This chapter reviews options for development co-operation partners to mobilise foreign direct investment and enhance its impact on sustainable development, including through the implementation of the FDI Qualities for Sustainable Development. Good practice examples illustrate these options.
FDI Qualities Guide for Development Co-operation
Strengthening the Role of Development Co-operation for Sustainable Investment
OECD Development Policy Tools
2. Compendium of options for development co‑operation to enhance the impact of FDI on sustainable development
Abstract
2.1. Overview of development co-operation options to enhance the impact of FDI on sustainable development
Development co-operation can complement and support government efforts to enhance the impact of FDI on sustainable development. This chapter builds on the Policy Toolkit to lay out what specific mechanisms can contribute to leveraging FDI for the SDGs. Based on a comprehensive review of FDI-related development co-operation assistance, it identifies and categorises options across the core policy principles of the Recommendation (OECD, 2022[1]):
1. governance and coherent strategic directions on investment and sustainable development
2. alignment of domestic and international policy and legal frameworks with regard to investment and sustainable development objectives
3. prioritisation of sustainable development objectives when providing financial and technical support to stimulate investment
4. facilitation of investment and sustainable development opportunities by addressing information failures and administrative barriers.
Table 2.1 identifies a non-exhaustive list of options that may be considered by development co-operation partners to support and complement partner country policy efforts along these four principles. Each option is then described in further detail and illustrated with good practice example in Section 2.2.
Table 2.1. Development co-operation options to strengthen sustainable investment in partner countries
Note: Policy principles on sustainable investment are based on the Recommendation (OECD, 2022[1])
2.2. Supporting sustainable investment with development co-operation
This section describes how development co-operation can be channelled to support sustainable investment, along the principles of the Recommendation. It relies on a review of FDI-related assistance, including examples provided by DAC members.
2.2.1. Development co-operation assistance to promote policy coherence and continuity on investment and sustainable development
Ensuring policy coherence is key to enhance the positive impact of FDI on sustainable development. Investment and sustainable development touch on various policy areas, including growth, innovation, jobs, skills development, gender equality, and decarbonisation which may all be governed by different policies and strategies and managed by different institutions. Furthermore, the architecture of the institutional framework may differ from country to country. Policy coherence and effective institutional coordination are important to ensure sound policy design, efficiency and implementation. Development co-operation partners could help promote coherence between investment and sustainable development policies, for example through Development Policy Loans, technical assistance to design integrated policies, strategies and action plans, or building implementation capacity in institutions and agencies to ensure inter-agency coordination (Figure 2.1).
Figure 2.1. Promoting policy coherence, continuity and effective policy implementation
Supporting governments in the design of coherent strategies and policies on investment and sustainable development
Development co-operation actors have extensive experience supporting governments in designing sound frameworks for investment, which often include an overarching objective to ensure that FDI contributes to sustainable development. Because attracting and governing private sector investment requires a broad set of policies and incentives touching on a range of policy areas, this support often takes the form of comprehensive reviews of the investment climate. By either carrying out or providing financial support for such work, development partners provide access to independent expertise informed by country comparisons and anchored in international good practice. Beyond their value in providing substantive input, such processes, which typically rely on consultations and dialogues with government institutions and stakeholders, can contribute to enhancing policy coherence, coordination, and participation of stakeholders in policymaking.
Various methodologies and tools have been developed to help governments review and improve their investment framework. The World Bank Group, for example, provides support to the development of FDI Strategies and Investment Roadmaps, improvements of policy effectiveness, and helps promote good practice and strengthen investor confidence. In doing so, the World Bank seeks to maximise the positive spill-overs of FDI for the local economy, such as new technology and business practices (World Bank Group, 2022[2]). UNCTAD carries out reviews to provide strategic advice to countries on how to attract and benefit from FDI (UNCTAD, 2008[3]). The OECD is home to the Policy Framework for Investment (PFI), which has been used by over 30 countries to review and support improvements in the investment climate through Investment Policy Reviews (IPRs). The PFI aims to mobilise private investment that supports steady economic growth and sustainable development, and seeks to advance implementation of the SDGs (OECD, 2015[4]). Some donors such as Australia, Finland, Norway, Switzerland, and the European Commission (EC) have supported IPRs based on the PFI (Box 2.1).
Box 2.1. PFI-based Investment Policy Reviews
An OECD Investment Policy Review (IPR) is a country-specific report conducted by the OECD Secretariat in partnership with the government of the country under review. IPRs have been used by over 30 countries, at varying levels of development and across all continents, as a tool for assessing investment and business climates, and for designing reforms to improve them.
Since 2006, reviews have used the Policy Framework for Investment (PFI) which takes a comprehensive, whole-of-government approach to investment climate reform. The PFI was updated in 2015 and is the most comprehensive and systematic multilateral-backed approach for improving investment conditions ever developed. By fostering an enabling environment for foreign and domestic investment alike, the PFI also plays an important role in delivering on the 2030 Development Agenda and in achieving the SDGs.
The PFI allows countries to evaluate their progress and to identify priorities for action in 12 policy areas: investment policy; investment promotion and facilitation; trade; competition; tax; corporate governance; promoting responsible business conduct; human resource development; infrastructure; financing investment; public governance; and investment in support of green growth. Three principles apply throughout the PFI: policy coherence, transparency in policy formulation and implementation, and regular evaluation of the impact of existing and proposed policies.
Source: OECD (2022[5]), OECD Investment Policy Reviews, https://www.oecd.org/investment/countryreviews.htm.
