The climate justice agenda is extensive. One of its priorities is helping countries that have contributed least to climate change but suffer most from it. Progress on this issue was the headline achievement at the UN Climate COP27 last November, where developed countries agreed to launch a loss-and-damage fund for the most vulnerable nations.
One of the priorities of the climate justice agenda must be to increase funding for greener development in emerging markets and developing economies.
Foreign direct investment is the most important segment of these much-needed private capital flows.
Some early movers in the developing world already benefit from significant climate FDI.
Why FDI matters so much
Foreign direct investment (FDI) across the many sectors impacting or impacted by climate change — 'climate FDI' for short — is the most important segment of these much-needed private capital flows. Relevant sectors range from agriculture, food and forestry to energy and infrastructure and tracking investment flows across them is difficult. However, using a simplified definition focused on renewable energy, transportation and environmental technology and services, data from fDi Markets, illustrated in the Exhibit below, shows that climate FDI has tripled in the last ten years and is now the largest FDI category.
In developed countries, strong flows of climate FDI have supplemented large pools of domestic capital in financing the transition, a dynamic that green incentives in the US Inflation Reduction Act will accelerate.
But few EMDE countries have received a significant share of climate FDI. Indeed, underperformance in channelling climate FDI is a key reason why developed countries haven’t mobilised the $100 billion in annual flows of public and private finance they pledged in 2009 to support climate action in the developing world.
Changing this picture is an urgent task. EMDEs face the transition with limited financial resources and, in many cases, post-COVID-19 pandemic high debt levels and/or regulatory barriers to investment. Many come with less than glowing sovereign credit ratings. With some notable exceptions, EMDEs have made less progress in greening their economies.
For now, most make only a small per capita contribution to global emissions. But a significant share of future growth in energy use will be driven by EMDE countries as they improve living standards for their populations. If they cannot decouple economic growth from greenhouse gas emissions, the climate challenge becomes even more daunting.
