Key highlights:

• Foreign direct investment (FDI) needs to rebound across all sectors if the UN sustainable development goals (SDGs) are to be achieved but the commitment to sustainability appears weaker in companies from sectors without direct links to the SDGs.  

• ESG issues have some impact on FDI decisions, the extent to which is often determined by the materiality of specific issues for a company’s business.

• Although companies recognise that investing in sustainability is in their long-term self-interest, cost often remains king. The unattractive risk-return profile of many SDG-related sectors poses a challenge for policymakers.

Our survey of 376 C-suite executives from multinationals in the energy, finance, healthcare, IT and manufacturing sectors shows that although many companies are making the right statements about their commitment to sustainability, cost usually remains the decisive factor. In our first article, we discussed how sustainability-related incentives, key to compensating for additional costs, have been weakened by introducing new trade barriers and FDI screening programmes. 

This picture is not a universal one. Here, we look at how a company’s commitment to sustainability is shaped by its sector’s relationship with the SDGs. Companies with activities directly related to the SDGs seem more likely to invest in sustainability but what about companies from sectors where direct links are much less clear?

Lower FDI returns

It makes sense that companies in the energy sector are investing in wind and solar power projects but the SDGs will not be met by sectoral investment alone. Investment in SDG initiatives needs to be cross-sectoral—meaning a reversal of current trends.

It’s unclear how important sustainability is to FDI decision-makers in companies without direct links to specific SDGs. However, sustainability is likely a lower priority in FDI decision-making when those direct links are not there. Some markets are favourable for cost and sustainability but they are few and far between. Typically, a market will be good for cost and poor for sustainability, or vice versa. 

FDI decisions will often come down to returns, which vary significantly across different sectors. The returns on FDI in many sustainability-sensitive sectors are meagre, according to Simon Evenett, professor of international trade and economic development at the University of St Gallen and the co-ordinator of Global Trade Alert, which monitors the impact of state policy on trade.

The most recent Global Trade Alert report found that the lowest average FDI returns between 2015 and 2018 were produced by the most SDG-sensitive sectors, including healthcare (1%) and telecommunications (0.8%). “I’m quite sure that there is variation across destination countries, so not everything is going to be a sustainability-related issue,” says Mr Evenett, “but the overall point is that returns are low when you compare them to your plain-vanilla FDI of manufacturing and wholesale trade”.

Walking the talk

According to our survey, more than 81% of respondents agree that countries focused on resolving sustainability issues will have an advantage as FDI becomes more competitive. Our research indicates that environmental, social and governance (ESG) issues have at least some impact on the location and structure of a company’s FDI. It also suggests that a sector’s proximity to specific ESG issues or SDG targets determines the degree of impact.

We asked respondents about the effects that three particular ESG factors would have on the likelihood of investing in a specific country. Those factors were “ambitious environmental targets in place to reduce greenhouse gas emissions in the country”, “the country’s commitment to protecting human/minority rights” and “strong rules to ensure good corporate governance”. As a result, companies across all sectors are much more likely to invest in countries with ambitious greenhouse gas targets (77%), commitment to protecting human rights (77%), and, where rules ensure good corporate governance (84%).

Companies in the energy and natural resources (80%), finance (83%), and healthcare (83%) sectors are the most likely to invest if there are ambitious environmental targets in place. There was a similar pattern in responses to our survey when it came to a country’s protection of human rights, manufacturing companies (81%) scored the highest.

Among technology companies that responded, the governance factor (81%), which underpins actions on environmental targets and human rights, has the most significant impact. Environmental targets (65%) have less influence on technology companies than other sectors. Tech firms were also most likely to agree that cost will always be the most important factor for FDI strategies. These are typically companies with a cross-sectoral role in meeting the SDGs rather than a direct link to specific targets. 

What exactly motivates these organisations with a cross-sectoral relevance to the SDGs to have a tangible impact?  

Two sides of the coin 

Many companies across all sectors (78%) say that a country’s commitment to implementing the SDGs is a key consideration in their FDI decision-making. We asked companies to cite their main reasons for incorporating ESG considerations into their FDI decisions. Again, some clear sectoral patterns emerge in the results. Almost six in ten energy and natural resources respondents incorporate ESG into their FDI decisions because it is “central to [their] organisation’s values and is part of all [their] investment decisions” and less so because of brand reputation or regulatory demands. 

This begs the question as to what compels a company without direct links to the SDGs to incorporate sustainability into their FDI decisions. Just 32% of technology companies saw ESG as central to their organisational values, with brand reputation (39%) instead the primary motivation—as it was among manufacturing businesses (46%). Although this is just a snapshot, it reinforces an impression formed elsewhere in our research: there is likely to be a greater conviction in a company’s approach to ESG and sustainability when it links directly to its primary business activity. A key challenge is to push companies without direct links to SDGs to adopt ESG as a central value.

What does this mean for FDI?

While companies increasingly recognise that investing in sustainability is in their economic self-interest and say that ESG factors form an essential part of their risk-management framework, they have urgent short-term considerations. Chief among them is cost, and as Mr Evenett notes, the FDI returns from sustainability-related sectors aren’t always attractive: “[i]f you take very low returns and you subtract out the necessary risk premium, you really have to ask yourself why does anyone invest in these sectors? And, since multinational corporations are responsible to their shareholders—they are not charities—you have to ask to what extent FDI can be a vehicle for sustainability in an era of low returns and high risk.”

In sustainability-related sectors, the economic fundamentals of FDI do not look favourable. Moreover, where companies are involved mainly in activities without direct SDG links, their commitment to ESG issues may not translate into the needed FDI if the SDGs are to be achieved. Overall, this paints a worrying picture for FDI’s role in achieving the SDGs. This has clear implications for countries seeking to attract sustainability-focused FDI and how they promote investment in the SDGs to incentivise companies in sectors that are not SDG-sensitive.