While such reviews can help create an enabling environment to attract sustainable investment, ensuring and increasing its impact on the SDGs requires tailored policies. For example, while respect for the rule of law and strong institutions are important conditions to attract investment that contributes to sustainable development, ensuring that FDI leads to improvements in gender equality, wages and carbon footprint, requires a specific set of policies and incentives that are typically not addressed in a detailed and quantifiable way through traditional investment policy support. Development co-operation actors have an opportunity to scale up their expertise and support on coupling mobilising with SDG-alignment efforts. In particular, the links between FDI and the SDGs could be further explored and included in diagnostics and policy recommendations. For example, the FDI qualities Policy Toolkit complements the PFI with additional guidance on how to improve the impact of FDI on sustainable development, and could be used to inform the design of coherent, SDG-aligned, investment policies. Development partners – including Finland, the Netherlands, the EC and Switzerland – have provided support to pilot the use and implementation of this Policy Toolkit, for example, as part of the EU-OECD Programme on Investment in the Mediterranean (OECD, 2021[6]) and the OECD Programme for Sustainable Investment in Africa.
Beyond reviews and diagnostics, development co-operation can help government institutions throughout the process of developing policies that can foster the positive impacts of FDI. This can include assistance to craft coherent and integrated national policies, strategies or action plans related to sustainable investment (e.g. investment, growth, innovation, jobs, skills development, gender equality, and decarbonisation). In addition to providing technical expertise in specific policy areas, development co-operation partners can help ensure an inclusive and consultative process, for example by supporting inter-ministerial dialogues and stakeholder consultations. The ILO, for example, provides technical support to governments in the design of National Employment Policies (NEPs), which aim to advance the SDGs and consider the complementarities between labour, sectoral, trade and investment policies (Figure 2.2). The development of NEPs also involves a comprehensive and intense process of tripartite social dialogue, making the process a tool to reinforce social dialogue institutions and mechanisms (ILO, 2015[7]).
Figure 2.2. ILO approach to design National Employment Policies (NEPs) taking complementary policies, including on investment, into account
Note: Investment policies are included under macroeconomic policies.
Source: Reproduced from ILO (2022[8]), National Employment Policies, https://www.ilo.org/global/topics/dw4sd/themes/n-e-policies/lang-en/index.htm.
Sustaining engagement and providing budget support to ensure policy continuity and implementation of reforms to strengthen sustainable investment
Development co-operation can help ensure that capacities are in place to carry out policy reforms and support policy continuity on investment and sustainable development. While time-bound reviews or technical expertise may provide useful policy recommendations to governments, important challenges often lie in the implementation of recommendations, policies and reforms, which require significant resources, technical expertise and capacity over a sustained period of time. Changes in governments and policy priorities may also add to the implementation challenges. Long-term planning and assistance to the implementation of reforms aligned with national priorities can be instrumental in helping partner countries move from recommendations to action. Donors can also have a positive influence on policy continuity by maintaining engagement in countries and acting as a neutral broker with government institutions.
Financial support to sector reforms can be effective in promoting implementation and continuity. For example, the European Union provides budget support as a means to deliver effective and durable results in support of EU partners’ reform efforts and the SDGs. Such support involves dialogue with partner countries to agree on priorities; assessment of progress achieved; financial transfers to the treasury account of the partner country once those results have been achieved; and capacity-development support. The EU has provided budget support to various countries, including to upgrade business environments, promote sustainable industry, or enhance resilience to climate change (European Union, 2020[9]). Donors can also provide technical assistance and build the capacity of institutions to support reform processes. Examples include support provided by Germany’s GIZ in the Dominican Republic to promote renewable energy, cut greenhouse gas emissions and support reforms in the energy sector (GIZ, 2022[10]).
A number of programmes or facilities have been developed to offer comprehensive policy reform and implementation support. For example, the African Development Bank (AfDB) Investment Climate Facility (ICF) supports both the design and implementation of reforms through legislative reviews, capacity building of key institutions, promotion of public-private sector dialogue, implementation of recommendations of the NEPAD APRM (African Peer Review Mechanism), research, and media work aimed at improving Africa’s image as a place to do business (AfDB, 2022[11]). The MENA Transition Fund, sponsored among others by eight DAC members, uses a range of financing and technical assistance modalities to support MENA transition countries across inter-related thematic areas including investing in sustainable growth, inclusive development and job creation, enhancing economic governance, and competitiveness and integration (MENA Transition Fund, 2021[12]).
Building capacity of public institutions involved in the design and implementation of policies related to sustainable investment to ensure inclusive decision making and effective inter-agency coordination
Development co-operation can support efforts to build the capacity and facilitate coordination across institutions, which is essential to promote policy coherence, effectiveness and continuity. Investment and sustainable development policies are often managed by different institutions and agencies that belong to different policy communities. Ensuring coordination, alignment and adequate repartition of capacity and resources is important to ensure effective and sustained implementation of policies on investment and sustainable development. Development co-operation partners can help overcome these challenges as part of general investment climate reform support, which often involves dialogues with different government agencies, and can include the creation of inter-ministerial task forces to support the process. Development co-operation assistance can also take a more targeted approach, for example by delivering training, facilitating policy dialogues, or through the development of tools and guidance. For example, UN DESA, together with regional commissions, UNDP and other partners, and with funding from Switzerland, Sweden, and France, has developed and rolled out training toolkits to promote policy coherence and integrated policies for the SDGs, which include case studies linking investment and SDG planning (UNITAR, 2021[13]; 2019[14]).
In addition to inter-agency coordination, development co-operation can also help encourage and facilitate engagement with stakeholders on the design and implementation of policies related to sustainable investment. This is particularly essential to understand how FDI affects stakeholders and ensure buy-in and sound policy design. Donors frequently provide support to private sector and stakeholder engagement in policy making, including as part of broader projects to support policy making and implementation. They can also provide ad hoc support to the organisation of events, dialogues, and support government institutions in the development of tools and processes facilitating stakeholder engagement. The FAO, for example, has provided support to the Egyptian Government in the development of agriculture investment strategies, including support to foster private sector participation in Egypt’s agriculture, support to public-private dialogues, improved coordination with stakeholders and institutional capacity building (FAO, 2020[15]). The Open Government Partnership (OGP), for example, is a multi-stakeholder organisation supported by various donors (including the United States, France, United Kingdom, Sweden, the European Union) to facilitate stakeholder engagement in policy reform across a range of policy areas (OGP, 2022[16]).
