How to boost sustainable investment for a post-2015 development agenda
What kind of international effort might be required to facilitate sustainable investment?
The global challenges of poverty, sustainable growth, and climate change are being tackled with renewed vigour through a post-2015 development agenda and accompanying sustainable development goals. This will see many countries embark on the design of national development strategies for 2030. Nations are also currently announcing their national climate action plans as part of an effort to ink a deal in December on a post-2020 multilateral climate regime. On the trade side, while uncertainty remains around the Doha Round trade talks, the WTO Trade Facilitation Agreement (TFA) is expected to enter into force sooner rather than later. The outcome document from the Third International Conference on Financing for Development (FfD3) held in Addis Ababa, Ethiopia from 13-16 July, meanwhile, strengthened international commitments and guidelines around development finance. Investment is common to all these processes that will, one way or the other, update the global development vision and in turn increase demands for quantitatively more investment that is also qualitatively more sustainable.
Shifting investment perspectives
Seen from some angles, investment remains a contentious multilateral issue, with divisions over the future of the international investment regime, rising numbers of disputes and criticism of their settlement, and close scrutiny of corporate contracts by media and civil society. Perspectives on foreign direct investment (FDI) have nonetheless evolved greatly over the years, for example, moving from closure to openness or from positive to negative lists. A few facts help to illustrate countries’ current broader openness to FDI. According to the UN Conference on Trade and Development (UNCTAD), some 80 percent of regulatory changes from 2000-2013 involved liberalisation or promotion, while the number of international investment agreements rose to 3268 by the end of 2014.
FDI demand stems from larger search for investment, not just for current growth, but also for sustaining future growth. Major demographic and energy transitions will require significant investments in education, energy, and infrastructure to mitigate and adapt to the threat of climate change. These needs outstrip the ability to finance investments through public expenditure, even in developed countries, and FDI is also a critical mechanism to help spread technological innovation across the globe.
The links between trade and investment more generally have equally become clearer over the years. Firms increasingly locate specific activities wherever it is best for them to maintain or increase their international competitiveness, helping to boost FDI, and giving rise to the concept of global value chains. FDI and trade are necessary complements for an integrated international production system that can act as an engine of growth. [Ref 1] Investment can, moreover, help to boost trade. The WTO TFA promises to reduce transaction costs at the country level by 10 to 15 percent. Reduced trading costs improves a country’s locational advantages that attract efficiency-seeking FDI. If FDI is not forthcoming, then the advantages of trade facilitation are less compelling. Alternatively, potential benefits to a host country would multiply if trade facilitation proceeds jointly with investment facilitation to attract FDI, and promote linkages with domestic enterprises and SMEs active in segments of arm’s length trade.
Bridging the sustainable investment gap
When accounting for all infrastructure needs ranging from water to telecommunications, the gap in global investment is at least US$1 trillion per year. An estimated US$5-7 trillion worth of annual investments, meanwhile, may be required to achieve the SDGs. Can this gap be bridged and needs met? From investor perspective the answer is affirmative, it is a matter of policy, not money. Answering the call of the post-2015 development agenda will require innovative partnerships incentivising private investment in social infrastructure. Global financial markets have abundant funds, including for niche activities such as impact investment, microfinance, and green investment. Civil society and the private sector already play an active role in areas such as education, health, extractive sector, and garments. For example, following the 1992 Rio Earth Summit, world industry associations began preparing responsibility guidelines.
For governments, despite development fatigue and budgetary constraints, many states are open to partnering with the private sector. The rationale for such cooperation is enlightened self-interest, in other words, leveraging donor assistance to enlist private resources to support recipient countries in implementing shared commitments on trade and sustainable development. Governments are, however, expected to lead the process. National policies in many cases can provide the critical enabling environment for investment. Potentially, all investment is sustainable, but depends on discovering and putting in place the appropriate policy and institutional frameworks.
What needs to be done?
