Why Peace Finance
There is an urgent need for innovative solutions to fund development in fragile and conflict-affected settings. We must create a market for Peace Finance – approaches that have a positive impact on peace and reduce risks for both investors and communities.
Some 1.9 billion people, almost a quarter of the world’s population and most of the world’s extreme poor, live in the world’s 60 fragile and conflict-affected settings. Because of growing conflict, instability and violence, none of the countries impacted by conflict are on track to achieve the United Nations Agenda 2030 Sustainable Development Goals (SDGs).
Sustainable development and stability require conflict-sensitive and peace-responsive private investment. However, much investment cannot find its way to places of great need and opportunity because of risks, whether real or perceived. We believe that greater investment can be catalysed. For example, if only 1% of annual global issuance in sustainable investment categories was aligned with Peace Finance standards and impact frameworks, that would represent more than 16 billion United States dollars (USD) of peace-enhancing finance.
This would amount to:
Herein lies the challenge – the peace actions that could reduce conflict and fragility risks and could open markets in conflict-affected settings to greater investment are underfunded and poorly aligned. New approaches are needed – we need to fundamentally rethink how peace and development are financed and how private investment can better reduce risks for both investors and communities.
Through preliminary research with financial partners, Finance for Peace has shown that peacebuilding activities closely linked to investment can significantly reduce financing risks. This, in turn, improves net present values, while yielding tangible and intentional peace impacts, benefitting all stakeholders.
While blended finance approaches have significantly grown and have successfully catalysed significant private capital in developing countries, these approaches often overlook their potential peace impact. In addition, more work needs to be done to ensure blended approaches minimise not just risks to investors but also to communities in fragile and conflict-affected settings.
We need a market for Peace Finance.
Why is Finance for Peace urgently needed?
Conflict is rising
The number of conflicts around the world has grown continuously in recent years. The year 2022 saw 55 state-based conflicts and 82 non-state conflicts, making 2022 the deadliest year for armed conflict since the 1994 Rwandan genocide. Two billion people, or a quarter of the world's population, now live in conflict-affected areas, according to the United Nations.
Sources: Obermeier & Aas Rustad (2023); Global Peace Index (2023); United Nations Security Council (2022).
In 2022, almost half of the world’s population lived in a fragile context, of whom half in Sub-Saharan Africa.
Source: OECD (2022).
Despite this, peacebuilding funding is at a record low – peacebuilding expenditure has declined from 17.2% of official development assistance in 2012 to 10.8% in 2021. These historically low levels of Peace Financing contrast with mounting peacebuilding needs.
Climate change causes food insecurity, which, together with conflict, leads to more migration
In 2022, a quarter of a billion people across 58 countries faced acute food insecurity at crisis or worse levels, up from 193 million people in 2021.
Sources: FAO (2021), UN DESA (2015), UNDP HDRO (2022)
Displacement is both a consequence and a driver of food insecurity. Conflict and climate change are triggering displacement on an unprecedented scale. The number of internally displaced people reached a record 71.1 million worldwide in 2022 due to conflict and natural disasters, a 20% increase since 2021.
Source: Reuters (2023)
The 27 countries hardest hit by climate change are also fragile or affected by conflict, facing a greater risk of enduring the worst consequences of climate change due to low societal resilience and high risk of ecological threats.
Source: World Economic Forum (2023)
Conflict hinders development
Only 12% of Sustainable Development Goals (SDGs) are on track in fragile and conflict-sensitive settings (FCS), and none of the targets for SDG 16 – Peaceful, Just, and Inclusive Societies – are close to being achieved.
Source: The International Dialogue on Peacebuilding and Statebuilding (2023)
Existing approaches lack the tools to mitigate the risks – real or perceived – in fragile markets and conflict-affected settings. This results in a missed opportunity. Although SDG 17 – Promoting Partnership-building – is the most frequently targeted SDG in blended finance transactions, SDG 16 is hardly addressed by investors at all.
Source: Convergence (2023)
Private financial flows are lowest in fragile and conflict-sensitive settings
Foreign direct investment (FDI) to FCS has fallen steadily from USD 102 billion in 2009 to USD 27 billion in 2020.
A vibrant and inclusive private sector can ignite economic growth, provide jobs and services, and help stabilise societies. Yet, the domestic private sector in most FCS is underdeveloped, and only 1% of global FDI flows goes to FCS. This is due to the high risks, real or perceived, of investing in FCS.
Source: UNCTAD (2023); World Bank (2020); UN PBSO (2021)
Existing blended finance approaches are not filling the gap
The least-developed countries have attracted only 6% of all the private finance that official development assistance has mobilised. This is due to a variety of factors, but the principal cause is a failure to link development and peace strategies to private-sector activity.
Source: OECD and UNCDF (2020).
There is significant bankable opportunity in growing new categories of sustainable finance.
Global sustainable issuance more than doubled to USD 1.64 trillion in 2021, from USD 761 billion issued in 2020. Moreover, the widening SDG investment gap observed in less economically developed countries stands in contrast to the 10% growth of the wider sustainable finance market in 2022, reaching USD 5.8 trillion.
If only 1% of this global sustainable issuance was aligned with Peace Finance standards and impact frameworks, more than USD 16 billion of peace-enhancing finance could be raised, de-risking investments in FCS settings.
Source: Bloomberg New Energy Finance (2022); UNCTAD (2023).
What does a market for Peace Finance require?
- New rigorous principles, standards and guidance for investors, government donors, industry verifiers, peacebuilding and development actors, along with communities. These can build trust, credibility and a verification regime required to scale peace-positive and bankable investment.
- A collection of successful initiatives that can show new structures, approaches, partnerships, learning and ultimately positive investment and peace outcomes.
Together with partners, Finance for Peace is developing both of these essential components.
While there is a plethora of existing environmental, social and governance principle frameworks and impact frameworks, many of these are not adequately tailored to assist investors in managing and mitigating risks in fragile and developing settings.
This deficiency is reflected in the field of blended finance, SDG and impact investing, where there are virtually no viable opportunities to invest in SDG 16 – Peace, Justice and Strong Institutions. It is crucial to draw lessons from the experiences of the green and social-impact investing markets and avoid the potential risk of “peacewashing”, which is analogous to “greenwashing” and “social-impact washing”.
Private investment can and should play a meaningful role in supporting peace outcomes while simultaneously minimizing risks at the investment level. Achieving this objective calls for new partnerships among institutions, investors, the private sector, peacebuilding and development actors. Investments have the potential to unlock vast opportunities in fragile and conflict-affected regions by fine-tuning the process from the outset, with due consideration for:
- engaging key stakeholders effectively
- carefully selecting partners to implement and manage proceeds
- applying metrics for diligent investment monitoring.
In simple terms, aligning investments with peace outcomes necessitates a deep understanding and engagement with the political, economic and cultural context of the investment, with the invaluable support of local context and peacebuilding experts. When investments are peace-aligned, all stakeholders benefit.
