The report effectively resorts to begging for China to adhere to the rules-based order. It recommends that Beijing steer clear of excessive self-reliance but allows considerable latitude for discussing the scope of the word ‘excessive’. It implores the world’s second-largest economy to increase transparency on laws that limit market access, blissfully forgetful of the opaque regime that helped incubate such laws in the first place. Then it urges China to define a common language on de-risking, ignorantly assuming that Chinese polity serves the interests of the EU.
Europe is being suffocated by the rules-based order of its own making—Beijing has weaponised the EU’s rules against itself, thereby asphyxiating its companies, consumers, and citizens.
Trade protectionism, Beijing’s erratic policy shifts, and the quest for localisation find themselves among the other appeals. In a cringeworthy moment, China is even requested to “Refrain from punishing companies for the actions of their home governments.”
Nothing in what is sought is inappropriate. Rather, what is bothersome is that it is being voiced in a 34,000-word, 56-page report that sees a US$19.35-trillion large grouping of 27 democratic nations bend before a US$18.56-trillion authoritarian regime. Besides an amused smile from the Chairman of Everything, Xi Jinping, for exposing the EU’s toxic dependence, this report will achieve little else.
On the other hand, the seven recommendations for the EU, may—and it is a big ‘may’—wake the grouping, and perhaps even the continent, from its strategic slumber. The most important among these is the one around rethinking supply chains of critical inputs and export control frameworks. Yet, here too, the report is unable to imagine a world without China. “Continue to proactively engage with China and reject calls for disengagement,” it recommends. Further, it seeks to remind the actors in this game—chambers of commerce, China-focused think tanks, and businesses—about de-risking but fails to define why this should be paid heed to this time around.
Finally, the report offers nine recommendations for European businesses. Being an industry chamber, some of them are better phrased and informed. For instance, it seeks to pre-empt legislative changes and political risk. It calls for conducting detailed supply chain reviews and risk assessments, as well as intensifying due diligence to determine exposure to potential shocks. It urges companies to monitor areas of risk such as public backlash or sudden changes in market conditions. But when it urges corporations to be prepared for emerging global regulations, it neglects that all ‘global’ regulatory actions are enfeebled by a Beijing that regularly refuses to abide by them.
The recent report sees a US$19.35-trillion large grouping of 27 democratic nations bend before a US$18.56-trillion authoritarian regime. Besides an amused smile from the Chairman of Everything, Xi Jinping, for exposing the EU’s toxic dependence, this report will achieve little else.
Overall, the report, like several before it, illustrates the risks that European businesses face in China and assumes that a benevolent Beijing knows the problems and will do something to fix them. Worse, it details for the benefit of China exactly how dependent the EU is on its markets, its investments, and its manufacturing.
Given that collective economic security shaped by national issues is a subset of collective national security designed for a common cause, carving out an agenda of mutualism will be impossible for the EU. It is not the same as the EU coming together and taking a collective defence/security stand against Russia at the time of conflict (and not prior to it), for instance.
China is appraised as a commercial venture, and it is unlikely that commercial entities will bear the cost of national security until it is too late and too high for them and others. And then they will; just ask the German Industry about the Russian invasion of Ukraine. But most businesses work on hindsight and not foresight when it comes to security issues as they have a false belief in their ability to shape outcomes.
When the Stuttgart-based Mercedes-Benz, for instance, decides to deepen investments in China, despite the EU scrambling for an exit strategy, it shows how strongly the corporate tail of a company is wagging the national security dog of an entire continent. That 19.67 percent of the Mercedes stock is held by two Chinese companies (9.98 percent by BAIC Group, and 9.69 percent by Li Shufu) is not only influencing decisions in one of EU’s most high-profile companies but also weakening the EU hand on strategic affairs between Beijing and Brussels. Worse, instead of finding ways to get out of China, the report states that European companies find that decoupling, i.e. “detaching completely from the Chinese market” from China is a risk.
The impassioned quest for benevolence from the Emperor seems to be the European approach towards China. Transborder calls for ‘alms’ must not pass off as strategy—they are not.
So, while China has weaponised everything, from trade and investments to technology and culture, the EU remains trapped in the pincer of its strategic-commercial constraints on the one side and the rise of ‘wokism’ with a Confucius colour on the other. It is being suffocated by the rules-based order of its own making—Beijing has weaponised the EU’s rules against itself, thereby asphyxiating its companies, consumers, and citizens. Against these democratic constraints and strategic confusions, the Beijing model is unambiguous in its direction and its action.
Take a step back and what you see from the Beijing-Brussels midpoint—New Delhi—is a feeble EU approach to China. Blissful in its strategic slumber, lying on the bed of post-World War II prosperity, with eyes wide shut, Brussels remains addicted to Chinese goods, Chinese markets, and Chinese manufacturing. It appears nothing will change, even as Beijing runs circles around the EU, watching it squirm, and awaiting the next round of periodic rhetoric, even as it plans a deeper dive into the strategic vitals of the EU. The impassioned quest for benevolence from the Emperor seems to be the European approach towards China. Transborder calls for ‘alms’ must not pass off as strategy—they are not.
From the vantage of New Delhi, it is not only the possibility of Russia joining the dragon’s choir that is imminent and worrisome; it is rather the European opera halls hosting this choir that present a clear and present danger. The most important learning from this document for those reading it from outside is scary. If the lesson of its energy dependence on Russia, and the consequent decapitating impact on its security in recent years, has not taught the EU ‘Strategy 101’, nothing ever will. Isn’t it time to reconcile to this simple fact: that the EU is a non-strategic actor and, without radical rethinking—always will be?
The original article appeared in ORF Website, March 30, 2024
New approaches should reduce the cost of capital, bridge the technology divide and develop new pathways to cooperation.
Climate change is the most salient example of a challenge that demands global cooperation to solve. Yet, this necessity has so far failed to translate into a cooperative mechanism that can withstand geopolitical shocks, partly because trust in the current approach is eroding.
The challenge: global frameworks haven’t kept emissions from rising
In 2023, the world breached the critical 1.5°C average temperature rise barrier for the first time. It is now visibly evident that the impacts of human activity on the climate are no longer a thing of the future. Climate-induced natural hazards are now among the foremost threats to lives and livelihoods, as witnessed by the devastating floods in Libya, East Africa, Italy, Yemen and Pakistan in 2023 alone. The Global South is particularly vulnerable, with some estimates suggesting that the gap in economic output between the world’s richest and poorest countries could be as high as 25 per cent compared to a world without climate change. The future looks even bleaker, with predictions from the Intergovernmental Panel on Climate Change (IPCC) suggesting that if current emission pathways are maintained, average temperatures could rise 3.2°C by 2100.
Yet the global climate governance framework has failed to deliver. Despite various landmark agreements in Rio (1992), Kyoto (1997) and finally Paris (2015), emissions have continued to rise. Trust has broken down between developed and developing countries, given that the former have not only refused to make binding commitments on emission reduction, but have also failed to deliver on whatever meagre promises they did make – for example, to provide $100 billion annually to the developing world by 2020.
However, the fact is such tussles distract from the real scale of the problem. The final text at COP27 noted that between $4 and $6 trillion needed to be invested annually in renewables and decarbonisation solutions if the world was to stay on track to its Paris commitments. Even less ambitious targets, such as the 2022 Report of the High-Level Expert Group on Climate Finance, noted that annual investments would have to be between $2 and $3 trillion annually, with at least $1 trillion of that being foreign private investment. Instead of identifying solutions to raise and target flows of this scale, global governance has lost its way fighting over small, insignificant change.
The $100 billion figure has been left behind by events. It is now necessary to think in trillions. For that to happen, the debate needs to be reframed away from questions of guilt and compensation and towards obligation and opportunity. Fortunately, restructuring climate investment as an opportunity is entirely possible given that the technologies to combat climate change are becoming increasingly cost-effective: The IPCC estimates that the global average cost of renewable energy has dropped by up to 85 per cent since 2010. As a consequence, over 80 per cent of climate projects in the developed world are financed by the private sector, which sees a clear business case for green investment in those geographies.
However, investment in the Global North alone will not address a global problem. Only around 25 per cent of global climate finance currently flows to the Global South, although the developing world is where vast new investments in infrastructure and energy access are actually needed. The prohibitive cost of capital in the emerging world means that, in contrast to the developed world, only 14 per cent of green investment originates from private savings.
A new approach for rethinking climate governance
The differentials in the cost of capital between the Global North and South are prohibitive and the largest constraint on private investment flowing into climate action where it is most needed.
There is now a need to rethink global climate governance. The fundamental imbalance is this: While the developed world has been the key contributor to historical emissions, future emissions will be concentrated in the developing world. For instance, the International Energy Agency (IEA) estimates one-quarter of global energy demand growth between 2019 and 2040 might come from India alone. This energy growth is natural if crippling energy poverty in countries like India is to be addressed. The advantage for policymakers is that much of the energy infrastructure in these countries is yet to be built, and there is an opportunity for new, greener development that does not mimic carbon-intensive pathways adopted by the developed world. Development is energy-intensive, but it does not have to be carbon-emitting.