Supporting efforts to assess and monitor the impact of FDI on sustainable development
Development co-operation can help measure and monitor the impact of FDI on the SDGs, which is crucial to ensure the effectiveness of government and development partners’ investment-related actions. While the measurement and monitoring of FDI flows and stocks is well established, monitoring and evaluation systems related to the impact of FDI on the SDGs are nascent. Development co-operation partners have deployed important efforts to better capture the impact of private sector resources on the SDGs. For example, the OECD Development Assistance Committee (DAC) has made important progress on the development of statistical tools and measures for tracking SDG-relevant investments, including through the ‘total official support for sustainable development’ (TOSSD) methodology. This new measure sheds light on how financing for private sector development is intended to affect sustainable development, as TOSSD reporting allows for the indication of intent to target one or more SDGs1 (Figure 2.3). Such advances are particularly important to allow the development of internationally comparable, unified and transparent data.
Figure 2.3. Private sector development support by SDG in 2020, using the TOSSD methodology
Note: Includes 93% of TOSSD (Pillars I and II) to PSD (e.g. coverage ratio).
Source: OECD (2022[17]), TOSSD database, https://tossd.online/
Development co-operation actors can draw from these advances and support partner countries in areas such as the development of metrics and indicators, data collection or establishment of a monitoring system. Initiatives such as UNIDO’s Investment Monitoring Platform, for example, can support data collection and help governments in Africa access comparable data and better assess the effectiveness of their policies on FDI, and the influence of FDI on domestic firms (UNIDO, 2022[18]). Donors (the Netherlands and Switzerland) have also supported the OECD Investment Committee (IC) to develop indicators on the impact of FDI on specific areas of the SDGs (OECD, 2019[19]). Those FDI Qualities Indicators that have built the foundation of the OECD work on sustainable investment are now being updated (OECD, 2022[20]).
2.2.2. Development co-operation assistance to promote alignment between domestic regulation and international standards on investment and sustainable development
Alignment between domestic regulations and international standards on investment and sustainable development is a fundamental condition to ensure that FDI positively influences sustainable development objectives. Alignment with these standards is crucial to create an environment where both domestic and foreign businesses are encouraged to carry out their operations in a way that contributes to sustainable development, and at a minimum, does not undermine progress towards the SDGs. In addition to steering domestic and foreign business behaviour towards more sustainable practices, alignment with international standards sends a positive signal to investors and trading partners, and helps create a level playing field conducive to attracting sustainable investment. Development co-operation often plays an important role by collaborating in the promotion of these norms, facilitating their adoption and providing assistance to translate them into national regulatory frameworks.
Figure 2.4. Aligning domestic frameworks with international standards that support sustainable investment
Supporting efforts to join major international conventions and agreements promoting sustainable development
Development co-operation actors can encourage and support government efforts to join major international instruments, such as the Paris Agreement, core UN and ILO conventions, and main international instruments on responsible business conduct (RBC) including the OECD Guidelines for Multinational Enterprises (the MNE Guidelines) (OECD, 2011[21]) and UN Guiding Principles on Business and Human Rights (UN, 2011[22]; OECD, 2022[20]) (see Table 2.2).
Table 2.2. Key legal instruments by SDG area
Source: OECD (2022[20]), FDI Qualities Policy Toolkit, https://doi.org/10.1787/7ba74100-en.
Development co-operation actors can, for example, support dissemination of legal instruments or collaborate with partner countries to bring regulatory frameworks in line with international standards in specific areas of the SDGs. In Viet Nam, for example, the ILO, with support from the United States, has helped develop a New Industrial Relations Framework aligned with the ILO Declaration on Fundamental Principles and Rights at Work (ILO, 2022[23]). Reviews carried out by the OECD in the context of non-Member countries’ adherence to the OECD Declaration on International Investment and Multinational Enterprises, for example, provide comprehensive advice on how to align national frameworks with the main elements of the Declaration, including the MNE Guidelines (OECD, 2011[24]).
Development co-operation can also support the implementation of commitments made. In the area of climate change, the World Bank has developed a Reference Guide to Climate Change Framework Legislation, to help policy makers legislate on climate change and meet Net-Zero Commitments. The World Bank has also provided support to countries in adopting climate change framework legislation (World Bank, 2020[25]). To support the implementation of international human rights standards, the Commission on Human Rights established the United Nations Voluntary Fund for Technical Co-operation in the Field of Human Rights, which provides financial support for technical assistance to build and strengthen national and regional institutions, legal frameworks and infrastructure that will have a positive long-term impact on human rights. The Fund receives voluntary contributions from Governments, organisations and individuals (OHCHR, 2021[26]). From 2017 to 2020, GIZ provided support to government institutions and agencies for the negotiations of investment contracts aligned and contributing to the SDGs in the extractive sector (Box 2.2).
Box 2.2. The CONNEX initiative support to fair and stable contracts for the extractive sector
The extractive sector is very important to the economies of many developing countries, with more than a fifth of gross domestic product generated through raw materials in many countries. Well-negotiated investment contracts, that can be professionally implemented, are a major success factor to ensure that the sector contributes to economic and social development. Investment contracts regulate the relationship between state and investor and clarify rights and responsibilities.
However, partner countries often lack the necessary information, capacities and specialist knowledge required to negotiate with investors on an equal footing. This can lead to loss of opportunities preventing the sector from realising its full development potential.
To address the issue, the CONNEX Initiative was established at the G7 summit in Brussels in 2014 to provide support in contract negotiations. The CONNEX Support Unit, co-funded by GIZ and the European Union, supports partner countries in complex contract negotiations, principally in the extractive sector, to facilitate the conclusion of stable investment contracts.
