According to a new analysis released on Thursday by the UN Conference on Trade and Development (UNCTAD), cross-border investment in climate change mitigation and adaptation is predicted to decrease in 2022 against the backdrop of a worldwide 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% less 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.
Climate action momentum at risk
“The shift from fossil-fuel to green investments to support the energy transition risks a setback, due to the loss of momentum in renewables and high oil and gas prices,” the report says.
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 sixfold between January and September 2022, is a leading indicator of that.
Global investment trends: Marked slowdown expected for 2022
According to another report published by UNCTAD on 20 October, FDI flows in the second quarter of 2022 reached an estimated $357 billion.
That’s a 31% decrease from the first three months and 7% less than the quarterly average of 2021. “The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates and fears of a coming recession,” the report said.
But it noted that FDI flows over the first half of the year were still up as the strong growth momentum of 2021 continued in the first quarter.
Fall in developed countries
FDI flows to developed economies were 22% lower in the second quarter, compared to the average of 2021, at an estimated $137 billion.
In Europe, flows to European Union countries were up 7%, while countries outside the bloc saw inflows fall by more than 80%.
Inflows in North America were 22% lower as cross-border mergers and acquisitions targeting United States firms more than halved.
“Some resilience” in developing world
FDI flows to developing economies as a group showed some resilience, increasing by 6% to $220 billion. But that uptick was driven mostly by continued growth in several large emerging economies.
Latin America and developing Asia maintained previous upward FDI momentum, while flows to Africa nearly dried up completely.
Investment projects down due to financial tightening
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.
According to the report, project numbers fell across most industries, with a few exceptions, notably in extractives and petrochemicals.
In terms of value, greenfield projects still experienced growth, due to a few large announcements concentrated in electricity and gas supply.