COP27 highlighted the many complexities of mobilizing the trillions of dollars needed for climate adaptation and mitigation in developing countries, which have contributed the least to global warming but are suffering the most from it. Meeting this need will require innovative mechanisms and multiple types of capital, some of it public but most of it private.
Foreign direct investment across the many sectors impacting (or impacted by) climate change—“green FDI” for short—is the most important segment of these much-needed private capital flows. With sectors ranging from agriculture and forestry to energy and infrastructure, it is difficult to track green FDI investment flows comprehensively. However, using a simplified definition focused on renewable energy, transportation, and environmental technology and services, data from fDi Markets shows that green FDI has tripled in the last ten years and is now the largest FDI category.
In developed countries, strong flows of green FDI have supplemented large pools of domestic capital in financing the transition, a dynamic that green incentives in the US Inflation Reduction Act of 2022 and the coming European Green Deal Industrial Plan are accelerating. But few developing countries have gotten a significant share. Indeed, underperformance in channeling green FDI is a key reason why developed countries have fallen short in mobilizing the $100 billion in annual flows they pledged in 2009 to support climate action in the developing world.