To achieve this goal, the CONNEX Support Unit makes independent experts available to developing and transition countries on request. The main focus here is on preparing and implementing specific contract negotiations. The CONNEX Support Unit has implemented support measures for complex contract negotiations in more than 12 countries worldwide, enabling them to mobilise additional resources from the extractive sector and increase this sector’s contribution to sustainable development.
Source: GIZ (2019[27]), Fair and stable investment contracts for the extractive sector, https://www.giz.de/en/worldwide/79791.html; CONNEX Support Unit (2022[28]), CONNEX, https://www.connex-unit.org/en/downloads/,
Supporting the negotiations and implementation of international investment and trade agreements, including on sustainability-related provisions
Efforts to integrate sustainability considerations into trade and investment are increasingly reflected in investment and trade agreements. International investment and trade agreements establish the terms and conditions for private investments made by individuals and business entities from one sovereign State in another sovereign State. Recent OECD analysis identified an increasing tendency to integrate business responsibilities and sustainability considerations into investment treaties (Gaukrodger, 2021[29]). For example, Gordon and Pohl find that out of 1 623 international investment agreements (IIAs) – which represents approximately half of all IIAs – only 8.2% included express references to environmental concerns, but since the mid‑1990s “the proportion of newly concluded IIAs that contain environmental language began to increase […]. In 2008, 89% of newly concluded treaties contained references to environmental concerns’” (Gordon and Pohl, 2011[30]).This trend is also reflected in preferential schemes such as the EU’s Generalised Scheme of Preference (GSP), which removes import duties from products coming into the EU market and include conditions related to labour and human rights (EU, 2022[31]).
Developing countries face a number of constraints when it comes to building negotiating capacity in international investment and trade negotiations. For example, policy coherence and institutional coordination challenges can cause difficulties in defining national negotiating positions, or in arriving at common negotiating positions. The lack or insufficiency of human, financial, and technical resources to adequately prepare for negotiations can also affect the negotiating strength of developing countries. In many instances, these resource constraints hamper countries’ ability (i) to conduct strategic development economics research and analyses as the bases for defining the national objectives for negotiations as well as developmental priorities; (ii) to conduct sector- or industry-specific research and analyses to identify the potential impacts of negotiating outcomes on domestic industries; and (iii) understand the negotiating context so as to be better able to define negotiating tactics and strategies (South Centre, Office of the Chairman of the G77, 2004[33]). Such challenges can be exacerbated by the rising complexity of investment and trade agreements covering a growing range of qualitative chapters related to sustainable development. In 2020, Mattoo et al. identified that the number of policy areas covered by Preferential Trade Agreements (PTAs) had increased over the last two decades, with most PTAs since the years 2000 covering between ten and 20 policy areas (Mattoo, 2020[33]).
Development co-operation partners can help developing countries in their efforts to negotiate and implement investment and trade agreements, including through support to embed and monitor the implementation of sustainability provisions. Developing country governments can seek technical assistance from development partners to assess the impacts of IIAs and other international agreements on sustainable development, to negotiate agreements to reflect the needs of governments to pursue sustainable development and to implement these rules. They may also seek financial and technical assistance to mitigate short-term adjustment costs that may arise as a result of greater trade integration. Box 2.3 provides examples of good case practices of development co-operation support to negotiate and implement investment and trade agreements for sustainable development. Beyond support that is targeting developing countries, development partners can also seek to embed sustainability considerations in policies, laws and agreements that relate to outbound investment in their own countries to foster positive impacts on partner countries.
Box 2.3. Examples of development co-operation support to negotiate and implement investment and trade agreements that are aligned with sustainable development objectives
Development co-operation partners can support developing countries in the negotiation and implementation of international investment and trade agreements through various approaches. Good practice examples include:
Funding research that informs developing country governments about the potential impacts of international agreements on specific sectors or industries as well as the economy as a whole. Such an assessment can explicitly consider the sustainable development impacts of FDI. For example, the European Union has been supporting the African Continental Free Trade Area (AfCFTA) since its launch in 2018 by facilitating negotiation fora or providing technical studies upon African Union demand. The Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative by UN ESCAP funded by various donors, provides research support on trade and investment for sustainable development, including in the context of trade agreements.
Building negotiating capacities of developing country officials by providing training in the form of technical seminars and workshops. Donors provide funding to the WTO Global Trust Fund to help developing countries and least-developed countries (LDCs) participate effectively in global trade negotiations by financing training and other capacity-building activities for government officials to help them better understand and implement WTO agreements and to enhance their negotiating skills. For example, the International Institute for Sustainable Development (IISD), together and with funding from UNEP, has developed a Sustainability Toolkit for Trade Negotiators to help build negotiating capacities on matters at the intersection of trade and the environment. The toolkit was rolled out through various workshops and training events (IISD, 2016[34]).
Facilitating mutual learning among developing country governments and the building of alliances, which can be the basis for better negotiating strength. The RTA Exchange is a knowledge sharing platform jointly implemented by the International Centre for Trade and Sustainable Development and the Inter-American Development Bank. It allows to share experience and best practices on using regional trade agreements as valuable laboratories for new trade rules and approaches that can be harvested at the multilateral level, in order to contribute to a more inclusive global trade and investment system that delivers sustainable development for all (ICTSD/IDB, 2021[35]).
Supporting the development of model agreements to facilitate investment treaty negotiations and support the development of specific investment treaties. Such model agreements can include sustainability-related provisions and considerations to the impacts of investment. For example, with funding from the EU and GIZ, the International Institute for Sustainable Development (IISD) supported the Southern African Development Community (SADC) in the development of a Model Bilateral Investment Treaty (BIT) Template. The Model BIT aims to promote harmonisation of SADC’s member states investment policies and laws and can be used as a guide to support specific investment treaty negotiations. The model BIT includes provisions on a broad range of policy areas including environmental and social impact assessment, environmental management, human rights, environment and labour standards (IISD, 2012[36]).
