Investment in projects that tackle climate change is expected to decline in 2022 as global foreign direct investment flows drop, according to a report published by the UN Conference on Trade and Development.
Between January and September this year climate change mitigation and adaptation sectors had seven per cent and 12 per cent fewer new projects announced, respectively, the report warned.
Climate change investment had been increasing since 2015 when the Sustainable Development Goals (SDGs) were introduced and the Paris Agreement adopted by nearly 200 countries. Last year also saw a strong acceleration in renewable energy, as a number of governments placed climate action at the heart of their post-Covid recovery plans.
"The boom was supported by post-Covid stimulus investment packages, especially in Europe, and loose financing conditions for international project finance worldwide," the report said. "Total project values in 2021 were twice the pre-pandemic level. This momentum is now at risk."
Part of the anticipated decline is due to the overall fall in foreign direct investment, which was down 31 per cent in the second quarter of this year, compared to the first and seven per cent 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.
In terms of the current international climate change projects developed economies make up two-thirds of the deals and investments.
Europe accounts for more than half of the renewables' projects, with more than 700 in the first three quarters of 2022. North America and developing Asia attracted about 200 projects each. Latin American and the Caribbean and Africa had 150 and 100 projects, respectively.
However, the report warns that while the current downward trend in investment is hitting "extractive industries" and "fossil fuel based energy generation" the current environment could lead to a "renewed push for investments in fossil-fuel based energy".
The report went on to note that high profits of multinationals in these sectors combined with the energy crisis has sparked growing interest among some investors.
It said "an early indication" was the value of cross-border M&As in the extractive industry, which rose six-fold in the first three quarters of 2022.
"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 commented.
The analysis runs counter to recent studies from the International Energy Agency, which has suggested that escalating concerns over energy security sparked by Russia's invasion of Ukraine has led to a surge in investment in renewables and low carbon infrastructure.
However, concerns over a slowdown in international investment in climate solutions remains widespread, especially among developing economies, and as such negotiations to boost financial flows into low carbon projects in those countries most exposed to climate impacts are expected to dominate proceedings at the upcoming COP27 Climate Summit in Egypt.
A version of this article first appeared at Investment Week.