Regulation and promotion are the basic policy levers to enhance investment. While most countries have liberalised laws governing entry, treatment, and exit of FDI, these are often inadequate, and where regulatory support infrastructure exists, clarification or improved coordination among different levels of government may still be needed. In many countries, the overall regulatory environment can be made more transparent, and the costs of doing business lowered. However, in the global competition for FDI, it is also important that investment should advance larger development objectives. Governments frequently offer generous fiscal incentives that do not induce specific development activities. Regulatory exceptions should avoid the sacrifice of long-term objectives for short-term gains. But policy experience in incentivising private investment in sustainable development activities is as yet nascent. Demonstration projects, pioneering partnerships involving multiple stakeholders, and institutional capacity in the public sector receptive to positive engagement with the private sector are needed. Many of these suggestions might be helped by an international support programme for sustainable investment facilitation.
Contours of sustainable investment facilitation
Such a programme would focus on the “nuts and bolts” of encouraging the flow of sustainable FDI to developing countries. Moreover, many developing countries and particularly the world’s poorest nations, do not possess the capacity to compete successfully in the world market for FDI and therefore require particular assistance to meet substantial investment needs. The programme would complement various efforts to facilitate trade, in particular, through the WTO led Aid-for-Trade Initiative and the recently adopted WTO Trade Facilitation Agreement. In a world increasingly dominated by global value chains, the latter address the trade side of the equation, while an international support programme for sustainable investment facilitation would address the investment side. Analogous to WTO efforts, a sustainable investment support programme would be entirely technical focusing on a range of practical actions to encourage the flow of sustainable investment to developing countries, with the aim of fostering their economic growth and development. These undertakings would in turn need the support of official development assistance, especially for least developed countries, to strengthen the basic economic determinants of FDI.
Defining sustainability characteristics of international investments is challenging. An international or non-governmental organisation could establish a multi-stakeholder working group to prepare an indicative list of FDI sustainability characteristics to use as guidance by governments seeking to attract sustainable FDI. This could include, for example, carbon dioxide-neutral foreign affiliates. This identification would also be helpful for governments wanting to encourage sustainable domestic investment. UNCTAD’s Investment Policy Framework for Sustainable Development and the OECD Guidelines for Multinational Enterprises or newly launched Policy Guidance for Investment could provide inspiration in this respect. Defining sustainable FDI is also increasingly required for investor-state disputes. The same applies to international investment agreements as these increasingly make reference to sustainable development. [Ref 2]. The working group could, in addition, identify mechanisms to encourage the flow of sustainable investment that go beyond those used to attract FDI in general. At the national level, special incentives could be one of the tools used by governments for this purpose. At the international level, the working group could examine among other things, lessons learned from established bodies such as the Clean Development Mechanism and the Clean Technology Fund.
The sustainable investment support programme could address a range of subjects starting, for example, with transparency. Host countries could commit to making information easily available to foreign investors on practices directly bearing on incoming FDI, beginning with issues relating to the establishment of businesses, including existing limitations and incentives, investment opportunities, and project development. Governments could also provide an opportunity for comments from stakeholders when changing the regulatory framework affecting FDI, or when introducing new laws and regulations, while retaining ultimate decision-making power.
Transparency is also important regarding the support offered to outward investors by their home countries. These could commit – through a designated focal point – to making information available to their foreign investors on the measures they have in place both to support and restrict outgoing FDI. Supportive home country measures include information services, financial and fiscal incentives, and political risk insurance. Some of these measures are particularly important for small and medium sized enterprises (SMEs). Multinational enterprises, in turn, could make information available on their corporate social responsibility programmes and any instruments they observe in the area of international investment.
On the national institutional side, investment promotion agencies could be the focal points for matters related to a sustainable investment support programme, possibly interacting and coordinating with the national committees on trade facilitation to be established under the TFA. The function of such agencies in attracting sustainable FDI and increasing its benefits for the sustainable development of host countries could be recognised and undertaken within the framework of a country’s long-term development strategy. Investment promotion agencies could also play a role in the development of investment risk-minimising mechanisms needed to attract investment, or in the prevention and management of conflicts between investors and host countries. Regular interactions between host country authorities and foreign or domestic investors would help.
Finally, as in the Aid-for-Trade Initiative and the TFA, donor countries could provide assistance and support for capacity building to developing countries in the implementation of various elements of a sustainable investment support programme starting with an assessment of their needs and the identification of sources of international assistance. Support could focus on strengthening the capacity of investment promotion agencies as country focal points for the sustainable investment support programme.