Providing technical assistance and capacity building to implement the sustainability provisions embedded in trade and investment agreements. For example, the EU-ILO-OECD Responsible Supply Chains in Asia programme, funded by the EU and implemented jointly by the three organisations, helps companies improve respect for human and labour rights and environmental standards across global supply chains and create an enabling environment for responsible business conduct. The project is carried out in partnership with six partner economies, including countries that have signed trade and investment agreements including sustainability provisions.
Supporting the development and implementation of legislation that aims to enhance the positive effects of investment
Ensuring that domestic regulations reinforce the possible benefits of FDI on sustainable investment is key to leverage investment for sustainable development. Open, transparent and non-discriminatory investment policies, combined with respect for the rule of law, integrity and quality regulations are important pre‑requisites of an enabling environment for sustainable investment. In addition, ensuring improved impacts of FDI on sustainable development requires an additional focus on policies at the intersection of investment and sustainable development, including regulatory frameworks on innovation, skills, the labour market, gender equality and the environment.
Development co-operation can play an important role in helping countries develop and implement regulatory frameworks on sustainable development that align with objectives to use investment as a tool to support sustainable development. Development co-operation can, for example, help lower regulatory barriers that impede greater female entrepreneurship and economic opportunities. The World Bank’s Women, Business and the Law project, for example, collects data and provides analysis on the laws and regulations that affect women’s economic opportunity, with a view to supporting economic empowerment for all (World Bank, 2022[37]). Development co-operation assistance can also support the development of new laws, and help build the capacity of regulators and relevant institutions to reinforce regulations and compliance on sustainable investment. In 2020, the Climate Disclosure Standards Board (recently consolidated into the IFRS Foundation), together with the Sustainable Stock Exchange initiative (SSE), announced their intention to collaborate to deliver capacity building activities for stock exchanges and regulators, as a way to strengthen support for climate–related disclosures and green finance. The IFRS Foundation and SSE carry out their activities with funding from both public and private donors (CDSB, 2020[38]).
Development co-operation can also support efforts to meet cross-border regulatory requirements of investment partner countries. In recent years, many countries have enacted legislation aiming at making investment and business activities more sustainable, which apply across borders. This includes a growing number of due diligence laws, which require that businesses report at home on the way they manage their environmental and social risks throughout their supply chains. Other examples include the development of taxonomies, which places an obligation on certain companies to disclose the proportion of their global investment that is aligned with environmentally sustainable activities. Without appropriate support, such requirements may be hard to meet for countries that may not have the resources and technical and institutional capacity to implement new standards. Development co-operation can help overcome the challenge, thereby achieving the dual objective of improving the impact of investment on the SDGs, and attracting sustainable finance and investment. The EU, for example, has developed a strategy to support the development of international sustainable finance initiatives and standards, and support low- and middle–income countries in scaling up investment flows towards environmentally sustainable activities (European Commission, 2021[39]).
2.2.3. Development co-operation assistance to incentivise and build capacity to mobilise and enhance the impact of FDI on sustainable development
Governments and development co-operation partners may use financial and technical support (such as subsidised loans or grants) to address market failures hampering sustainable development and thereby help attract sustainable investment and improve the capabilities of firms and skills of workers. Development partners can help governments in the design and implementation of financial support schemes (e.g. with technical assistance). They can also work directly with the private sector to incentivise investment for sustainable development in developing countries.
Figure 2.5. Incentivising investment and building domestic capabilities on sustainable investment
Ensuring a robust impact management and monitoring strategy in the provision of de‑risking instruments and scale up the use of blended finance in least developed countries
Development co-operation partners provide financial support to incentivise sustainable investment in specific sectors or regions. Development finance institutions (DFIs), for example, use public funds to invest in private sector operations with a dual objective to achieve financial returns while creating positive developmental impacts. DFIs employ various financial instruments to undertake their investments, including loans, guarantees and equity investment, to catalyse private investment and achieve development impacts (ODI, 2015[40]). While disparities in impact management and measurement frameworks present a challenge for the assessment of DFIs’ developmental impact, such support can be crucial to attract investment in activities or locations where the risks would otherwise be deemed too high for private investors (OECD, 2022[41]). Multilateral development banks, for example, are large providers of political risk insurance which can be important to enable FDI in developing countries (IsDB/ICIEC, 2020[42]).
Due to their mandate and experience working with the private sector, DFIs are well placed to play an active role in enhancing the positive impacts of investment on the SDGs. However, recent research has found that DFIs have been slow to adapt their business models to growing calls for sustainability, and shift their focus from mobilisation to impact (ODI, 2021[43]). Harmonisation of impact management standards and greater integration of the transformational objectives of investment could bolster efforts to improve impacts of FDI in developing countries. Some DFIs have stepped up their efforts in that area. With its Sustainable Development Analysis and Opinion mechanism, AFD for example, has sought to better integrate inclusion of sustainable development concerns in AFD’s financing operations (AFD, 2018[44]).
Blended finance, defined as the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries, has gained ground (OECD, 2018[38]). Through blended finance, development partners can enhance the risk-return profile for private investors by re‑allocating the risk or cost of an investment from the private sector to the development co-operation partner. Between 2012 and 2020, USD 306 billion of private finance was mobilised by development finance. Amounts mobilised decreased between 2018 and 2019, but increased again in 2020 ‑(Figure 2.6); 17 members of the OECD DAC now engage in blending; and 167 facilities were launched between 2000‑16 to pool finance for blending (OECD, 2020[39]). The OECD DAC Blended Finance Principles include a focus on ensuring that blended finance is anchored in a development rationale.
