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How Is Climate Change Risk Affecting FDI Inflows?

New research is examining multinationals’ investment decisions amid increasing climate risk and the vulnerability of FDI in a changing world.

A new direction in the study of FDI and climate change

To date, most academic research has focused on the impact of foreign direct investment (FDI) inflows on carbon emissions, with many studies exploring the so-called “pollution haven hypothesis”. However, a new spate of studies is now examining the exposure of multinationals’ FDI to physical climate risks, particularly as it relates to human-caused climate change.

Do companies typically factor climate-related risks into their FDI decisions?

According to newly published research, company-level evidence suggests companies with high climate risk exposure are more likely to reduce FDI in response to the target country’s physical climate risks following the Paris Climate Accord in 2015. They also found that, at a country/industry-level, higher emission productivity – gross domestic product (GDP) per unit of emissions – leads to higher FDI inflows.

The research also found that advanced economies are more negatively affected by “transition risk” – that is, risks arising from the transition to a low-carbon economy – than is the case with emerging economies.


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