The conversation around climate change is sometimes narrow and often centres on mitigation and adaptation. Frequently, businesses and governments tend to overlook its wider effects. Climate change involves more than carbon and energy, and the solutions encompass more than fossil fuel divestment and legally binding agreements. The way in which climate change impacts foreign direct investment (FDI) is an issue that is often neglected.
Thus far, discussion on climate finance has concentrated on positive innovations in the areas of renewables, carbon capture and storage, new financial incentives, and financial tools such as the Green Climate Fund – all of which have added to the climate change financial discussion. However, key areas like foreign investment, and trade and development are closely connected to the collateral damage of climate change.
In the wake of the economic and financial crash in 2009, investors looked to emerging economies as possible growth markets while rates in their traditional markets remained low. Since then, many corporations in emerging markets have been borrowing at an unprecedented rate, buoyed by low rates and favorable terms. The IMF’s recent Financial Stability Report estimates that corporate debt in emerging markets grew fivefold in the past ten years to $18 trillion USD. However, the much anticipated rise in interest rates by the US Federal Reserve and the accompanying rise of the US Dollar have triggered a reversal in this trend, increasingly shifting investment from emerging markets and back to the United States.
On top of $1.23 trillion USD FDI which shifted away from emerging markets in 2014, some of these markets lost an additional $1 trillion USD in investment in the past six months alone. The additional impacts of climate change and a shifting global ecosystem add a worrying level of unpredictability for developing economies. If such outflows continue, companies and governments will be under considerable pressure to reduce their focus on the non-financial aspects of their economies. One way countries do this is by competing against each other to offer favorable corporate tax schemes and other economic incentives.
Fortunately, some emerging economies and blocs are bucking this trend, such as ASEAN which witnessed another banner year in foreign direct investment, despite a decrease in global FDI. Although the area contends with a history of corruption and environmental degradation, the ASEAN economy is an important test case to ensure the right course of action is taken.
One way of ensuring the correct course would be the creation of a filter for global investment based on open standards. This would take into account the full scope of non-financial risks posed by climate change to ensure that global investment flows are considering such these risks. This would not be confined to just carbon and energy, but all effects of climate change, relevant to emerging economies.
Additionally, the Paris Climate Summit pledge of $100billion in public and private funding to developing countries on an annual basis by 2020 could help curb the tide of adverse climate change effects in developing countries.
While it is evident that climate change will affect our most active global economies, some solutions already exist. GRI Sustainability Reporting Standards are available and used by thousands of companies in almost a hundred countries, as well as dozens of governments worldwide. Employing an effective filter for FDI in emerging economies is fundamental to building a more sustainable economy and world.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