It is necessary to not just increase the amount of private capital deployed in the Global South, but also to ensure the scope of such investment is widened to include adaptation. Scaling up private investment into renewable energy, particularly grid-scale solar power, is easy to at least imagine. Yet other use cases for climate capital are no less important and need to be financialised. Traditional water conservation methods, regenerative agriculture, drought-resistant practices and seeds, low-cost community infrastructure like bunds to protect against sea level rise and salination – all these can no longer be financed out of public finances alone and must be seen as priority targets for private capital. Finally, the technology needed to scale up green energy solutions also remains concentrated in the developed world and China, requiring the Global South to often pay a heavy premium for using these technologies. Resolving these inequities and addressing the geopolitics around those imbalances will be imperative for achieving the Paris targets and necessitate a radical re-imaging of global cooperation around climate action.
Fortunately, climate action aligns well with the national development strategies of much of the emerging world. The Indian G20 Presidency highlighted the need to place green development at the heart of the climate action agenda. For the global energy transition to be successful, the right conditions need to be created for the Global South to use this transition as a means to eliminate energy poverty, create new economic opportunities and resolve existing gender and health inequalities. The outcome from COP28 in Dubai has kindled renewed hope for multilateral climate cooperation. For the first time there is a clear consensus on the need to transition away from all forms of fossil fuels. The operationalisation of the loss and damage fund and the decision on the global adaptation goal also sends a strong message that adapting to the impacts of climate change is now just as important as mitigation. Yet, the decisions from COP28 fall short of outlining a clear pathway for providing the means of implementation necessary for effective climate action in the Global South. Going forward, ambition must be combined with equity if the United Arab Emirates consensus is to be implemented.
The following are proposals to reimagine global climate governance:
Reduce the cost of capital: The global financial architecture needs urgent reform and re-targeting. Much climate investment requires capital upfront, with savings paying out over long tenures, sometimes in decades. The differentials in the cost of capital between the Global North and South are prohibitive and the largest constraint on private investment flowing into climate action where it is most needed. Ending this problem will need a vast expansion of guarantees and Multilateral Investment Guarantee Agency (MIGA)-like schemes.
Traditional reasons for this spread in capital costs are related to the political risks of investing in developing countries. Sovereign risk is, of course, real, but it is also often exaggerated. Certainly, reducing the spread of sovereign risk is a vital task for international financial reform. Climate risk is the greatest threat to the stability of the international financial system. Sovereign risk cannot be allowed to outweigh climate risk.
Bold new initiatives are needed to address the question of sovereign risk delaying climate action. For example, it may be necessary to produce internationally administered pools of capital that directly discount the cost of capital for projects and platforms related to climate action.
India’s experience with digital public infrastructure has shown that there are other possible approaches. The creation of global public goods need not be cost-intensive. A global pipeline of 10,000 climate projects, each with a clear timeline, risk-reward payoff, and carbon scoring – which together might mitigate a significant proportion of future emissions – would represent such a global public good. A green infrastructure database on such a scale would allow for the much faster and more transparent mobility of green capital.
Thus, the mandate and lending patterns of multilateral development banks (MDBs) must be changed if they are to tackle the climate change. These entities can be instrumental in channelling greater financial flows to the Global South by taking on some of the risks that prevent private capital flows to these geographies. While the key areas for reform have been identified by several independent committees, there is a need for clear, time-bound action. An independent committee under the Indian G20 Presidency has put forward a roadmap for MDB reform, aiming to make the provision of global public goods a pivotal mandate alongside existing priorities. This roadmap must be made more ambitious, along the lines suggested above.
Bridge the technology divide: The lesson of the pandemic for the developing world was that even lifesaving technology in a health emergency may not flow quickly enough between the Global North and the Global South. It is natural, therefore, to ask how technological diffusion will work in the climate space.
The global understanding of intellectual property in the health sector is that patent protection is vital for innovation but also that, on occasion, governments may have the duty to override protections in the face of emergencies. The right to issue compulsory licences is rarely invoked but is a vital part of the international property rights landscape. A similar mechanism needs to be deliberated on for climate tech. The presence of the possibility of compulsory licenses also ensures that many companies have the incentive to be good global citizens and provide voluntary licences that spread access to lifesaving technology while preserving a satisfactory share of their profits. Regulators and global institutions need to be able to create a parallel set of incentives for climate tech.
Fortunately, emerging economies are also seeing the emergence of a home-grown cleantech ecosystem driven by start-ups looking to disrupt traditional energy systems. This innovative sector might solve the problem of scaling up climate tech, but home-grown innovation continues to suffer from a lack of available public funds to incentivise research, reduced access to cutting-edge tech and a shortage of early-stage risk capital to bring certain technologies to commercial scale. Creating the right mechanisms to connect available risk capital in the Global North to cleantech ecosystems in the emerging world will be essential to bridging this innovation gap. Voluntary licensing can play a role in this mechanism as well.
Repositioning the start-up sector in the emerging world towards climate goals is a matter of allowing for potential rewards through the creation of risk funds. A simple $100 billion climate tech fund that would disburse money to 120-odd companies in the Global South, including start-ups with clear roadmaps for scaling up climate tech, would greatly multiply the mitigation effect per dollar of its money.
Spotlight the climate-health-gender nexus: The climate conversation needs to be made personal, especially for the vast populations of the Global South. Women, for example, are most affected by climate change and serve on the frontlines of adaptation. They should lead the effort to counter it. Female leadership in the climate field is both practical and essential. Creating women-led projects investing in female leadership will allow for the conversation about climate to move from an elite 30,000-foot discussion to one related to the real requirements and concerns of households.
Women are also the most likely to bear the health impacts of climate-related hazards.
For countries across the world, public health systems will have to adapt and shift scale in response to new climate-related risks. Putting health at the centre of the climate conversation will also allow for a further personalisation of climate policy. It will create new reasons for and loci of climate action.
Multilateral forums such as the United Nations Framework Convention on Climate Change (UNFCCC) and the G20 must better acknowledge and differentiate impacts of climate change on health outcomes across genders and craft women-led initiatives to mobilise societal support for political action. It is essential to establish appropriate mechanisms that include and build capacities of this key population segment to shape global and national action on climate.
Build new pathways for cooperation: While traditional multilateral mechanisms – such as the UNFCCC and other organs of global climate governance – may have fallen short at times, there is nevertheless an opportunity for global action that transcends geopolitical divides. India’s approach to its G20 presidency prioritised consensus in contested times. Even at the height of geopolitical polarisation, every major country is nevertheless moving, for its own reasons and out of a sense of responsibility, to take national action on mitigation and adaptation. In other words, climate action is the location of “inadvertent cooperation” between great powers and the driver of greater regional dialogue as well.
It can and should be viewed as a mechanism for restoring global stability and trust in multilateralism – if, that is, parties live up to their own commitments. This inadvertent cooperation should be captured and energised through new partnerships, institutions and dialogues. Countries with the coincidence of capabilities and concerns can collaborate in smaller groupings for faster and more ambitious action. UN-led discussions may suffer from “zero-sum” approaches and offer outcomes with only minimal ambition. They offer a suitable location for the mutual blame game, but global climate action must proceed nevertheless and build on the national action and inadvertent cooperation that is already visible.
This co-authored article with Danny Quah was first published on the World Economic Forum (WEF) as part of its White Paper on ‘Shaping Cooperation in a Fragmenting World’.
The Raisina Dialogue has become a feature today in the calendars of leaders around the world. It is a must-attend for all who seek to move the needle, disrupt the status quo, defend their beliefs, and create what shall be. India’s flagship conference on geopolitics and geo-economics enters its 10th year. In that time, it has emerged as a global, inclusive, and wide-band forum of international importance, transcending borders and ideologies, ages and agendas, hashtags and echo chambers. It is India’s ‘global public square’—located in New Delhi, incubated by the world. Its purpose is to preserve and promote the often-challenged art of dialogue and of working through differences. In keeping with Indian Prime Minister Shri Narendra Modi’s vision of delivering public goods for the benefit of all humanity, it is indeed a platform that serves this planet.
Raisina has been crucial in propelling discourse, nurturing collaboration, and fostering a sense of shared responsibility. It is a venue for celebrating diversity in all its shapes and forms: of thought, of approaches, of beliefs, of politics. It has captured the age-old Indian premise that within us all lies a desire and power to do good. Each view must be heard, and each suggestion must be considered. Pluralism, confabulation and heterogeneity is what makes us resilient and anti-fragile; and what drives the evolution of individuals and of societies. This is India’s own story as well; an enormous diversity that rests on a powerful timeless unity. or this reason, Raisina provides a rare opportunity for leaders and diplomats, scholars and policymakers, journalists and academics, teenagers and seasoned thinkers, business folks and civil society—to all come together to debate, deliberate, disagree, and discover shared futures and common pathways.
On this occasion, we celebrate the Raisina Decade: a period during which the Dialogue has helped build regional partnerships and transcontinental collaborations, while responding to global challenges. For three days every year, it has brought a fractured and polarised world together. This volume chronicles this journey, and reflects on its unique strengths and attributes. And this is best done by bringing together how it is perceived by eminent participants from different parts of the world. These are the thoughts of those who have themselves experienced Raisina and have contributed ideas, who have listened and spoken there and who appreciate the difference it has made.
