Richard Bolwijn is the director of investment research at Unctad, the United Nations’ Conference on Trade and Development, an intergovernmental organisation within the UN that promotes the interests of the developing world in global trade.
He caught up with Spotlight to discuss sustainable development and the upcoming World Investment Forum in Abu Dhabi.
What are the biggest barriers to investing in sustainable development?
There are many, but let me highlight three important ones, focusing on developing countries. First, there is the high-risk ratings of many of the poorer countries, resulting in very high capital costs. Because most of the sustainable development sectors are infrastructure sectors, or require infrastructure-related investments, they’re very capital intensive. The cost of capital is an especially important hurdle for renewable energy investments.
Second, in many developing countries the capacity to develop large-scale projects that require a lot of planning, regulatory approvals, impact assessments and other technical steps is not always present. The result is that few infrastructure projects of the size required to interest large institutional investors or funds are being brought to market. These countries need support in project preparation.
Third, there is the general business and investment climate. In many developing countries foreign investors are deterred by complex administrative procedures, by a lack of infrastructure, intermittent power, and so forth. It is hard to set up a new renewable energy installation if the grid to connect it to is weak, or to build a new hospital if roads to reach it still need to be paved.
How have international events over the past 12 months changed the investment landscape?
Not for the better. We talked about barriers to investing in sustainable development. Well, you need a stable environment to make a long-term investment that relies on returns well into the future to be profitable. If the uncertainty factor becomes greater, then the cost of capital goes up, and all of a sudden your spreadsheets don’t work anymore. So that causes companies or investors to delay projects or even call them off completely.
Over the past few years, we’ve seen a food crisis, a fuel crisis and a finance crisis. Food security is an issue in many poorer countries; the cost of oil and gas has gone up hurting economic growth; and many developing countries continue to hover close to debt distress. The uncertainty caused by these crises is a big negative for international investment.
But sometimes the immediate negative can have some long-term positive effects if it leads to a needed policy shift. Take the food crisis for example. International investment flows in agriculture have been languishing for years. Last year, the number of projects was lower than in 2015 when the sustainable development goals were adopted. If the food crisis leads to changes in policies that can stimulate responsible investment in agriculture, and in wider agrifood processing, and in resilient food supply chains, perhaps we can turn it around.
[See also: The UAE must show political leadership in its Cop28 presidency]
What would you like to see coming out of Cop28 in terms of sustainable development?
My first ask is for countries to simply stick to their commitments at previous Cops, in terms of transferring finances to developing countries to help them with the energy transition.
Public finance, whether domestic or international, needs to take the lead role. But something that has already been a theme at previous Cops is for international public finance to catalyse private investment. A lot of investment in infrastructure is needed for the green transition and, as I said, the cost of capital for poorer countries to invest in renewable energy, or energy infrastructure is very high.
You can lower it by joining forces to de-risk investment. In renewable energy projects, in developing countries, if you bring in an international investor, you can reduce the cost of debt by about 10 per cent, if you bring in an international investor, a multilateral development bank, and work in partnership with the government you can reduce it by 40 per cent.
Many developing countries have had negative experiences in the past with these so-called public-private partnerships [PPPs], because of unexpectedly high costs to the state or to citizens or because of financial irregularities. But the evidence that the cost of capital is the key problem for the energy transition in developing countries makes it imperative that we find a way to make these partnerships work.
There is another outcome I would like to see. We are always talking about innovative financing mechanisms. But many of the mechanisms we keep bringing up – including the PPPs I just mentioned, but also others like blended finance or green bonds – they have been around for aeons. They are not that innovative anymore. The finance wizards working in capital markets have shown they can come up with more innovative instruments, and I would like to see them bring some new solutions to the climate problem. For example, not just bonds aimed at relatively easy investments in shiny new solar installations, but more difficult mechanisms to finance the early retirement of fossil fuel assets.
What can policymakers do to make investing in sustainable development more attractive to investors?
Institutional investors, pension funds and sovereign wealth funds manage enormous amounts of capital. But that money is for the most part invested in the US, Europe and other richer markets. There is real appetite to invest in sustainable development. The sustainable finance market – green bonds, ESG funds and so forth – has grown several times over in recent years and is now worth just short of $6trn.
So in capital markets, there is no great need for stimulus. We just need to make sure that sustainable financial products do what they promise. We need to tackle greenwashing, and a lot of efforts are already going into improving standards for sustainability reporting by firms and investors.
But we do need to make sure that more of the money is channelled to the right places. If we could rely on the growth of sustainable finance in capital markets, we would meet the sustainable development goals easily. But unfortunately, that money doesn’t arrive in the poorest countries and the sectors where it’s needed the most, such as infrastructure, water and sanitation, renewable energy and healthcare.
One of the reasons, of course, lies in the fiduciary requirements that institutional investors face. There are rules they have to follow about certain risks they can take. If the risks in developing countries are much higher than they are in developed countries, then automatically, these funds are forced to invest in developed countries. Changing this has proved difficult.
To make it more attractive and possible for institutional investors to invest in poorer markets would mean changing the rules, allowing them to invest part of their money in slightly riskier assets. We can also try to lower the risks, providing investment guarantees and risk-sharing mechanisms, and helping to build more stability in the markets where the money is most needed. None of this is easy.
Can you tell me a bit more about your event, the World Investment Forum?
The World Investment Forum is the biggest platform in the UN system on international investment in sustainable development. It covers the entire investment value chain from the mobilisation of funds in global capital markets down to on-the-ground investment projects in developing countries. It has all of the stakeholders along that value chain, from stock exchanges to institutional investors, financial market regulators, investment authorities, investment promotion agencies, treaty negotiators, special economic zones and many others.
I am hopeful to hear lots of new insights and new solutions for climate finance and investment that can support new initiatives on the part of Unctad and its partners in the World Investment Forum.
Register now to attend the World Investment Forum 16-20 October 2023 in Abu Dhabi on worldinvestmentforum.unctad.org.
[See also: Setting the stage for action on climate finance]
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