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Peace finance is an approach to investing that accounts for the risks and impacts associated with investments in fragile and conflict-affected settings (FCS). Peace finance recognises that conflict and instability are fundamental realities for 80% of the global poor with significant repercussions for global stability, peace and prosperity. It is widely accepted that commercial activities in these regions can exacerbate conflict and instability or, conversely, mitigate them. Investments in FCS expose investors to a range of risks – including reputational, legal, and regulatory risks as well as the risk that conflict disrupts business activities. In a peace finance approach investors prioritise minimising the negative impacts of their investees; there may also be opportunities for investors to encourage investees to identify avenues to contribute to peace.
Most asset classes, equities, bonds and companies in developed or emerging market portfolios are highly exposed to conflict and instability, either directly or through their value chains. Whether an investee company is extracting oil and gas, or sourcing cotton, leather coffee or cacao, its operations and/or supply chains are likely highly exposed to conflict risk.
Moreover, two of the most strategic global transformations – the energy transition and digitalization – rely on critical raw materials (copper, cobalt, tin, tantalum, tungsten, gold, etc.), which are sourced from a narrow group of FCS. While investors are increasingly active in climate finance, the energy transition is indeed fraught with conflict risk. ‘Clean power’ – in the form of solar, hydro and wind – requires securing access to land and natural resources, which may be implicated in conflict.1
The number of civil wars has almost tripled over the course of the past decade, with a six-fold increase in battle-related deaths since 2011.2
The OECD estimates that 1.9 billion people now live in FCS, amounting to 24 per cent of the global population.3
In 2022, the global economic impact of violence was estimated to be $17.5 trillion, equivalent to 12,9 per cent of the global GDP, or 2,200$ per person.4
See the FCS map here
Financial institutions are insufficiently prepared to address conflict-related risks
Investors underestimate the impact of conflict and instability on their portfolios, leading to misallocation/mispricing of underlying assets and/or expanding portfolios to FCS without mechanisms to analyse the relative risk posed by the context in relation to the cost-benefit of the venture. Most investors manage conflict through ‘exclusionary criteria’ (particularly related to oil and gas, weapons, etc. or countries on the list of ‘Sanctioned Countries and Territories’), overlooking the extent to which risk exposure crosses sectors and value chains. Investors also tend to underestimate their ability to influence the conduct of investees with regards to their conflict impacts. Misallocation is enhanced by a weak understanding of “conflict risks” and their impact on portfolios.
“Conflict risks” include a range of potential impacts that arise from business activities that may create, drive, sustain, or intensify conflict in a range of ways (as illustrated in the table below). FCS are often characterised by weak state capacity and regulatory frameworks, high levels of corruption, widespread human rights violations, sustained conflict and violence, and political instability. It is well established that when companies operate in FCS, their presence and activities interact with the context to shape the impacts that a company has on its stakeholders and on the operating context itself. While companies may deliberately position themselves as neutral actors with respect to conflict and violence, their impacts are never neutral with respect to conflict.
Conflict risks thus create ‘double materiality’: in addition to the reputational, legal, financial, security and human rights risks that conflict contexts pose to companies, companies also impact upon conflict – and vice versa. Irrespective of the company’s intentions, a company that is insensitive to the dynamics of conflict and fragility may ultimately – even if inadvertently – generate, sustain, or drive conflict, either directly or indirectly. Therefore, investors in almost any sector or industry may be exposed to these risks as well.
There are important legal and regulatory risks to take into account. In recent years, there has been an increasing recognition that human rights-based approaches alone are insufficient to deal with the scale and nature of risks in these contexts. The policy and regulatory environment is changing to reflect this emerging consensus, raising the bar for companies and investors alike; two key illustrative examples are below:
Investors can use their leverage to encourage business practices that minimise impacts that can intensify conflict and instability
Peace finance as an approach is grounded in a set of internationally-recognised standards of conduct, best practices, normative frameworks, law and soft-law and regulations. The below six elements of the peace finance approach apply in different ways to different companies operating in different industries and circumstances. It is not a “check-list” to be applied in the same way in all cases, but rather presents core elements that need to be tailored to suit the investment in question, and then reflected in core policies, practices, monitoring and accountability mechanisms of the investor and the investee:
The highest priority for peace finance is to encourage investors to use their leverage vis-a-vis investee companies to encourage business practices that minimise impacts that intensify conflict and instability; there may also be some cases in which investees have opportunities to operate or source in ways that contribute to peace and stability. From the above list, conflict-sensitivity is the only approach that can foster positive impacts on conflict.
Peace finance is thus analogous to term “climate finance”: broadly speaking, the priority amongst investors is not to finance the climate per se, but to finance efforts aimed at reducing emissions and reducing the vulnerability of human and ecological systems to negative climate change impacts; where possible such efforts are also designed to increase resilience. Similarly, the priority of peace finance is not to turn financial actors into “peacebuilders”, but to engage them in the vital work of reducing negative impacts on conflict, violence and instability, and where possible exploring opportunities to contribute to peace through their investments.
The Peace Finance imperative is both pressing, urgent and timely
The war in Ukraine has demonstrated that market volatility generated by conflict impacts investment portfolios irrespective of whether they are invested in Ukraine or Russia. Moreover, the worst forms of human rights abuses happen in areas affected by conflict, demonstrating that peace finance is a vital component of any sustainable finance approach.
And yet, “peace finance” is rarely integrated into company due diligence, ESG analysis, engagement strategies or impact frameworks of asset managers nor as part of the obligations required by the majority of development finance institutions. It is time to recognise that conflict, much like climate change, is a defining feature of modern times, which will require concerted effort to surmount.
Indeed, with global conflict on the rise and a rapidly changing policy environment, the Peace Finance imperative is both pressing, urgent and timely. Investors have a clear interest in peace and a critical role to play in managing conflict risks.
Opportunities for investors
Opportunities for companies