This edition of the Raisina Files is infused with this conviction. The call of this century is to dispense with cynicism and to embrace what is appearing and emerging. A call to work towards inaugurating an inclusive and sustainable future. Rising up to the task requires us to create and cooperate, to build communities fit for this purpose.
This volume comprises contributions from an ensemble of thinkers who problematise, and attempt to answer, the pressing questions that matter. What are the power dynamics between a State and its citizens in this age of the digital? How do we protect our children in their always-online world, while preserving their agency and rights? If the current Western-led mechanisms of international aid are failing to meet the needs, how do we ensure that assistance truly reaches the grassroots? What transformations do our food systems require so they can be fit for the zero-hunger goal? As we move to the green frontiers, how will women lead the change? And how does the global financial system become just that—global?
India’s goal of reaching net zero presents a crucial challenge and opportunity. Its success depends on financing key sectors effectively, thus, shaping the pace of decarbonisation.
At COP26, India set itself the ambitious target of achieving net zero carbon emissions by 2070. Fulfilling this target will require critical sectors such as power, industry, and transport to switch from current production methods to low-carbon technologies. To help manage the economic growth and minimise the negative impact on businesses and the public.
In essence, the net-zero target presents itself as India’s biggest infrastructure and employment generation opportunity for the next 50 years. As per some estimates, solar and wind installations will need to grow 70 times from current levels to reach 7,700 GWs to achieve net zero by 2070. In addition to this, the country will need to build infrastructure to support 114 MMTPs of green hydrogen production. Estimates for this asset buildup place the costs of transitions for electricity, industries, and transportation at over US$ 10.1 trillion. However, current capital sources are sufficient to cover asset buildup valued at US$ 6.6 trillion, leaving a deficit of US$ 3.5 trillion.
The net-zero target presents itself as India’s biggest infrastructure and employment generation opportunity for the next 50 years.
Therefore, the magnitude of the asset buildup and the management of the human aspects of the transition will pose the most significant challenge and opportunity for India’s economy in the coming decades. Finance will be critical in this aspect as the country needs an average mobilisation of over US$ 200 billion annually for the next 50 years. Not just the scale but also the delivery of the finance to these sectors will decide the eventual pace of decarbonisation.
We suggest six steps that could aid in achieving this scale of finance. Essentially, financing will depend upon a three-step function of raising capital, deploying it (e.g., making loans) and collecting it back (e.g., recovery of the principal and interest). Each of our suggestions aims to solve some key problems within this three-step financing process.
The first step should be to notify sectoral targets, if possible, all the way up to 2070 and create an aligned taxonomy for achieving the same. The taxonomy would allow financiers to understand the funding potential of projects and mitigate the transition risk by answering what’s green and what’s not. Such a step could also help augment the capital-raising ability of financial institutions and corporates as they can tap lines of credit that are aligned to these targets for e.g., green or transition bonds.
The taxonomy would allow financiers to understand the funding potential of projects and mitigate the transition risk by answering what’s green and what’s not.
The second step entails leveraging public funds to mitigate lending risks and enhance the accessibility of finance at competitive rates, particularly for emerging business models and innovative technologies. This step is particularly important for a financial system which is shifting from financing fossil fuels to new age low-carbon technologies. By using de-risking structures, financial institutions can feel more comfortable deploying loans into new-age and green businesses with unique requirements and limited credit histories. For instance, electric vehicles (EVs) are expensive upfront, and bankers may have a limited understanding of the technology, leading to conservative lending practices. Credit guarantees at attractive rates can both help alleviate these concerns and allow for deeper financing penetration.
Third, like China, which today houses four of the largest five banks in the world, India should look at building massive banks and infra-debt funds that could allow for improved finance availability for mega RE, green hydrogen and other infrastructure projects marked by long gestation period to be built at a pace not seen in the past.
Fourth, the country could moot the greater participation of the foreign banks, which could bring in the much-needed foreign capital as well as take the currency risk, to finance the asset buildup in the country. This will require greater coordination among policymakers and regulators, often a rarity in India, to identify the key bottlenecks that have led to many foreign banks shutting shop in the country or getting reduced to fringe players in the lending ecosystem of the country.
Fifth, deepening the bond market and boosting other refinancing instruments will help create a greater flow of debt capital towards greenfield projects in the country by freeing up the books of debt providers like banks.
India must increasingly leverage its growing global influence to drive reforms in the international financial system, which currently obstructs the flow of climate finance beyond the developed world.
Sixth, to address the quantum challenge, public money could be used to incentivise foreign investors to make investments, who at present shy away from the country since investments are inherently expensive owing to currency hedge costs, in green projects in the country.
Finally, domestic and currently available foreign sources alone will not be sufficient to meet this financial challenge. India must increasingly leverage its growing global influence to drive reforms in the international financial system, which currently obstructs the flow of climate finance beyond the developed world. Specifically, expediting the reform agenda of Multilateral Development Banks (MDBs) prioritised during the Indian G20 presidency is essential. These entities must now be equipped to better utilise their resources to mitigate risks associated with private climate investments in the Global South. India must also better utilise plurilateral groupings such as the BRICS to address specific challenges. This includes establishing a dedicated pool of capital aimed at lowering the costs of green financing and fixing flaws in the credit rating systems that continue to be biased against the EMDEs.
Co-authored with Vaibhav Pratap Singh for the ORF Website
APM Modi and Sheikh Mohamed bin Zayed are putting in place the building blocks for a prosperous Arabian Sea community
Post-Independence, India has been unfair to the sea that laps against our western shoreline. We forget that the Arabian Sea has long been a fertile bridge for the exchange of ideas, stories, commerce, and culture. Khazanas of knowledge have flowed through its waters and lasting friendships have been forged. More than any Indian Prime Minister (PM) before him, Narendra Modi recognises the injustice of this neglect. His upcoming visit to Abu Dhabi will be his seventh — six more than any predecessor. Before his first trip in 2015, no Indian PM had set foot in the Emirates for over three decades.
While numbers are often inconsequential, sometimes they do matter. As the B-school adage goes: If you can’t count it, it doesn’t count. Seven prime ministerial visits paint a picture. It signifies a change in the relationship and a growing appreciation of each other’s importance. What India and the United Arab Emirates (UAE) have built is a special affinity. It reflects a new reality, one where the India-UAE bond is no longer voluntary but mandatory, not a choice but an instinct. PM Modi and Sheikh Mohamed bin Zayed Al Nahyan have undertaken a systematic overhaul: We are now mutually indispensable.
At the same time, he is attending the World Government Summit, a platform for deliberating innovation to deal with emerging governance challenges.
The very texture of this relationship is different. PM Modi is travelling to inaugurate the first Hindu temple in the UAE, an exemplar of Abu Dhabi’s promotion of a more pluralistic society. At the same time, he is attending the World Government Summit, a platform for deliberating innovation to deal with emerging governance challenges. In tandem, these act as a synecdoche for the larger relationship: The two nations are partnering with each other while celebrating who they are. They seek to be part of each other’s change while not seeking to change the other. India has friendly relations with many nations, and yet such friendships often come with prescriptive clauses of what India can or cannot do; of what India should or should not be. A large part of why the India UAE relationship is special is because it is descriptive, not prescriptive.
Embedded deeply in the India-UAE bond is a celebration of each other for what we are — plural yet singular. Plural because of our diversity of cultures and customs, and the heterogeneity inherent in our nations. Singular because we have navigated uncharted territory, and plotted an unmapped path for ourselves. In their own unique ways, both countries are exceptions in the region and in today’s times. The UAE has created a lush economy in the middle of an arid desert. India’s specific development challenges have no parallels, with individual states the size of entire nations. For both of our countries, there have been no models to follow, no moulds to fit into. This is the foundation of our mutual respect. It will continue to be the bedrock of our relationship as we transform incomes, update infrastructure, and move from an analogue to a digital world.
Diaspora lies at the centre of our relationship. More than 60,000 Indians have signed up to attend the PM’s address at the Zayed Sports City Stadium. However, statistics of this sort do not do true justice to the real story of the Indian diaspora in the UAE. The fact is Indians today share the top floor of skyscrapers in Abu Dhabi and Dubai. Positions that by default went to Europeans and Americans, today, see a large proliferation of Indians, whether in finance, energy, or infrastructure. They are being recognised as valued advisors, creative talents, and financial wizards, rubbing shoulders with Emiratis in building a 21st-century nation and contributing to the future of the UAE. This cohort of Emiratis and Indians is working to make the UAE a global hub for our century, even as they make India a global economic powerhouse for the benefit of the country, the region, and humankind at large.
Positions that by default went to Europeans and Americans, today, see a large proliferation of Indians, whether in finance, energy, or infrastructure.
As China rose, a small clique of cities benefitted: Hong Kong, Singapore, London, and New York. India’s journey, from four trillion dollars to 30, will see the world benefit. Abu Dhabi and Dubai will hold a privileged position in this odyssey. Even as India benefits, so will the global ambitions of the UAE. Moving forward, the UAE will be the new Gateway to India. It will be a talent hub, connecting Indian opportunities and Indian talent with the rest of the world. It will be a trade hub, with goods — and energy — that flow to and from India passing through it. It will be a finance hub, where it will be able to source at scale the capital required to sate India’s growing appetite.
