World Investment Report 2022: International Tax Reforms and Sustainable Investment
09 June 2022
Thank you very much for coming to the launch of the World Investment Report 2022, one of UNCTAD’s key flagship reports.
This report comes out at an extraordinary time for the world economy, which is suffering from the compounding effect of multiple global crises: climate change, the COVID-19 pandemic and the was in Ukraine.
Today, billions of households around the world are looking at their shrinking family incomes, alarmed by the rapidly rising cost of living.
The FAO Food Price Index is near record highs, oil over 120 dollars a barrel, transport costs are triple the pre-covid average, interest rates are rising, real incomes are falling.
But allow me today to focus on the World Investment Report and provide a wider perspective to understand the slow but
transformative trends that shape investment flows and ultimately the future.
As every year, the World Investment Report 2022, use data for all countries in the world to provides the latest trends in global foreign direct investment, greenfield projects, and international project finance deals - the latter being key to sustainable development.
The report also has dedicated sections mandated by the general assembly on investment trends in the SDGs, climate change, capital markets and sustainable finance.
This year we analyze in detail the introduction of a global minimum tax for multinational enterprises spearheaded by the G20 and the OECD, which will have important implications for the developing world. So let me address these three issues; investment trends, international tax reforms, and sustainable finance.
Firstly, with regards to current investment trends and prospects.
Global foreign direct investment flows in 2021 increased almost 70% from the exceptionally low levels of 2020.
However, the global environment for international business and cross-border investment has changed dramatically in the last three months.
The war in Ukraine - added to the pandemic & climate crisis- is rapidly increasing investor uncertainty.
This is a year of uncertainties.
Global value chains are greatly disrupted, consumers are worried, and interest rates are rising. Fears of recession are also high, and rising investor uncertainty will put significant downward pressure on global FDI in 2022.
We therefore expect that global FDI flows in 2022 to have a downward trajectory.
New project activity is already showing signs of increased risk aversion among investors. Preliminary data for the first quarter of this year shows that greenfield project numbers are already down 21 per cent and international project finance deals are down by 4 per cent.
Last year, FDI recovered in all regions of the world, this is good news, but the recovery was highly unequal - almost three quarters of the global increase was due to the upswing in developed countries, where FDI reached $746 billion - more than double the 2020 level. This increase was mostly caused by mergers and acquisition transactions and high levels of retained earnings in the largest multinationals - as opposed to productive capacity-enhancing greenfield projects. Greenfield projects remained one fifth below pre-pandemic level.
These high levels of retained earnings in 2021 were the result of record profits in multinational companies as the profitability of the largest 5,000 multinational companies doubled last year. Despite this the appetite of multinational companies for investing in new productive assets overseas remained weak.
Overall FDI flows to developing economies grew much more slowly than those to developed regions, but still increased by 30 per cent to $837 billion. The increase was mainly the result of strong growth performance in Asia, a partial recovery in Latin America and the Caribbean, and an uptick in Africa.
In 2022, FDI flows to the structurally weak, vulnerable, and small economies accounted for only 2.5 per cent of the world total in 2021. FDI down 1 per cent from 2020.
International investment in sectors relevant for the SDGs increased substantially in 2021, by 70 per cent. But, the growth mostly went to renewable energy, while investment activity in other SDG-related sectors in developing economies - for example, on infrastructure, food and agriculture, health, and WASH - saw only a partial recovery, remaining below pre-pandemic levels. Moreeover, investment in adaptation only represented 5% of climate change investment.
Now let me turn to one of the themes of this years' report: International tax reform.
Last year the G20 and the OECD proposed a minimum tax of 15 per cent on the foreign profits of the largest MNEs. The aim of this is to discourage multinational companies from shifting profits to low-tax countries and to reduce tax competition - race to the bottom between countries.
Once approved, this measure will increase the corporate income tax faced by multinationals on their foreign profits. Their rise in the effective tax rate is conservatively estimated to increase tax revenues in host countries by about 15 per cent.
Both developed economies and developing economies are expected to benefit substantially from this increased revenue collection.
However, these benefits are not automatic.
In a world of smaller tax rate differences countries stand to gain more from improvements in other investment determinants such as infrastructure and the regulatory and institutional environment- where some developing countries are at a disadvantage.
These tax reforms call for national investment policymakers and investment promotion institutions to act quickly if they want to be competitive.
Fiscal incentives are widely used for investment promotion in special economic zones. Investment policymakers need urgently to review their incentives packages, both for existing and new investors, and revise them to adapt to the new environment.
This report includes a guide for policymakers to do so.
UNCTAD believes that the international community should alleviate the constraints that are placing developing countries, and especially Least Developed Countries, at a disadvantage in the implementation of the tax reforms.
We must vastly scale up technical assistance to developing countries to support them in processes related to this international tax reform and ensure their perspective is taken into account and their voice is heard.
To conclude, let me turn to the third section of this year's report: sustainable finance in capital markets.
UNCTAD estimates that the value of sustainability-themed investment products in global financial markets amounted to $5.2 trillion in 2021, up 63 per cent from 2020.
These products include sustainable funds, green bonds, social bonds, and other sustainability-linked bonds.
The fast growth of sustainable finance is very positive.
But we must underline our concern that developing economies are largely bypassed by the sustainable fund market as most sustainable funds are domiciled in developed countries and targeted at assets in developed markets.
Concerns remain about greenwashing and the real impact of sustainability-themed investment products as most of these financial products are self-labelled and there is a lack of consistent standards and high-quality data to assess sustainability credentials.
UNCTAD is working to address these issues.
Since 2021 we have been partnering with Institutional Investors and sovereign wealth funds who exert significant influence, for example with public pension funds hold that more than $22 trillion in assets and sovereign wealth fund more than $11 trillion.
Currently, more than half of the world's 100 largest public pension and sovereign wealth funds do not disclose or report on sustainability issues and we are working closely with them to change that.
We are also contributing with our Sustainable Stock Exchanges Initiative. Exchanges continue to play an important role in promoting sustainable finance, especially in ESG disclosure which is now mandatory in 30 markets.
Beyond awareness raising, exchanges support mobilising finance for gender-equality-themed investment products, improving women's access to financial markets and promoting higher levels of female participation in corporate board rooms.
Lastly, at the last World Investment Forum we launched the Global Sustainable Finance Observatory, through which we seek to combat greenwashing.
Let me conclude, FDI rebounded considerably last year but 2022 remains a year of great uncertainty, marked by the triple shocks of the covid pandemic, the impacts of the war in Ukraine and the ongoing climate crisis. However, sustainable finance is growing specially in the renewable energy sector and, a renewed global tax regimes can hold opportunity for developing countries.
We will support them to ensure they can benefit from the opportunities ahead.
Thank you
