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10 August, 2022

FDI drivers in 2022: ESG

The global race to net zero has turned ESG into one of the most important drivers of FDI in the post-Covid world.

By Viola Caon and Sofia Karadima

Embracing environmental, social and governance (ESG) criteria is rising in importance as a driver of foreign direct investment (FDI), with investors increasingly taking into account such criteria as part of their site selection decision.

However, when it comes to responsible investing, there is more to it than simply ticking off the ‘E’, ‘S’ and ‘G’. Taking into consideration the UN’s Sustainable Development Goals (SDGs) is becoming more prominent, while all companies have to be on their guard to avoid accusations of greenwashing.

ESG is a set of standards used by companies to measure how responsible their practices are, while the SDGs consist of 17 goals set out by the UN that it hopes to achieve globally by 2030.

GlobalData’s Company Filings Analytics Trends & Signals Q1 2022 report, which was based on earnings call transcripts in the first three months of 2022, reveals a 23% rise in ESG mentions when compared with the final quarter of 2021.

The study also states that mentions of “various SDGs set by the UN have been steadily increasing in companies ESG reports since 2016”. In addition, the data shows that companies tend to refer to different SDGs in their earnings calls depending on the sector in which they operate.

What is the relationship between ESG and FDI?

A poor performance when it comes to ESG or the SDGs can have a negative effect on how attractive a company or a location is to investors. Conversely, however, the outside expertise that FDI can bring can help those struggling to meet sustainability standards.

If foreign investors back projects that promote ESG and the SDGs, then the host countries are going to benefit from industry-specific expertise, the transfer of technology and job creation in sectors that deliver environmental and social impact. 

There are specific areas where FDI flows can be particularly helpful when it comes to moving a company or country closer to meeting the SDG targets. They are:

  • renewables
  • affordable and eco-friendly housing
  • rehabilitation centres
  • affordable irrigation systems
  • affordable medical equipment and consumables
  • affordable micro credit and mortgages
  • affordable sanitation services
  • agricultural logistics services
  • construction of wastewater treatment plans
  • electronic waste recycling

The chart below shows where FDI into the renewables and alternative power sector has been most prominent and has grown the most over the past three years.

According to data from Investment Monitor’s FDI Projects Database, Spain stands out in terms of renewables FDI projects growth, going from 46 in 2019, then 27 in a Covid-19-hit 2020, to a spike of 78 in 2021. Perhaps unsurprisingly given its market size, the US has consistently attracted the most renewables FDI projects in this period, going from 61 in 2019 to 72 in 2020 to 81 in 2021.

Some countries seemed to shrug off the FDI slump brought about by the Covid-19 pandemic when it comes to renewables FDI. Brazil experienced a large rise in this sector in 2020, going from 12 projects the year before to 55. The UK also enjoyed a strong 2020, going from 25 renewables projects in 2019 to 40, a figure that held firm in 2021 with 44 projects.

FDI, ESG and supply chains

Waterproofing supply chains from disruptive events is key for foreign investors with operations in several countries, and ESG can play a key role in this.

A survey by procurement and supply chain consultancy Proxima has found that companies without sustainable supply chains will attract less investment and see share prices drop over the next decade.

The survey, which was conducted among investment managers based in the UK and the US, revealed that 84% of the responders believe that issues with supply chain sustainability and a lack of ESG standards are a financial threat to their investments.  

Thus, committing to climate action, reducing gender inequalities and ensuring workplace safety within supply chains is rising on investors’ agendas as a way to build resilient supply chains, promote the achievement of the SDGs and generate sustainable economic growth.

How are countries faring when it comes to meeting ESG criteria?

While many countries have signed the Paris Agreement, which targets limiting global warming to below 2°C, and have, among other things, committed to bringing carbon emissions down to zero by 2050, some are further along this journey than others.

In 2021, China was the country that invested the most in energy transition with a total of $266bn. It was followed, by some distance, by the US with $144bn. An even more distant Germany was in third with $47bn.

The data in the chart above is drawn from BloombergNEF’s Energy Transition Investment Trends 2022 report. Investment in energy transition as referred to in this report covers a wide scope of sectors including renewables, energy storage, electric vehicles and heating, hydrogen, nuclear, sustainable materials and carbon capture.

In 2021, global investment in the low-carbon energy transition totalled $755bn, up from $595bn in 2020 and just $264bn in 2011, according to the report.

“The largest sector in 2021 was renewable energy, which attracted $366bn for new projects and small-scale systems (up 6.5% from 2020), but the electrified transport sector grew the fastest and hit $273bn (up 77%)," the report said. "The next largest sectors of spending were electrified heat ($53bn) and nuclear energy ($31bn).”

The Asia-Pacific region attracted the most investment at $368bn, and recorded the highest growth at 38%, but investment rose to a new record in all regions.

“Still, investment must triple in the next few years to get on track for net zero by 2050,” the report notes.

Which countries are still attracting oil and gas FDI?

Comparing the proportion of oil and gas construction projects against those in alternative power infrastructure can give an indication of which countries have more work to do to meet the net-zero targets.

Data from the GlobalData Construction Intelligence Centre shows that in the period between 2009 and 2019, the United Arab Emirates attracted more projects in oil and gas (331) than in alternative power infrastructure (318).

Russia, Saudi Arabia, Egypt and Canada have also attracted a high proportion of oil and gas construction projects in the period, with Brazil, Chile, Japan, Peru, Spain and the UK at the other end of the spectrum.

This article is part of a series focusing on FDI drivers that are rising in importance in the post-Covid environment. The full list comprises:

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