PM Modi and Sheikh Mohamed bin Zayed are putting in place the building blocks for a prosperous Arabian Sea community. They are restoring the sea to the storied position it held in antiquity, refreshing it and bringing it into the 21st century. This community will offer people-centric, development-first, and growth-led solutions for Africa, Europe, and the Indo-Pacific. The space between the Gulf and the subcontinent will reclaim its role as the wellspring of inclusive globalisation in this century, just as it was millennia ago.
This article appeared originally in Hindustan Times.
More investment is needed to achieve the goals of the 2015 Paris Agreement. This Policy Brief suggests that the solution lies in increasing climate FDI—cross-border investment aligned with climate goals—by creating a ‘climate-friendly investment climate’. The authors recommend four targeted measures, drawing from a new ‘Guidebook on Facilitating Climate FDI’, to be published by the World Economic Forum in collaboration with Wavteq/fDi Intelligence: (1) Align investment promotion agency (IPA) strategies, key performance indicators (KPIs), incentives and de-risking instruments to climate goals; (2) Create a database of sustainable suppliers and a supplier development program to help domestic firms become sustainable; (3) Map multinational enterprise climate commitments and create a pipeline of endorsed and vetted carbon-neutral investment projects that help MNEs deliver on their commitments; and (4) Include climate FDI provisions in international investment agreements and national legal frameworks. Finally, a Coalition of IPAs for Climate is proposed to increase knowledge, facilitate cooperation, and drive action to increase climate FDI. The Coalition can use the measures to help facilitate two-way climate FDI between G20 economies, resulting in mutually beneficial outcomes.
1. The Challenge
According to IPCC estimates, about US$800 billion in new investment in energy systems is required each year between 2012 and 2050, to reach the Paris Agreement goal of limiting global warming to 1.5°C (de Coninck et al. 2018 in IPCC 2022, p. 361). This is in addition to current investment trends. Estimates place the baseline investment in energy systems at US$2.38 trillion of yearly investments, compared to the US$3.2 trillion that is needed (de Coninck et al. 2018 in IPCC 2022, p. 321).
Figure 1. Historical and Projected Global Energy Investments in Different Scenarios (2016-2050)
Note: The left figure uses six global models to represent four different scenarios: investment in energy systems that continue along the current baseline (i.e., pathway without new climate policies and measures beyond those already in place), increasing investment to achieve nationally determined contributions (NDCs), increasing investment to keep global warming to 2°C, and increasing investment to keep global warming to 1.5°C. The bars represent the model means, while the whiskers the full model range. The right figure represents the needed change in investment to keep global warming at 2°C or 1.5°C relative to the baseline. Whiskers show the full range around the multi-model means. Source: Rogelj et al. 2018 in IPCC 2022, p. 155
What about beyond energy systems? Earlier OECD estimates place the total investment needed at around US$6 trillion (see Figure 2, red box). These are astoundingly large figures.
Figure 2. Energy Investments Vs Other Investments for Climate Goals (2015–2035)
Note: Estimated annual world mitigation investment needed to limit global warming to 2°C or 1.5°C (2015–2035 in trillions of USD at market exchange rates). Source: de Coninck et al. 2018 in IPCC 2022, p. 373
More recent estimates suggest that between US$2 and US$2.8 trillion in investment may be needed every year to reach climate goals (Songwe et al., 2022), as shown in Figure 3. This may not always require new investment but a combination of mobilising new investment and the reallocation of existing capital.
Figure 3. Investment Needs for Climate Action Per Year by 2030
Source: Songwe at al., 2022, p. 23
How will the world mobilise new investment and reallocate existing capital? The capital will need to come from both public and private sources, but much more is needed to unlock and crowd-in private capital in this area.
The challenge is creating the right conditions to grow such investments. In other words, creating a ‘climate-friendly investment climate’.
The solution lies in a combination of institutional capacity and domestic reforms through improved policies and measures (Songwe et al., 2022: 28). Creating a climate-friendly investment climate will need to include policies and measures both on the demand side (encouraging increase in the consumption of low-carbon goods and services) and policies and measures on the supply side (encouraging increase in the production of low-carbon goods and services) (Prest 2022). Policies and measures will also need to address risks associated with scale-up in climate investments, including political, commercial, technological, and currency risks. Policies and measures will also need to promote, attract, facilitate, and incentivise such investments.
The question is what, exactly, policymakers should do.
Two recent analyses attempted to answer this question, including a T20 policy brief in 2022 (Sauvant et al., 2021; Stephenson and Zhan, 2022). The first provided an initial list of potential policies and measures, while the second defined climate FDI[a] and helped build a list of 15 different potential policies and measures.[b]
While this was a commendable start, greater clarity and precision was needed, and the World Economic Forum facilitated a way forward. Across a number of months in 2022 and early 2023, the Forum convened a series of technical meetings with investors, investment authorities, and experts to build on and further refine climate FDI policies and measures.[c] The aim was to produce a ‘Climate FDI Facilitation Guidebook’ that can be used by investment authorities to help grow climate FDI flows.[d] The Guidebook, set to be published in June 2023 in collaboration with Wavteq/fDi Intelligence and made available for free, will provide a ‘how-to’ for four categories of measures identified as particularly important to increasing climate FDI. The four were selected and refined through in-depth consultations (see footnote b), especially considering which measures were most suited to public-private collaboration.
For each of the four priority measures, the Guidebook will lay out: (a) a step-by-step approach; (b) considerations related to implementation and the stakeholders that need to be involved; as well as (c) potential risks and mitigation strategies. The present policy brief aims to capture the primary suggestions to help inform G20 deliberation and action.
2. The G20’s Role
As argued in the 2022 T20 policy brief mentioned earlier, the G20 is the proper forum to support scaling of climate FDI for at least three reasons.
First, climate is one area where G20 economies agree that more action—and especially coordinated action—is needed. The United States (US) and China, for example, notwithstanding their tensions issued in 2021 a number of joint statements and declarations on climate. This indicates that climate action is one area where cooperation is possible even between strategic rivals (State Council of the People’s Republic of China 2021; US Department of State, 2021a and 2021b).
More recently, the US and the European Union (EU) took decisive action to grow climate FDI, whether through the European Green Deal or the US Inflation Reduction Act (2022). The former will encompass €1.8 trillion in investments (European Commission 2023), while the latter includes US$400 billion to help achieve climate goals.
India is also exploring options to attract greater international investment to green sectors, as its remarkable success in expanding green energy has primarily been driven by domestic investments. As of 2020, tracked green finance in India reached US$ 44 billion. Around 83 percent of this was from domestic sources, with the private sector contributing about 59 percent of the domestic investment. However, the annual flows are only one-fourth of the amount needed to achieve the country’s NDCs (CPI, 2022). Thus, it is imperative that international flows must increase rapidly for India to remain on-track to achieve all its NDCs. Within this, FDI will be a priority area for India. Several sectors of the Indian economy are already fairly open to FDI, with minimum regulation; indeed, certain sectors such as renewable energy and electric vehicles have already seen inflows of some form of climate FDI. India will be keen to scale this up, while ensuring that these investments do not come with any conditions that may compromise its ambitious plans to establish a robust manufacturing ecosystem for green industries.
Second, firms carrying out the bulk of FDI are from G20 economies, and therefore helping them grow climate FDI will have a big impact on the world’s climate outcomes (Stephenson and Zhang, 2022, p. 14). Third, once G20 economies adopt policies and measures in support of climate FDI, this will create both a signalling and demonstration effect for non-G20 economies to consider similar approaches.
3. Recommendations to the G20
Recommendation 1. Consider adopting a conceptual framework and definition of ‘climate FDI’ to facilitate coordination and cooperation.
The way to think about climate FDI can be captured in an upside-down triangle that shows the relationship between different types of investment (see Figure 4).
Figure 4. Conceptual Framework for Climate FDI
Source: Based on Stephenson and Zhang, 2022: p. 6, updated and revised.
The broadest category includes any investment, whether portfolio investment or direct investment (either foreign or domestic). Then comes foreign direct investment (FDI) as a subset of investment, and then sustainable FDI as a subset of FDI. Sustainable FDI can be defined as FDI that follows principles of responsible business conduct (RBC) and contributes to Environmental, Social, and Governance (ESG) goals. Continuing down the narrowing conceptual path, green FDI is FDI that aligns with and contributes to the ‘E’ part of ‘ESG’ or the environment. Finally, climate FDI is FDI that aligns with and contributes to the climate dimension of the environment. Within climate FDI, certain projects can contribute to climate adaptation while others, to climate mitigation.
It is worth illustrating the difference between green and climate FDI to avoid confusion. On the one hand, consider an FDI project that ensures that effluents are cleaned before flowing into a river (‘clean river’ example). This would be an example of green FDI, as it does not have a climate impact. On the other hand, consider an FDI project that uses cleaner energy in production that was previously used in that location for that activity (‘clean energy’ case). This would be an example of climate FDI, as it has a climate impact (see Figure 5).