While private finance mobilised through blended finance approaches has grown rapidly in the last decade, the amounts contrast sharply with the estimated USD 3.7 trillion gap to finance the SDGs. There is scope to further scale up blended finance mechanisms, especially in LDCs. Of all the private finance mobilised by official development finance interventions between 2012 and 2017, only USD 9.3 billion, or 6%, went to LDCs, whereas over 70% went to middle–income countries (Figure 2.6) (OECD, 2020[46]). More transparency and harmonisation in impact management and measurement approaches could also contribute to making blended finance more impactful and effective. Greater project diversification, and a conscious effort to scale up support for companies, projects and regions that face the greatest difficulties accessing finance, can also contribute to increasing both investment mobilisation and impact.
Figure 2.6. Private finance mobilised by official development finance, across regions (2020 USD bn)
Source: OECD, Amounts mobilised from the private sector for development, http://www.oecd.org/development/stats/mobilisation.htm
Adopting a targeted approach to catalyse investment in high impact sectors and activities
Development co-operation partners can adopt a targeted approach to supporting FDI that contributes to specific SDG-related objectives. This can include investing in sectors that contribute to progress in productivity and innovation. Official development finance was transformational for many countries in their digital revolution. For example, the CDC Group, the UK’s DFI, pioneered investments in Africa’s mobile network, which spearheaded the technological transformation of the continent. The number of mobile phone users increased from almost none in the early 2000s to more than 400 million in 2017. (Runde, Bandura and Ramanujam, 2019[47]). In 2021, a consortium comprised of UK’s Vodafone Group and CDC Group, Kenya’s Safaricom, South Africa’s Vodacom Group, USA’s Development Finance Co-operation, and Japan’s Sumitomo Corporation, obtained a telecoms operating licence, enabling a total planned investment of USD 8 billion, the single largest FDI to Ethiopia to date (Embassy of Ethiopia in the UK, 2021[48])
In the same spirit, development partners may also decide to allocate funding to support investment in clean energy projects (Box 2.4). According to the International Energy Agency (IEA), clean energy investment in emerging and developing economies needs to increase by more than seven times – from less than USD 150 billion last year to over USD 1 trillion by 2030 to put the world on track to reach net-zero emissions by 2050. The 2021 special report produced by the IEA in collaboration with the World Bank and World Economic Forum calls on governments to give international public finance institutions – including development and green banks as well as infrastructure and clean energy funds – a strong strategic mandate to finance clean energy transitions in the developing world. According to the IEA, enhanced provision of debt, equity and a range of blended finance instruments and structures will be important to help catalyse project development and attract higher levels of private capital in markets and sectors with persistent risks and barriers (IEA, 2021[49]). In line with this objective, multilateral development banks, in particular, have committed to aligning financial flows with the Paris Agreement at the 2017 One Planet Summit, by redirecting financial flows in support of low-emissions, climate–resilient development in developing countries and by developing processes and tools to put commitments into practice.
Box 2.4. Catalysing clean energy investment: the example of the AfDB and IFC’s Redstone Concentrated Solar Project
The solar power project developed by the Saudi company ACWA Power, an investor and operator of power plants and water desalination plants, and financed by the African Development Bank and the International Finance Corporation, aims to balance South Africa’s energy mix, which currently consists more than 80% of coal, and accelerate the transition to renewable energy. The project is expected to create more than 3 500 jobs over its life cycle. The financing conditions required that the project fulfils social development requirements for employees, Black Economic Empowerment, procurement from small and medium enterprises (SMEs), local content, and shareholding by local communities. The Redstone CSP project introduces a novel technology to store solar energy in a molten salt thermal energy storage system, which will enable the power plant to deliver a stable electricity supply to more than 200 000 South African homes during peak demand periods, even well after the sun has set. First introduced and tested in the US, this way of generating and storing energy is particularly prone to the desert environment in South Africa and other African countries.
Source: AfDB (2018[50]), South Africa – Redstone 100mw Concentrated Solar Power (Csp) Project – ESMP Summary, https://www.afdb.org/en/documents/document/south-africa-redstone‑100mw-concentrated-solar-power-csp-project-esmp-summary-102590
Development co-operation partners increasingly embed gender equality objectives in their financing decisions. This may involve the provision of grants with the explicit objective of gender equality promotion, or the issuance of policy directives requesting that new investments address gender equality concerns. Initiatives such as the ‘2X Challenge’, initiated in the G7 context, establish definitions and methodologies for gender-lens investing that provides women in developing country markets with improved access to support, leadership opportunities, finance, and products and services that enhance economic participation and access. In Latin America, IDB Invest, the private arm of the Inter-American Development Bank, offered a performance–based financial instrument based on gender outcomes, with funds from the Canadian Climate Fund. With this mechanism, projects meeting a pre‑defined gender-related target, could obtain a reduction in the interest rate on the loan of up to 25 basis points (Oueda, 2018[51])
Development partners can also affect the impacts of FDI on sustainable development through screening criteria conditioning financial support to sustainability commitments and practices. Through the use of sustainability and other screening criteria to evaluate the sustainable development impact of projects, donors can ensure that sustainable development aspects are sufficiently integrated in investment decisions. For example, the Dutch Good Growth Fund (DGGF), provides financial support to businesses exporting or investing in developing countries, as well as domestic firms. To access funding from the DGGF, businesses must comply with a range of criteria, including international corporate social responsibility standards, and contributing to the country’s sustainable development – i.e. to local employment, production capacity and/or knowledge transfer (DGGF, 2022[52]). The OECD UNDP Impact Standards for Financing Sustainable Development (IS-FSD), approved by the OECD DAC in March 2021, constitute a decision-making framework for all organisations with a desire to demonstrate public accountability regarding their measurement and management of impact (OECD/UNDP, 2021[53]). As such, they can be used by development co-operation partners to screen potential partners and assess their impact focus, including on cross-cutting themes such as gender, climate and the quality of jobs.
