The FDI angle:

• Foreign direct investment (FDI) flows into renewables and fossil fuels are a useful indicator for the energy transition.
• There is a significant void between energy FDI in developed and developing countries.
• Why does this matter? A slower transition to renewables in developing countries risks prolonging the world's path to net zero carbon emissions.

The decision by the UN to host COP28, the world’s highest profile event on climate change, in Dubai was inevitably destined to raise eyebrows. 

Despite its recent sustainability push, the UAE remains one of the world’s largest exporters of hydrocarbons. The recent leak of documents suggesting that the UAE’s COP28 president Sultan al-Jaber plans to use the summit for oil deals with foreign governments didn’t help either. 

However, the energy transition may have less of a clear-cut outcome than many in the West advocate for. The role of the UAE as both an exporter of hydrocarbons, as well as cleantech champion, reveals some of its often unsung nuances. 

FDI data is consistent with this more nuanced picture. While the global shift towards investment in sustainable energy is unequivocal, FDI data points in the direction of a growing divide between developed and developing countries. 

With COP28 opening its doors on November 30, here are three charts illustrating the emerging tensions caused by the energy transition. 

Global greenfield FDI has switched from fossil fuels to renewables. FDI into renewables in 2019 reached $126bn, at the time its highest since records began in 2003, according to greenfield investment monitor fDi Markets. This was the first year where FDI into green energy almost matched that into fossil fuels, beginning a cycle of dominance seen ever since.

In the past three full years, FDI into renewables has soared and eclipsed that into fossil fuels. A staggering $369bn was pledged to renewable energy generation projects globally in 2022, more than three times the value of fossil fuel projects. Growth in jobs created by FDI since 2010 has also been greatest in the renewable energy sector.

Foreign investors only account for part of the energy transition, as shown by China, the world’s largest investor in wind and solar projects. Deployment of renewables in Asia’s largest economy is primarily shaped by Chinese domestic companies.

Nonetheless, FDI is a strong indicator for prevailing trends. In the first three quarters of 2023, FDI renewables has already topped $220bn, according to preliminary fDi Markets data. This is still way ahead of the less than $60bn of FDI in oil and gas projects.

There is nuance to the global trend of investment shifting away from fossil fuels. The transition is much more pronounced in advanced economies than developing countries. 

In 2022, renewable energy accounted for the vast majority (88%) of FDI into energy projects in advanced economies. By comparison, renewables made up only two thirds (67.7%) of all energy FDI into developing countries last year. 

Coal, oil and gas remain an incredibly important path to development in emerging countries. So far in 2023, the void between advanced and developing countries is even wider. Fossil fuels account for 6.6% of energy FDI in advanced countries compared with almost 30% in developing countries.

This is exemplified by Guyana, a small developing South American country, which is undergoing an economic boom due to significant oil and gas reserves found off its coast.

“Oil and gas will bring much-needed resources to expand the economy, strengthen traditional sectors and make us more competitive globally,” Guyana’s president Irfaan Ali told fDi in an interview last year. 

This void between countries of different incomes is clear when looking at the largest destinations for fossil fuels FDI. Between January and September 2023, eight out of the top 10 destinations for FDI into coal, oil and gas were developing countries. These included Iraq, which has experienced a surge of inbound FDI so far in 2023 due to oil and gas, Brazil and Pakistan.

Many are betting on the continued importance of oil and gas in our future energy system. Less than 1% of total global investment into clean energy comes from oil and gas companies, according to a recent International Energy Agency report.

“​​There are many different stances across the industry on energy transitions, from outright opposition through to grudging acceptance and, in some cases, active pursuit of new opportunities,” wrote IEA executive director Fatih Birol.

This is notable in many developing countries. Petrobras, Brazil’s state-owned energy company, plans to invest $102bn over the next five years. The majority of the capex ($73bn) will be deployed in the exploration and production of oil and gas.

“The energy transition will unfold gradually and responsibly as we will invest in new energy sources along with our ongoing investments in oil production,” said Jean Paul Prates, CEO of Petrobras.

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