Figure 5. Green FDI vs Climate FDI: The Clean River Vs Clean Energy Examples
Recommendation 2. Consider endorsing and using the ‘Climate FDI Facilitation Guidebook’, both within G20 and non-G20 economies through capacity building and technical assistance.
The overall recommendation to the G20 is to consider endorsing and using the Guidebook to grow climate FDI both in their own, and in other economies. G20 policymakers can ensure that their investment authorities consider the Guidebook, especially investment promotion authorities (IPAs). In addition, G20 economies may wish to provide technical assistance and capacity building to authorities in emerging markets and developing countries to consider implementing measures in the Guidebook. This will bring about two interrelated benefits. It will help improve the climate friendliness of investment climates in these economies, and thus help facilitate G20 climate FDI into those economies. At the same time, it will help lower emissions and the carbon content of investment projects around the world, which is needed given the inherently global nature of the climate challenge. Nevertheless, it is important to realise that emerging markets and developing countries may not be in the position to decarbonise as quickly as more developed nations. The solution is to be guided in terms of the depth and direction of climate FDI measures by commitments in each country’s NDCs, as by definition these climate commitments are in line with the priorities and capacities of the country in question.
Finally, different measures will be more relevant to different economies at different points in time. The Guidebook provides four categories of policies and measures to consider, though policymakers may wish to adopt and implement specific measures according to the political and economic conditions in each country.
Measure 1. Align IPA strategies, KPIs, investment incentives and de-risking instruments to NDCs.
The first category of measure is to align IPA strategies, KPIs, investment incentives and de-risking instruments to climate goals identified in NDCs. For instance, ensuring that investment incentives are aligned with—and thus help deliver—NDC goals. Incentives should include not just the fiscal[e] and financial but also those of a non-monetary nature.
Examples of non-monetary incentives can be captured by the heuristic of a ‘red-green-gold’ approach: speed of approvals (red carpet treatment), expedited customs clearances (green channel process), and targeted aftercare (gold status treatment). De-risking instruments such as purchase guarantees (e.g., renewable power purchase agreements) and investment insurance are also important to help crowd-in climate FDI. It is worth noting that insurance many need to address different types of risk, e.g., political risk, commercial, currency risk, and the risk of technology changing and making some technological choices obsolete before the end of the project’s lifetime.
Figure 6. Steps to Roll Out Measure 1
Source: World Economic Forum and Wavteq/fDi Intelligence (forthcoming)
Measure 2. ‘Match and catch’
The second category of measures is to create a database of domestic suppliers with sustainability dimensions, along with a supplier development program to help domestic firms become more sustainable. This helps ‘match’ investors to domestic suppliers and helps domestic firms ‘catch up’ to the level required by investors.
Having a database of domestic suppliers facilitates investment because it helps overcome information asymmetry between foreign and domestic firms, providing foreign investors with information on domestic suppliers of goods and services they can source domestically. This will lower the time and cost for foreign firms to operate, since they can source inputs domestically that they would otherwise have had to produce themselves or else import.
Supplier databases can be designed to include not only traditional information such as the goods and services offered and contact information, but also information on how domestic firms are operating sustainably. This can help foreign firms select and negotiate contracts with domestic firms that are operating in a climate-friendly manner. It will also encourage domestic firms to increasingly shift to a climate-friendly way of doing business in order to attract and qualify for foreign capital that either aims or requires to be contracting with firms that are operating in such a manner. This has been called a ‘virtuous sustainable investment cycle’ (Stephenson, 2020).
At the same time, supplier development programs can help with the technical assistance and capacity building needed for domestic firms to provide goods and services at the quality, cost, and scale required by foreign firms. Supplier development programs can also be oriented to helping domestic firms acquire the certifications and reach standards of sustainable operations, which can be reflected in the supplier database. When information regarding sustainable operations is included in a supplier database, the database is known as a ‘supplier database with sustainability dimensions’ (SD2). The first SD2 was created by the Council for the Development of Cambodia (CDC), with the support of the World Economic Forum (CDC, 2023). Other economies may wish to ensure that their supplier databases also include sustainability dimensions.
Figure 7. Steps to Roll Out Measure 2
Source: World Economic Forum and Wavteq/fDi Intelligence (forthcoming)
Measure 3. Help them help you
The third category of measures is to map the climate commitments of multinational enterprises (MNE) to investment opportunities in host economies and create a pipeline of endorsed and vetted carbon-neutral climate-friendly investment projects that would help MNEs deliver on their commitments. Endorsement by the host government of the pipeline of investment projects de-risks investment in countries that may have relatively more risk or unpredictability.
At the same time, vetting by a third party provides validation and verification that the investment would be designed and implemented in a climate-friendly manner. This creates more certainty for investors to carry out climate investment, as the evidence shows that certainty and predictability are of utmost importance for investment decision-making.
Figure 8. Steps to Roll Out Measure 3
Source: World Economic Forum and Wavteq/fDi Intelligence (forthcoming)
How can investment authorities determine MNE climate commitments? Table 1 provides a snapshot of the different platforms where this information may be available. This can help kick-start the search for a good fit between these public commitments and the climate FDI projects that an economy can propose.
Table 1. Potential Sources to Identify MNE Climate Commitments
Platforms
Description
Strengths & Weaknesses
Examples
1. Company websites & social media
• MNEs may publish their climate commitments, corporate sustainability reports and progress reports on their own websites.• This allows MNEs to showcase sustainability efforts and report on progress made in achieving targets to a wider audience.• Platforms like LinkedIn and Twitter can be used to publish progress reports and engage in conversations with stakeholders.
• Direct engagement with stakeholders and key interest groups.• MNE is accountable to the wider public if climate commitments/pledges are published online.• MNE controls messaging on their websites.• No requirement for commitments to be specific, or mandatory progress reporting to be published on websites.
• Nestlé published commitment to net-zero emissions by 2050, using 100% renewables in its operation by 2025[f]• American Airlines published their ESG Report which states their action plan of reaching net zero carbon emissions by 2020[g]
2. Sustainability and reporting platforms/ rankings
• Several third-party platforms publish and report on MNE climate commitments to manage their environmental impacts.• In most cases, this information is self-reported and in some cases, independently verified.• Key metrics that are collected and reported on include: GHG emissions, renewable. electricity usage, supply chain emissions, carbon reduction targets and progress made in achieving them.
• Publishing commitments on a recognised third-party platform can increase the credibility of a company’s climate commitments.• Publishing commitments on a third-party platform may garner the MNE greater visibility (beyond their own website/social media).• Several reporting platforms and rankings offer benchmarking services that will allow MNEs to compare their commitments and performance against peers or the industry standard.• Participating in a third-party platform may not always be free (e.g. fee for participation, data collection, consultation).
• SBTi[h]• CDP[i]• Ecovadis[j]• Sustainability Accounting Standards Board[k]• The Climate Pledge (initiative supported by Amazon and Global Optimism) has been joined by more than 300 businesses across 51 industries and 29 countries[l]
3.Industry-specific initiatives
• Some industry have their own sustainability initiatives and platforms for industry players to publish their climate commitments/pledges.
• Allows comparison and comparability of MNE commitments across the industry, and can promote collaboration as companies share best practices in achieving climate commitments.• May promote a one-size-fits-all approach to climate commitments, which may not be meaningful depending on industry composition.
Source: World Economic Forum and Wavteq/fDi Intelligence (forthcoming)
Measure 4. The 5 Cs of climate in IIAs: Clarification, Coordination, Competence, Compel, Carve out
The fourth category of measures is to include climate FDI provisions in international investment agreements (IIAs), with the aim of complementing approaches outlined above with legal instruments.
Under efforts of both UNCTAD (2022a, 2022b) and OECD (2022), a new generation of IIAs is being developed, reforming earlier IIAs and helping develop instruments that accurately reflect society’s climate goals. Concretely, there are a number of ways that climate FDI goals can be integrated in clauses and provisions within a new generation of IIAs (see Table 2).
These can be captured by the five Cs of climate in IIAs:
Clarification clauses/provisions on how the treaty relates to and covers climate goals
Coordination provisions that encourage the facilitation of climate FDI between parties
Competence provisions that convey the state’s right to regulate for climate goals
Compel provisions that require the parties and their firms to adhere to standards or actions
Carve out provisions that do not provide the same protection to climate negative investments
Table 2. Ways to Include Climate FDI Provisions in IIAs and Examples
Source: World Economic Forum and Wavteq/fDi Intelligence (forthcoming), based on UNCTAD (2022a and 2022b) and OECD (2022)
When reviewing and reforming IIAs or developing new IIAs, it is important to ensure that the text aligns with sustainable objectives and climate objectives, while also promoting, facilitating and protecting investments. One suggested aspect to consider is the inclusion of clauses that encourage and facilitate climate FDI (or sustainable investment more broadly), as prima facie this would only have upsides and no downsides, in that such provisions are likely to only help support and promote climate FDI flows. This approach is captured above by the second ‘C’, ‘2. Coordination’.