Practical steps moving forward
There are several ways in which this idea could be moved forward. One option is to extend the Aid-for-Trade Initiative to cover investment as well, recognising the close interrelationship between investment and trade, and in tune with other trade international frameworks such as the WTO’s General Agreement on Trade in Services (GATS). Transactions falling under the latter’s Mode 3 – “commercial presence” – account for nearly two-thirds of the world’s FDI stock. The initial emphasis could be on investment in services and focus on key sectors for promoting sustainable development. Relevant initiatives, however, might require a broader interpretation of the current Aid-for-Trade mandate. This approach could also benefit from the OECD’s Creditor Reporting System that monitors where aid goes and what purpose it serves. The matter could equally be taken up by the Global Review on Aid-for-Trade, to examine its feasibility. Alternatively the current Aid-for-Trade Initiative could be complemented with a separate Aid-for-Investment Initiative but, given the tight interrelationships between trade and investment, this would be a second-best solution.
Another more ambitious and medium-term option is to expand the TFA to cover sustainable investment. This could be done through an interpretation or amending the Agreement as agreed by member states. A subsidiary body of the Committee on Trade Facilitation could provide the platform to consult on any matters related to the operation of what would effectively be a sustainable investment module within the Trade Facilitation Agreement. It is, however, as yet still uncertain when the required two-thirds majority of the WTO membership will have ratified the TFA or how the accompanying Trade Facilitation Agreement Facility will function in its quest to act as a financing facility to support developing countries unable to access funds from other agencies. Member states would also presumably wish to gather some experience with the operation of the TFA before expanding it.
A third, ambitious option might be for WTO members to launch a “Sustainable Investment Facilitation Understanding” focusing entirely on ways to encourage the flow of sustainable FDI to developing countries, inspired by and complementing the TFA, to be undertaken after the completion of the Doha Round. Work could equally begin in another international organisation with experience in international investment matters, for example in UNCTAD, the OECD, or the World Bank. A group of leading outward FDI countries could also launch such an initiative, for example, through the G20. The objectives of a support programme for sustainable investment facilitation can also be reached if its elements were to be incorporated in international investment agreements. Some of these agreements contain commitments by treaty partners to consult on the promotion of investment flows between them. But few contain binding commitments. Such approaches, while helpful, are nevertheless necessarily more piece-meal.
Meeting the future
The issues mentioned for possible inclusion in an international support programme for sustainable investment facilitation, as well as the options outlined on how such a programme could be put in place, are illustrative and all need to be seen against the background of the importance of economic FDI determinants. If these determinants are unfavourable, and investments are not commercially viable, even the best support programme is likely to have negligible effect. Concomitant productive capacity building is therefore critical. The key premise is the urgency of creating more favourable conditions for sustainable FDI flows to meet the investment needs of the future. As governments and the private sector increasingly share this view they will hopefully muster the political will and find the appropriate venue to put an international support programme for sustainable investment facilitation in place.
More details on the ideas outlined in this article can be found in a longer research piece published by the E15Initiative: An International Support Programme for Sustainable Investment Facilitation, July 2015. Implemented jointly by ICTSD and the World Economic Forum, the E15Initiative convenes world-class experts and institutions to generate strategic analysis and recommendations for government, business, and civil society geared towards strengthening the global trade and investment system.
Karl P. Sauvant. Resident Senior Fellow, Columbia Center on Sustainable Investment (CCS). Sauvant is also the Theme Leader of the E15Initiative Expert Group on Investment Policy.
Khalil Hamdani. Visiting Professor, Lahore School of Economics, Pakistan
[Ref 1] Sauvant, Karl P. The International Investment Law and Policy Regime: Challenges and Options. E15Initiative. Geneva: International Centre for Trade and Sustainable Development (ICTSD) and World Economic Forum.
[Ref 2] Gordon, Kathryn, Pohl, Joachim and Bouchard, Marie. Investment Treaty Law, Sustainable Development and Responsible Business Conduct: A Fact-finding Survey. OECD. 2014.