Leveraging ESG performance to win FDI

The race to net-zero

As global competition for FDI intensifies, the race to carbon neutrality has never been keener.

The United Kingdom, Japan and the Republic of Korea, together with more than 110 other countries, have pledged carbon neutrality by 2050, and China has pledged to get there before 2060.  Some countries, including the UK, Sweden, France, Denmark, Japan and New Zealand have additionally enshrined their net zero target into law. Others, such as Ireland whose policies still await state approval, are demonstrating commitment in other ways, including supporting cleantech investment.

According to the Energy and Climate Intelligence Unit (ECIU), a London-based think tank, this means that 49% of the world’s gross domestic product and about 50% of global carbon dioxide emissions, are now covered by a net-zero commitment.

And, with the value of low- carbon goods and services set to be worth between £2.8tr and £5.1tr by 2050, more governments (as well as local authorities and businesses) are ready to commit, as the ECIU’s Net Zero Tracker[1] leader board illustrates.

Competition for opportunities arising will be considerable. Indeed, countries that fail to demonstrate commitment to net-zero may well find themselves missing out, particularly at a time when interest in environmental protection and long-term sustainability, along with social conscience and good governance has never been greater.

ESG as a key measure of performance

Whilst the term ESG has been mainstream for the last decade, with investor appetite taking greater account of sustainable value, the events of 2020 have accelerated that interest. Proven links between a company’s ESG performance and its profitability have been established, and as we move into 2021, ESG has taken the relatively short leap from a key indicator of business performance to assessment criteria for FDI decision-making.

In 2018, Stanford University researchers[2] established that climate mitigation yielded substantial economic benefit, even for poorer economies, with the rising costs of managing the effects of global warming impacting spend in potential growth areas such as technology and innovation.

This is supported by evidence from economies such as the UK which has successfully reduced its carbon impact whilst at the same time investing in growing its low-carbon economy, documented in its Clean Growth Strategy. [3]

Investment in renewable energy, clean technologies and in businesses that demonstrate an environmental & social conscience is set to grow apace, creating hundreds of thousands of new jobs in technology, finance, law and investment management, providing significant economic growth for countries, regions and cities alike.

Conversely, amongst the casualties of the race to carbon neutrality are fossil fuels, with coal and oil and industries that rely on them becoming increasingly demonised in the eyes of investors. Without financial investment, economies that rely heavily on revenue from these will have to reconsider investment options.

Leveraging ESG for FDI and funding

As the FDI location selection process increasingly mirrors that of an asset manager selecting the optimum return without compromising on sustainability or social conscience, economic development leaders are having to demonstrate the commitment of their cities and regions to long-term sustainability, social enterprise and robust programmes of governance, in four key areas;

Most economic development leaders already commit significant resources to collecting internal and external data and information for reporting, analysis and audit. So, measuring and reporting on ESG metrics adds an additional layer of complexity and cost, despite the competitive advantages for FDI.

However, as access to sources of funding and grants, innovation awards and other benefits increasingly depends on the ability to demonstrate the successful implementation of sustainability, community and diversity programmes, ESG reporting may well become an essential tool in economic development.

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