It is worth acknowledging that approaching climate FDI from the legal side will take longer than any of the earlier measures that are easier to facilitate. However, notwithstanding the greater time and effort this may take, over time, climate FDI provisions in legal instruments are likely to have a significant impact on growing these investments. Figure 9 suggests how investment authorities may approach this process.
Figure 9. Steps to Roll Out Measure 4
Source: World Economic Forum and Wavteq/fDi Intelligence (forthcoming)
Recommendation 3. Consider creating a Coalition of IPAs for Climate.
One way to help operationalise climate FDI measures and scale collaboration on growing such investment is through a potential Coalition of IPAs for Climate.[n] This idea is currently under discussion, with the aim of potentially launching such a coalition in Davos in January 2024. The World Association of Investment Promotion Agencies (WAIPA), which supports the initiative, will play in important role.
What would the coalition do in practical terms? As a first step, coalition members would first endorse at the CEO level a statement—circulated and discussed in Davos in January 2023 (see Annex)— on the importance of increasing climate FDI and the opportunity to use climate FDI measures to do so. As a second step, coalition members would aim to use the Guidebook to implement climate FDI measures.
While there have been a number of other coalition mechanisms to mobilise action in support of climate goals, this would be the first time that IPAs specifically add their voice and muscle to the effort. To illustrate, the First Movers Coalition brings together 65 companies and at least 10 government partners so far, that have committed to support carbon goals through procurement decisions (US Department of State, 2022). Meanwhile, the Coalition of Trade Ministers on Climate brings together ministers from 50 countries that have agreed to leverage trade for climate goals (EC, 2023). Adding the investment piece to this puzzle could help all parties better achieve climate goals, given that investment and trade are two sides of the same coin, and that procurement can be considered a form of investment.
In addition, FDI flows are increasingly two-way, with IPAs facilitating not only inward FDI, but also outward FDI (see Figure 10, red box). This is due to the realisation that outward FDI can lead to increased growth and competitiveness of firms and home economies, acting as complementary channel to inward FDI for development (Stephenson and Perea, 2018). As a result, there is scope for two-way, mutually beneficial climate FDI facilitation between IPAs of G20 economies, as one economy’s inward FDI is by definition another economy’s outward FDI (Stephenson, 2018).
Figure 10. Incidents of Mandates of IPAs (2019, n = 91).
Source: Sanchiz Vicente and Omic (2020)
4. Conclusion
The world needs more investment to help achieve and deliver its climate goals—but where to start? This policy brief outlined four concrete, practical measures that G20 policymakers may wish to consider, providing step-by-step suggestions for how to do so. These measures are captured—and further developed—in a Guidebook on Climate FDI Facilitation, which provides more detail on each, and can serve as a complementary resource. A Coalition of IPAs for Climate could also help catalyse and scale cooperation in this space, providing mutually gainful outcomes for G20 economies, and the world.
Attribution: Matthew Stephenson and Samir Saran, “Creating a Climate-Friendly Investment Climate,” T20 Policy Brief, May 2023.
Annex
References
de Coninck, H., A. Revi, M. Babiker, P. Bertoldi, M. Buckeridge, A. Cartwright, W. Dong, J. Ford, S. Fuss, J.-C. Hourcade, D. Ley, R. Mechler, P. Newman, A. Revokatova, S. Schultz, L. Steg, and T. Sugiyama, 2018: Strengthening and Implementing the Global Response. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte,V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, T. Maycock, M.Tignor, and T. Waterfield (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 313-444.
Rogelj, J., D. Shindell, K. Jiang, S. Fifita, P. Forster, V. Ginzburg, C. Handa, H. Kheshgi, S. Kobayashi, E. Kriegler, L. Mundaca, R. Séférian, and M.V.Vilariño, 2018: Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte, V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, and T. Waterfield (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 93-174.
Sauvant, Karl P. and Stephenson, Matthew and Kagan, Yardenne, Green FDI: Encouraging Carbon-Neutral Investment (October 18, 2021). Columbia FDI Perspectives, No. 316, 2021, SSRN.
[a] “Climate FDI can be determined on the basis of investment impact, rather than the traditional methodology of defining FDI based on investor motivation (Dunning, 1982). In other words, climate FDI is any investment that leads to measurable improvement in climate conditions in a host economy, regardless of sector or activity” (Stephenson and Zhang, 2022: 6).
[b] Related work by Joachim Monkelbaan and Jose Vieira Martins had identified a longer universe of 38 different policies and measures, which was synthesised and prioritised through an internal working group at the World Economic Forum.
[c] Virtual and in-person meetings of the community to discuss climate FDI policies and measures took place on 21 July 2022, 9 November 2022 at COP27, 14 December 2022, 18 January 2023 at the World Economic Forum Annual Meeting in Davos, and on 29 March 2023.
[d] To help produce the Guidebook, specialized consulting firm WAVTEQ was selected as a partner, and has helped build out information on the top climate FDI measures through additional interviews and research. WAVTEQ has since been acquired by The Financial Times.
[e] Fiscal incentives to attract FDI will lose some of their effectiveness following the OECD Base Erosion and Profit Shifting (BEPS) process. If host states levy less than the 15 percent minimum tax on firm profits, other specified jurisdictions can charge a ‘top-up’ tax and pocket this amount, incentivising host states to meet the 15 percent threshold or lose fiscal revenue without gaining investment attractiveness. Please see Stephenson and Zhan, “We’ve entered a new era for investment policy and promotion”, forthcoming. The authors also wish to acknowledge Karl Sauvant for raising this point during the 29 March 2023 consultation.
Over the past decades, India has witnessed unprecedented growth not only in economic terms but also in terms of its international prominence. Has India effectively utilized its participation in the G20 to showcase global leadership potential emerging from developing nations?
Samir Saran: By all counts, the Indian Presidency of the G20 can be assessed as having been an outstanding success. The Indian leadership was able to ensure that the dynamic federal architecture was able to jointly deliver on the objectives that had been spelled out at the outset. Every state of India was involved, in some cases infrastructure was invested into certain parts of the country, and in all instances visible support of people and polity was in evidence. The G20 became a people’s project and India hosted about 220 meetings in 60 cities.
From a global perspective, India determinedly and delicately ensured that the Global South became a participant, and it could contribute to the agenda for the grouping this year.
From a global perspective, India determinedly and delicately ensured that the Global South became a participant, and it could contribute to the agenda for the grouping this year. India walked an extra mile to understand their concerns and expectations, and also ensured that some were also invited to the proceedings. It conducted two Voices of the Global South conferences under the chairship of the Indian Prime Minister indicating the seriousness with which it took this task. This has lent legitimacy to its international standing within this very large group.
Finally, at a time of polarized politics and breakdown of trust among countries, India fashioned an ambitious declaration in Delhi that responded to issues that are important to all. It achieved consensus amongst countries on matters that had been left unresolved in other multilateral forums. Its ability to deliver this outcome demonstrated its leadership and that of the emerging and developing countries to contribute significantly and effectively to matters pertaining to global governance. Indonesia, India, Brazil, and South Africa, in the consecutive years of Presidency have an opportunity to showcase the importance and prominence of emerging country leadership in world affairs.
India and Brazil find themselves in a unique position, jointly leading a troika of developing countries. Drawing on India’s experience, can it wield the potential to reshape G20 outcomes? Could you provide concrete examples of results aligning with the Global South perspective?
SS: Brazil has an even bigger opportunity than India did. India’s troika with Indonesia and Brazil straddles two continents–Asia and Latin America. Brazil has the advantage of having a troika which includes South Africa and, therefore, the African continent. It is an opportunity which must be capitalized to articulate our common challenges as leaders in the developing world. Brazil has declared poverty reduction as a key theme of its G20 Presidency and this is very relevant. It is an indication of both our challenges and our aspirations. Equality and Equity, even as we grow and develop, are another Brazilian objective and resonate with developing societies.
Brazil has an even bigger opportunity than India did. India’s troika with Indonesia and Brazil straddles two continents–Asia and Latin America. Brazil has the advantage of having a troika which includes South Africa and, therefore, the African continent.
India had strived hard with its partners to have a result-oriented G20. India had 87 outcome documents and 118 action items coming out of its Presidency. The African Union’s addition to the G20 is of course a key achievement. The adoption of a framework on Digital Public Infrastructure is also a significant milestone. Both of these are at the core of the Global South expectations.
The Indian Presidency has also gone further on the social protection agenda. It has come out with G20 Policy Priorities on Adequate and Sustainable Social Protection and Decent Work for Gig and Platform Workers & G20 Policy Options for Sustainable Financing of Social Protection. This is an important part of the Brazilian agenda as well and corresponds with what is needed in developing countries.
Despite the undeniable significance of the G20, the group faces criticism for inherent characteristics like the absence of a permanent Secretariat, insufficient means for implementation monitoring, and perceived lack of representation due to its “elite” membership. Drawing from your first-hand experience, do these criticisms hold merit? What are the primary challenges and gains associated with a grouping like the G20?
SS: We should look at each of these criticisms discretely. First, on the lack of a permanent Secretariat, one may ask if this is in fact a criticism. The G20 has functioned without overzealous bureaucracies. It may well be one of the secrets to its continued functioning. What we may need is a central repository of G20 knowledge rather than a Secretariat.