Providing support to build the domestic capabilities of firms to participate in value chains and foster decarbonisation, productivity and innovation, as well as job quality, skills and gender equality
The availability of skills in host countries can be an important factor for foreign investment decisions, therefore training a labour force that can be readily employed by foreign firms may be conducive to attracting more foreign firms. Development partners can help by providing skills matching and training that will help attract FDI and foster positive impacts. Many developing countries receive assistance from development co-operation partners for employment programmes linking the private sector with job seekers, equipping the latter with the skills sought after by potential employers. Vocational training programmes, for example, can help address the skills mismatch and attract FDI in activities and sectors with high impact potential (Box 2.5). Capacity building and training programmes can also be relevant to support re‑skilling for sectors in transition, for example in the context of decarbonisation efforts.
Development partners can also help build the capabilities of domestic firms, entrepreneurs and workers, to foster decarbonisation, productivity and innovation, as well as job quality, skills and gender equality. Such support can take the form of grants or loans to help businesses invest in research and development (R&D), for example to adopt innovative low-carbon solutions. Donors and development actors may also engage with domestic firms to build their capacities to become partners and suppliers of foreign firms, through training or capacity building programmes. For instance, the IFC and Newmont Ghana Gold Ltd. jointly developed a local procurement and supplier development programme called the Ahafo Linkages Programme, which is focused on capacity building and integrating local businesses into the supply chain. This is done through the support and development of local SMEs using a technical and business skills mentoring approach to enable them to meet Newmont’s procurement standards and stringent requirements (Simanye, 2014[54]).
Box 2.5. Building workers capacity to create jobs: SIDA and UNIDO’s Heavy Duty Equipment and Commercial Vehicles Academy in Ethiopia
In Ethiopia, there is a growing need for skilled labour, and finding a trained workforce is a bottleneck for companies. Technical vocational education and training programmes do exist but are often based on theoretical training and are poorly aligned with the actual needs of the labour market and the private sector. SIDA’s strategy includes creating improved opportunities for productive employment with decent work conditions – particularly for women and young people.
A Public Private Development Project was launched with SIDA, UNIDO and Volvo, to address both the private sector’s need for a skilled workforce and the country’s high unemployment rates. Volvo and its customers needed highly trained mechanics to secure sustainable maintenance of a large order of trucks. Meanwhile, the provision of modern and qualitative vocational training and job opportunities aligned well with Sweden’s strategy for development co-operation with Ethiopia.
This resulted in Ethiopia’s first state-of-the-art vocational training for heavy machinery being established at the Selam Technical and Vocational College, during the period 2012‑19. Volvo contributed technical equipment, training material, trainings of teachers, ongoing curriculum development and apprenticeship opportunities for students. UNIDO has considerable experience with technical vocational training and is responsible for the overall project management. The training takes place at the Selam Vocational Training College, which also manages the administration of the academy, the recruitment of teachers and the selection of students.
Source: SIDA (2020[55]), SIDA’s private sector collaboration, https://sidase-wp-files-prod.s3.eu-north-1.amazonaws.com/app/uploads/2020December 01161630/sidas-private-sector-collaboration-1.pdf.
2.2.4. Development co-operation assistance to facilitate sustainable development opportunities by addressing information failures and administrative barriers
The way businesses – both foreign and domestic – carry out their activities is a key determinant of the impact of FDI on sustainable development. Regardless of the sector or location, investment providers and recipients can take active steps to understand and manage their impacts on workers, communities, the environment and society as a whole. Social and cultural norms, as well as general awareness of standards of business conduct can be important factors influencing business behaviours. Development co-operation can be instrumental in raising awareness about impacts of FDI on sustainable development. Development co-operation partners can also provide training and build the capacity of firms to implement RBC standards, as a way to attract responsible investment and enhance the impact of FDI.
Figure 2.7. Facilitating sustainable investment opportunities
Raising awareness and facilitating implementation of corporate sustainability standards, including RBC due diligence
Broad awareness of the links between FDI and sustainable development is important to create an environment where social and cultural norms are conducive to fostering positive impacts of investment. General public awareness can also support more efficient policy making, informed by stakeholder dialogue and allowing the identification of key challenges and opportunities to enhance FDI impact. Development co-operation actors can help raise public awareness of the links between FDI and sustainable development, notably through the development of tools, training, organisation of events and dialogue for businesses, policy makers and civil society.
Development co-operation can also be instrumental in raising awareness and facilitating implementation of standards that promote the positive impacts of foreign and domestic businesses. Implementation of international RBC standards including the MNE Guidelines, the UN Guiding Principles on Business and Human Rights, and the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, is essential to foster the positive impacts of FDI on sustainable development (OECD et al., 2020[56]). Development co-operation partners can support efforts to disseminate and promote a shared understanding of what expectations towards businesses embedded in international RBC standards entail. For example, in countries that have adhered or are in the process of adhering to the MNE Guidelines, development partners can support the establishment and help build the capacity of National Contact Points for RBC, which are agencies established by governments tasked with a mandate to promote the MNE Guidelines and related due diligence guidance, and to handle cases as a non-judicial grievance mechanism (OECD, 2022[57]). Such support can take different forms including funding for review and capacity building, but also active participation in pairing and peer learning activities.
Development partners can also finance or take part in projects involving businesses and relevant actors to build capacity and actively support practical implementation of sustainability standards. For example, through the Better Work programme, the ILO and the IFC with funding from official donors, work with governments, businesses and stakeholders, and provides training in factories on the implementation of labour standards to promote better working conditions and competitiveness. The programme has supported 1 700 factories across 12 countries (ILO/IFC, 2022[58]). Donors can also undertake awareness raising activities and building capacities to carry out risk-based due diligence – a process through which businesses identify and manage their environmental and social risks and impacts – in alignment with international RBC standards. In 2022 the OECD released an e–learning Academy to provide stakeholders with knowledge on RBC and OECD risk-based due diligence, thus supporting implementation of RBC standards (OECD, 2022[59]).
