investment Policy Monitor, which analyzes investment policy trends related to climate change sectors across the world between January 2010 and June 2022, based on the review of 104 policy measures adopted during that period in both developed and developing countries.

As highlighted in the World Investment Report 2022, financing and investing in climate change have been growing significantly, but the need for investment in climate change mitigation and adaptation is still substantial. Attracting international private investment to respond to a country’s specific needs in climate adaptation and mitigation is key to closing the financing gaps in these sectors.

However, the Monitor finds that policy initiatives to promote climate change adaptation and mitigation through FDI have focused primarily on the renewable energy and electricity sectors (60 per cent of the measures). Although renewable energy plays a key role in the transition to a low-carbon economy, other mitigation policies have not received equal policy attention, and policy measures to attract investment in climate change adaptation sectors still need to be developed and implemented to respond to the growing need for financing in those sectors.

The Monitor also highlights differing concerns between developing and developed countries. In developing economies, 30 per cent of the policy measures adopted in climate change-related sectors between 2010 and 2022 concerned liberalization, mostly related to the unbundling of the energy market or the privatization of State-owned enterprises (SOEs). An additional 43 per cent of the measures aimed at promoting investment in renewable energy generation, green technologies (e.g. incentive schemes aimed at reducing the carbon footprint of industrial and agricultural production), and in water and electricity.

Conversely, in developed economies, 3 out of 4 measures were related to the introduction or widening of FDI screening mechanisms, confirming the trend towards heightened national security concerns highlighted by UNCTAD in recent years. This trend is likely to continue in light of the energy security concerns raised by the war in Ukraine and its impact on energy supply and prices.

Channeling mitigation investment into developing countries and upscaling adaptation investment remain key challenges. They call for climate change strategies that comprehensively address energy issues such as security of supply, efficiency, affordability, and environmental sustainability, while also addressing the development of climate change mitigation and adaptation sectors and technologies.

To foster investment in climate change mitigation and adaptation key sectors, countries need to consider new instruments and targeted policies to attract low carbon investment. These could include preparing pipelines of bankable and impactful projects in developing countries, providing political-risk insurance to de-risk climate FDI, adopting climate impact assessments when reviewing investment projects, and developing facilitation services targeting specifically climate FDI. Moreover, climate change strategies should embed investment promotion as a key component and communicate the government’s priorities in the medium and long run. In parallel, the targets arising from the comprehensive climate change strategy should be embedded in investment promotion strategies to inform the activities of the actors involved in the investment promotion efforts.

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