The knowledge repository brings us to the second criticism of implementation and monitoring. Leveraging the knowledge repository may allow us to hold the G20 members accountable for their commitments.
The lack of representation is a weakness of any plurilateral grouping. The ideas which brought the group together are the criterion for its exclusivity. It so happens that the G20 members are economically elite because they currently contribute the most to global GDP. The membership should adapt and change with the times. We have started this process with the addition of the African Union to the group. And the efforts of India to partner with the Global South in many ways smashed the glass ceiling and made the G20 relevant and respond to the leadership of the Global South.
At the think tank / academic level, we at ORF (Secretariat of the Think 20) were able to solicit policy briefs from over a 1,000 authors from over 75 countries and ensured that the process is inclusive and open to all. Some of our important convenings outside of India were in Kigali, Rwanda, and Cape Town, South Africa. These established the inclusive design of the Indian Presidency.
As a leader within one of the G20 engagement groups, the Think20, you have had the opportunity to observe how the integration of civil society on official negotiation tracks functions. Does civil society play a substantial role in agenda-setting or decision-making within the official G20 agenda? If so, how can these opportunities be expanded?
SS: We cannot speak on past Presidencies but can say with confidence this year that civil society has contributed to the official G20 agenda. The energy with which the G20 India team followed and engaged with conversations in all the engagement groups is a reflection of these. We have also seen some of our ideas find space in the Leader’s Declaration.
The addition of the African Union, the commitment to expand climate finance, and the push for digital public infrastructure were all at various points recommended by Think20 India.
The concept of Task Force notes introduced by T20 Indonesia was elevated to Task Force statements by T20 India. It was something that ensured more engagement with the specific Sherpa tracks. For instance, the Trade and Investment Working Group may not want to wait for the full Think20 Communique which may have specific recommendations. It may have more interest in the full statement of the Task Force on Macroeconomics and Trade.
Innovations such as this help academia and think tanks make more valuable and timely contributions to the G20 process.
India and Brazil have a history of coordinating positions in various multilateral forums such as the United Nations, BRICS, IBSA Dialogue Forum, and the World Trade Organization G20. Can the G20 be considered a noteworthy example of the potential for Indian-Brazilian cooperation?
SS: Brazil-India have been reliable partners to each other. At the G20, the United Nations, and the World Trade Organization, the partnership takes on a unique global character. At BRICS, IBSA, and other smaller groups, the partnership is characterized by a conversation amongst similarly situated and aligned countries barring a few exceptions.
Brazil and India have a vital role in keeping the focus on development in these international plurilateral groups. We have a stake and voice, by rights, not indulgence. The two countries are both aware of this and leverage their voice accordingly. The role of the troika in the success of a G20 Presidency is an open secret.
Brazil and India have a vital role in keeping the focus on development in these international plurilateral groups. We have a stake and voice, by rights, not indulgence. The two countries are both aware of this and leverage their voice accordingly. The role of the troika in the success of a G20 Presidency is an open secret. Our collaboration at the international level on behalf of the Global South is something we should maintain momentum on and continue to permanently center development as the most important mission of the G20. This would certainly be a triumph of the Indian-Brazilian partnership in world affairs.
In India, the Banker’s G20 became the People’s G20. Brazil, with its rich constituency of civil society and research organizations, will take this forward and shape the process indelibly.
This interview was given to CEBRI-Journal in November 2023.
Green technology and capital is concentrated in rich countries. Here’s how to address the north-south divide.
The recent United Nations climate summit, known as COP28, offered a glimmer of hope for international climate action. Negotiators struck a deal to transition the world away from fossil fuels and formally approved a loss and damage fund to support the countries that are most vulnerable to climate impacts. Yet COP28 fell short in one major area: It did not outline a clear pathway for funding and implementing climate action in the global south.
The implications of this will be felt around the world. Despite landmark U.N. climate agreements, global emissions have continued to rise. New research suggests that the world will breach the critical threshold of 1.5 degrees Celsius of warming above preindustrial levels by the end of the decade.
As emissions peak in the developed world, future emissions growth will be concentrated in the global south. Yet the resources needed to limit these emissions—namely, green technology and capital—are concentrated in the global north.
The global energy transition will only be successful if the international community fixes the north-south divide. Critical capital must no longer be withheld from the parts of the world that require it the most. There is an urgent need for leaders to reimagine climate cooperation. They can do this by ensuring that the global south has access to the financing, technology, and forums it needs to scale up energy access, support communities most affected by climate change, and make progress on climate targets.
The global energy transition will only be successful if the international community fixes the north-south divide. Critical capital must no longer be withheld from the parts of the world that require it the most.
Countries in the global south have felt cheated by international climate conferences that often overlook their voices and needs. These nations are particularly vulnerable to the impacts of a warming planet; in 2023, climate-induced natural hazards were among the foremost threats to lives and livelihoods in places including Libya, Yemen, Pakistan, and East Africa.
Yet countries in the global north have not only refused to make binding commitments to reduce emissions, but have also failed to deliver on the meager promises they have made, such as a 2009 commitment to provide $100 billion annually to the global south by 2020.
The resulting tussles between both sides distract from the real scale of the problem. It is not enough to think in terms of billions. The final text at the 2022 U.N. climate summit noted that the world would need to invest between $4 and $6 trillion annually in renewables and decarbonization solutions to transition to a low-carbon economy. Even less ambitious targets call for between $2 and $3 trillion in annual investments. Yet instead of identifying solutions to raise this kind of money, negotiators have fought over small, insignificant change.
Most of these investments will need to go to the global south. Currently, only around 25 percent of global climate finance, both private and public, flows to the global south. Yet in the next three decades, most global energy demand growth will come from these countries as they seek to address severe energy poverty. The International Energy Agency has estimated that one-quarter of this growth between 2019 and 2040 could come from India alone.
Since much of the global south’s energy infrastructure has not been built, there is an opportunity for development that does not follow the carbon-intensive pathways of the global north.
Most of these investments will need to go to the global south. Currently, only around 25 percent of global climate finance, both private and public, flows to the global south.
The good news is that green technologies have become increasingly cost-effective; the Intergovernmental Panel on Climate Change has estimated that the average cost of solar and wind energy and batteries has dropped by up to 85 percent since 2010. But the private sector only tends to see a clear business case for green investment in the global north, where more than 80 percent of total global climate finance is concentrated. In the global south, by contrast, only 14 percent of green investment comes from the private sector.
That’s because climate investment often requires considerable upfront capital and can take years to yield substantial returns. That initial investment has proved a hurdle for the global south to securing private funding. The International Energy Agency has estimated that the nominal financing costs for green energy can be seven times higher in developing and emerging economies compared with the United States and Europe.
This imbalance in capital costs is partly due to sovereign risk, or the political risks of investing in developing countries. Yet, while sovereign risk is real, it is often exaggerated and should not outweigh climate risk, which poses the greatest threat to the stability of the international financial system.
The technology needed to scale up green energy solutions also remains concentrated in the developed world and China. The global south often has to pay a heavy premium to use these technologies, including solar panels, wind turbines, and battery storage technologies.
Global leaders will need to resolve these disparities to meet their climate targets. Fortunately, climate action already aligns with much of the global south’s national development strategies. As the rotating president of the G-20 last year, India highlighted the need to place green development at the heart of climate action. But the global south can’t do it alone.
The global south often has to pay a heavy premium to use these technologies, including solar panels, wind turbines, and battery storage technologies.
There are four critical steps that the international community can take to rebuild trust in the climate action process and advance global cooperation.
First, the international financial system needs urgent reform to encourage more private funding in the global south. This will be essential to renewable energy projects and other mitigation measures. But it will also support adaptation efforts, including regenerative agriculture, drought-resistant practices, and low-cost community infrastructure such as bunds to protect against sea level rise and salination.
Multilateral and bilateral development institutions should expand financial guarantees and blended finance mechanisms to reduce the perceived risks associated with investments in the global south. For example, G-20 countries could create a pool of capital—administered by an agency such as the Multilateral Investment Guarantee Agency, which is housed in the World Bank—with the sole aim of reducing the cost of capital for climate-related projects.
Multilateral development banks must also be reformed to tackle the climate crisis. These banks can be instrumental in taking on some of the risks that hinder private capital flows to the global south. An independent committee under India’s G-20 presidency put forward a road map to reform such banks so that they prioritize eliminating extreme poverty; tripling sustainable lending levels; and creating a new, flexible funding mechanism. The G-20, as well as the World Bank and International Monetary Fund, should build on this road map by establishing hard timelines for implementing the reforms and ensuring support for green projects.
Second, the international community must ensure that the global south has access to technology it needs for the energy transition. In the health sector, there is a global understanding that while intellectual property protection is vital for innovation, governments may have to override protections in emergencies; in those rare instances, governments can turn to compulsory licenses to use a patent without the consent of the patent holder. Despite this precedent, the COVID-19 pandemic showed the world that even lifesaving technology may not flow quickly enough to the global south in a health emergency.