Development partners can also play an important role in promoting transparency and harmonisation of disclosure frameworks. While availability of non-financial information is crucial for both domestic and foreign firms to manage their impacts and integrate sustainability considerations in their investment decisions, disparities in disclosure frameworks and practices impede further uptake and implementation of RBC standards. Donors can help promote alignment and transparency, for example by supporting standard-setting initiatives, or engaging with governments, market regulators, stock exchanges. For example, the Australian Department of Foreign Affairs and Trade supports the Sustainable Trade and Investment in the Indo-Pacific programme, implemented by the Global Reporting Initiative (GRI) which aims to increase corporate transparency on social and environmental impacts to drive sustainable trade and investment in the Indo-Pacific region. Through this programme GRI supports the capacity of listed companies to disclose their sustainability impacts, and promotes a reporting environment conducive to transparency, by engaging market regulators and stock exchanges in the region (GRI, 2022[60])
Supporting government agencies in the delivery of services in support of sustainable development
Government agencies, in particular Investment Promotion Agencies (IPAs), are key players in bridging information gaps that may otherwise hinder the realisation of foreign investments and their potential sustainable development impacts. Their primary role is to create awareness of existing investment opportunities, attract investors, and facilitate their establishment and expansion in the economy, including by linking them to potential local partners. Most IPAs prioritise certain types of investments over others, by selecting priority sectors, countries or investment projects, and allocating resources accordingly. Development co-operation can help build the capacity and support institutions in effectively prioritising investment against sustainability criteria, and delivering services to businesses that positively influence their contribution to the SDGs. For example, the ILO and the World Association of Investment Promotion Agencies provide training to IPAs to strengthen their investment promotion and facilitation capacities, expand their after-care services and, more broadly, enhance the development impacts of FDI, particularly as regards the creation of more and better jobs (WAIPA, 2020[61]). GIZ has designed an IPA Toolbox, which provides practical guidance to support IPAs and includes advice to ensure that IPAs activities advance the SDGs (GIZ, 2020[62]).
Developing, supporting or partaking in industry and/or multi-stakeholder initiatives to promote SDG alignment and supply chain linkages
Collaborative initiatives, including industry and multi-stakeholder initiatives, can be effective ways to promote a shared understanding and implementation of sustainability standards while fostering value chain linkages. Active efforts to manage environmental and social impacts along the value chain are necessary to achieve and maximise the positive spill-over effects of FDI. While finance providers and foreign investors can embed sustainability criteria in their investment decisions and practices, positive impacts on the SDGs will be enhanced if investment recipients similarly engage in activities that contribute to job creation, well-being and gender equality, and adopt an SDG lens in their own practices and business decisions, including related to sourcing, contracting, and all forms of business relationships. Industry initiatives can go a long way in promoting common norms and practices in entire value chains, which in turn reinforces inter-firm linkages and investment attractiveness. In many cases, collaborative initiatives include trade unions, NGOs, and civil society members, which may contribute to finding common solutions to sustainability issues, improving industrial relations and promoting accountability.
Development partners support financially a number of collaborative initiatives and can also take an active role in convening and steering such initiatives. For example, the Extractive Industries Transparency Initiative (EITI), a global multi-stakeholder initiative which aims to establish a global standard in the management of oil, gas and mineral resources, is funded by adhering countries, but also receives support from various donors through its Extractives Global Programmatic Support (EGPS) multi-donor facility managed by the World Bank (EITI, 2022[63]). The Green Economy Coalition, which brings together trade unions, businesses, NGOs, UN agencies and citizen’s groups to promote an equitable environmental transition, receives funding from the European Union. As part of the develoPPP.de programme of the German Federal Ministry for Economic Co-operation and Development (BMZ), GIZ has co‑operated with BASF, Procter & Gamble and Cargill to assist farmers in the Philippines and Indonesia to secure certification for their produce according to the Sustainable Agriculture Network of the Rainforest Alliance (GIZ, 2021[64]). In addition to promoting sustainable practices, development co-operation partners can seek to convene or leverage multi-stakeholder partnerships to strengthen value chain linkages and thereby boost spill-over effects (Box 2.6).
Box 2.6. Boosting competitiveness and SDG impact: GIZ’s Competitive Cashew Initiative
Launched in 2009, the Competitive Cashew initiative brings together more than 100 public and private partners, including the German Federal Ministry for Economic Co-operation and Development (BMZ), the Bill & Melinda Gates Foundation, the United States Agency for International Development (USAID), and private international companies such as Kraft Heinz Foods, Intersnack and Olam.
The initiative, which is coordinated by GIZ, works along the entire value chain, from production, processing and marketing right through to export. Experts give the producers advice about cashew farming and operational management. The initiative also channels investments from participating MNEs into local production and processing capacities. Moreover, while raising the productivity and sustainability of the regional cashew industry, the initiative helps to attract additional foreign investors.
Since 2009, more than 430 000 cashew farmers in five producer countries (Benin, Burkina Faso, Côte d‘Ivoire, Ghana and Mozambique) have taken part in further training, enabling them to increase their total earnings by more than EUR 100 million. The farmers have also formed a cooperative in order to sell their harvests more efficiently and forge contacts with companies that process cashew nuts locally. By providing local processing companies with advice and support, the initiative has succeeded in raising processing capacity in the five countries from 9 000 tonnes to 250 000 tonnes in 2016. In addition, more than 440 000 new jobs have been created – 75% in production, 25% in trade and processing.
Source: GIZ (2022[65]), The Competitive Cashew Initiative, https://www.giz.de/en/workingwithgiz/8410.htm.
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Note
← 1. TOSSD includes all cross-border resource flows (ODA, OOF and South-South co-operation) to eligible countries (the so-called Pillar I) plus all global and regional expenditures to finance international public goods (Pillar II). Private finance mobilised can also be considered as part of the TOSSD framework but is not shown in the current section because its SDG focus is not available.