According to recent research released by the UN Conference on Trade and Development (UNCTAD) on October 27, cross-border investment in climate change mitigation and adaptation is expected to diminish in 2022 against the backdrop of a global investment slump.
The research published in the run-up to the UN climate change conference COP27 shows that the number of new investment projects is declining across most industries, particularly those fighting climate change, and provides a gloomy picture for global foreign direct investment (FDI) in 2022.
In sharp contrast to the previous year’s significant pace, there were 7% and 12% fewer new projects announced in the climate mitigation and adaptation sectors between January and September 2022, respectively.
94% of global climate investments went toward mitigation initiatives, while adaptation initiatives lagged far behind.
Renewable energy and, to a lesser extent, other energy efficiency projects, are where most mitigation expenditures are made.
Globally, developed economies accounted for two-thirds of renewable energy greenfield investments and international project finance arrangements.
With more than 700 projects in the first three quarters of 2022, Europe alone accounted for more than half of all renewable energy projects.
About 200 projects each were attracted to North America and emerging Asia, whereas only 150 and 100 projects, respectively, were attracted to Latin America and the Caribbean, and Africa.
Risk to the momentum of climate action
The paper warns that the energy transition’s move from fossil fuel to green investments “risks a setback, due to the loss of momentum in renewables and high oil and gas prices.”
For the time being, the decline in investment is also having an impact on the fossil fuel-based energy sector and the extractive industries, where project counts fell by nearly 16% in the first three quarters of 2022.
A renewed drive for investments in fossil-fuel-based energy, whose production exacerbates climate change, the report cautions, might result from the huge profits made by multinational corporations in these areas mixed with the current energy crisis.
The value of cross-border mergers and acquisitions in the extractive industry, which increased six fold between January and September 2022, is a leading indicator of that.
Global investment trends: A significant downturn is anticipated in 2022
Another analysis released by UNCTAD on October 20 estimates that FDI flows will total $357 billion in the second quarter of 2022.
This is 7% below the quarterly average for 2021 and a 31% drop from the first three months.
The food, fuel, and financial problems throughout the world, the conflict in Ukraine, rising prices and interest rates, and worries about an impending recession, according to the research, have changed investor attitude.
However, it pointed out that FDI inflows during the first half of the year were still higher as the first quarter’s strong growth momentum carried over into 2021.
Decline in developed nations
The expected $137 billion in FDI flows to developed economies in the second quarter was 22% less than the average for 2021.
While inflows to non-EU nations fell by more than 80% in Europe, flows to EU countries increased by 7%.
North American inflows decreased by 22% as a result of a more than halving in cross-border mergers and acquisitions aimed at American companies.
In the underdeveloped world, “some resilience”
The total amount of FDI going to developing nations increased by 6% to $220 billion, demonstrating some resilience.
However, that increase was mostly fueled by the sustained expansion of numerous sizable emerging economies.
While FDI flows to Africa almost entirely stopped, they did so in Latin America and developing Asia.
Due to financial constraints, investment initiatives have been halted
According to the report, new investment project announcements, a sign of future trends, declined in the first three quarters of 2022, indicating tighter financial circumstances and greater investor skepticism.
A 10% decline in greenfield project announcements, particularly in the manufacturing sector, was contrasted with a stagnant 2021 level for foreign project finance arrangements. In both situations, monthly data exhibits a declining tendency.
The developed economies, Latin America, and Central Asia saw the largest drops in new investment projects.
The research states that most industries saw a decline in project counts, but a few stood out, particularly the extractive and petrochemical industries.
Greenfield projects continued to expand in value as a result of a few significant announcements centered on the supply of energy and gas.