Before climate emergencies worsen, regulators and global institutions need to identify clearer mechanisms to share intellectual property rights for critical technologies and disseminate climate tech. This will be essential to ensuring that the green transition is not afflicted by severe delays and global disputes similar to those witnessed during the pandemic.
Emerging economies are also starting to see homegrown clean tech ecosystems driven by start-ups looking to disrupt traditional energy systems. Yet this sector suffers from a lack of public funds, reduced access to cutting-edge tech, and a shortage of early-stage risk capital to reach commercial scale. New mechanisms to connect risk capital in the global north to the clean tech sector in the global south will be essential to bridging the technology gap—for instance, a $100 billion fund that would disburse money to around 120 companies in the global south, including start-ups that plan to scale up climate tech.
Emerging economies are also starting to see homegrown clean tech ecosystems driven by start-ups looking to disrupt traditional energy systems.
Third, multilateral forums, such as the UNFCCC and the G-20, should better acknowledge the role of women in climate action, especially in the global south, and create women-led initiatives to mobilize support for political action on climate. Women are especially vulnerable to the effects of climate change—in many countries, they bear the responsibility of securing resources such as food and water that are made scarcer by global warming. Investing in female leadership will help shift the climate conversation from an elite discussion to one grounded in the real concerns of households.
Women are also the most likely to face health impacts from climate-related hazards, and public health systems worldwide will have to adapt to new climate-related risks. Putting health and gender equality at the center of the global climate conversation will create new reasons for climate action.
Finally, the world needs to build new pathways for climate cooperation. Despite geopolitical divides, nearly every country has a national action plan for climate mitigation and adaptation. Climate action has driven greater regional dialogue, including through the African Union’s Climate Change and Resilient Development Strategy and Action Plan and Central Asia’s Bishkek High-Level Dialogue on Climate Change and Resilience.
Climate action has also led to inadvertent cooperation among great powers, such as the United States and China. This kind of cooperation, which is often driven by the private sector, has been a key enabler of supply chains essential for green energy growth.
Countries with similar capabilities and concerns should collaborate in smaller groupings for faster and more ambitious action.
Climate cooperation can—and should—become a way to restore global stability and trust in multilateralism. Leaders should energize inadvertent cooperation through new partnerships, institutions, and dialogues. Countries with similar capabilities and concerns should collaborate in smaller groupings for faster and more ambitious action. The “climate club” that German Chancellor Olaf Scholz launched at COP28 to support decarbonization among some 36 member states is a good start. But the world needs an alliance with equal representation from partners in both the global north and south that can implement a binding finance package to channel transformative climate finance to the global south.
The international community must reimagine the global climate governance framework to address the scope of today’s climate challenge. As the clock ticks down to prevent catastrophic warming, only innovative approaches can mitigate damage to our planet. Key to this will be ensuring that the most vulnerable countries are no longer shut out of the capital and technology that they need to transition to green, resilient economies.
Innovative approaches will require regulatory processes to include all stakeholders.
Technology has long shaped the contours of geopolitical relations – parties competed to outinnovate their opponents in order to build more competitive economies, societies and militaries. Today is different. With breakthroughs in frontier technologies manifesting at rapid rates, the question is not who will capture their benefits first but how parties can work together to promote their beneficial use and limit their risks.
The challenge: benefits of frontier technologies may be compromised by inequities and risks
The prolific pace of advancement of frontier technologies – artificial intelligence (AI), quantum science, blockchain, 3D printing, gene editing and nanotechnology, to name a few – and its pursuit by a multitude of state and non-state actors, with varied motivations, has opened a new chapter in contemporary geopolitics. For state actors, these technologies offer a chance to gain strategic and competitive advantage, while for malicious nonstate actors, these technologies present another avenue to persist with their destabilizing activities.
Therefore, emerging technologies have added another layer to a fragmented and contested global political landscape. Besides shaping geopolitical dynamics, they are also transforming commonly held notions of power – by going beyond the traditional parameters of military and economic heft to focus on states’ ability to control data and information or attain a tech breakthrough as the primary determinant of a state’s geopolitical influence.
These technologies also have significant socioeconomic implications. By some estimates, generative AI could add the equivalent of $2.6 trillion to $4.4 trillion to the global economy and boost labour productivity by 0.6% annually through 2040.14 Yet, simultaneously, the rapid deployment of these technologies has sparked concerns about job displacement and social disruption. These dynamics are triggering new geopolitical alignments as states seek to cooperate or compete in developing and using new technologies.
As frontier technologies take centre stage in global politics, they present a new challenge for international diplomacy.
As frontier technologies take centre stage in global politics, they present a new challenge for international diplomacy. What can states do to stem the proliferation of frontier dual-use technologies in the hands of malicious actors who intend to cause harm? Can states look beyond their rivalries to conceive out-of-the-box solutions, or will they always be playing a catch-up game with tech advancements? What role behoves the United Nations-led multilateral frameworks regarding the global governance of these technologies, or will plurilateralism and club-lateralism trump it?
A new approach for governing frontier technologies
The historical evolution of global tech regimes offers important lessons for the challenges posed by frontier technologies today. During the Cold War, industrialized nations established export control regimes, such as the Nuclear Suppliers Group and the Missile Technology Control Regime, that sought to exclude certain countries by denying them several dual-use technologies. Those control regimes proved successful in curbing tech proliferation. However, with changing geopolitical realities, the same regimes began extending membership to previously excluded countries. This approach offers a vital lesson: shedding the initial exclusivist approach in favour of extending membership helped to retain the regimes’ legitimacy.
Secondly, while the multilateral export control regimes succeeded, the nuclear non-proliferation regimes performed sub-optimally as they amplified the gap between nuclear haves and have-nots. This triggered resentment from the nuclear have-nots, who sought to chip away at the legitimacy of the regimes.
The key lesson for today is that the success of any tech-related proliferation control efforts is contingent on not accentuating existing technology divisions between the Global North and South.
The UN-led multilateral framework has focused on enhancing global tech cooperation through initiatives like the Secretary-General’s High-level Panel on Digital Cooperation. However, while there has been little substantive progress at the global, multilateral level, bilateral and minilateral tech cooperation has thrived. Groupings such as the Quad, AUKUS and I2U2 that focus on niche tech cooperation present a possible model pathway forward.15 They have demonstrated the value of like-minded partners coming together to realise a common vision and ambition. These arrangements also suggest that even as the UN-led multilateral frameworks attempt to grapple with frontier technologies, minilaterals may provide the starting point for collaboration to address frontier technologies’ advancement.
To ensure that efforts at tech regulation succeed, countries will be required to undertake innovation in policy-making, where governments take on board all the stakeholders – tech corporations, civil society, academia and the research community. The challenge posed in recent months by generative AI through tools like deep fakes and natural language processing models like ChatGPT has shown that unless these stakeholders are integrated into policy design, regulations will always be afterthoughts.
How to strengthen tech cooperation
The following are four proposals for strengthening global cooperation on frontier technologies:
– Develop the Responsibility to Protect (R2P) framework for emerging technologies: Similar to the R2P framework developed by the UN for protecting civilians from genocide, war crimes, ethnic cleansing and crimes against humanity, the international community must create a regulatory R2P obligation for states to protect civilians from the harms of emerging technologies. This obligation would entail three pillars: 1) the responsibility of each state to protect its populations from the emerging technologies’ misuse, 2) the responsibility of the international community to assist states in protecting their populations from the emerging technologies’ misuse, and 3) the responsibility of the international community to take collective action to protect populations when a state is manifestly failing to protect its own people from the emerging technologies’ misuse. The specific measures that are needed will vary depending on the specific technologies involved and the risks that they pose.
– Design a three-tier “innovation to market” roadmap: States must ensure responsible commercial application and dispersion of new technologies. One critical step towards this is for states to design a three-tiered tech absorption framework comprising a regulatory sandbox (pilot tested in a controlled regulatory environment for assessing collateral impact), city-scale testing and commercial application.
– Convene a standing Conference of the Parties for future tech: The Global South must convene a standing Conference of the Parties (COP) for future technologies along the lines of COP for climate change negotiations. This body would meet on an annual basis where the multistakeholder community – national governments, international organizations and tech community – will deliberate on new tech developments, present new innovations and reflect on related aspects of the dynamic tech ecosystem and its engagement with the society and communities.
– Link domestic innovation ecosystems: Inter-connected national innovation ecosystems will ensure that like-minded countries can pool their finite financial, scientific and technological human resources to develop technologies. For instance, in the field of quantum science, the European Commission’s research initiative, the Quantum Flagship, has partnered with the United States, Canada and Japan through the InCoQFlag project. Likewise, the Quad has the Quad Center of Excellence in Quantum Information Sciences. This underlines the importance of prioritizing one of the frontier technologies and networking domestic innovation ecosystems to focus on its development, as no country alone can harness the deep potential of frontier technologies and mitigate the associated risks.
Technology as a tool of trust
Throughout history, technology has been the currency of geopolitics. New innovations have bolstered economies and armies, strengthening power and influence. Yet, technology has also served as an opportunity to bind parties closer together. Today, at a time of heightened geopolitical risks, it is incumbent on leaders to pursue frameworks and ecosystems that foster trust and cooperation rather than division.
Samir Saran 