I have worked in the responsible investment space, trying to focus investors’ attention on incorporating environmental, social and governance (ESG) risks into their investment processes, for well over a decade, long before ESG issues became mainstream. There is no doubt that there has been significant momentum, and that today most businesses and investors actively consider climate risks and opportunities and are increasingly integrating human rights issues into their processes.
However, even though many actors in the private sector have made commitments to sustainability through the UN Sustainable Development Goals (SDGs) and the Paris Agreement, the reality is that none of these goals will be achieved unless capital flows from the global north to the global south. This is why I feel passionately about the role that Finance for Peace can play in developing the frameworks and that standard that will give investors the confidence required to shift capital to where it needs to go, and why I have accepted the role of inaugural Chair of the Finance for Peace Steering Committee. Without this shift in capital, our climate ambitions and the SDGs simply can’t be achieved.
Today, 75% of the world’s extreme poor and SDG needs are in fragile and conflict-affected places. 1.9 billion people live in these countries and private sector capital alongside government investment is desperately needed. However, as it stands, little of this capital it is flowing where it is needed. To enable capital flows, lower risks and create investment opportunities, we need new approaches, and this is why Finance for Peace has been established. A core part of the work of Finance for Peace will be to develop standards and frameworks that will assist investors, particularly bond issuers and equity funds, to invest in a way that enhances peace. We are currently consulting on frameworks for peace-aligned investment through our Peace Finance Impact Framework which includes a Peace Bond Standard and a Peace Equity Standard.
We believe that Peace Finance approaches can lower risk for communities and for investors, in ways that are bankable. This provides investment opportunities, which is important given that developing and emerging economies are some of the fastest growing in the world. Peace Finance is a way of opening these markets for investors, in manner that is fair and impactful for local communities.
The United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2023 finds that developing countries face a widening annual investment deficit as they work to achieve the SDGs by 2030. The gap has grown to approximately USD 4 trillion per year, up from USD 2.5 trillion in 2015 when the SDGs were adopted. The report finds that global foreign direct investment fell 12% in 2022, and while allocation to SDG-investment sectors such as renewables has nearly tripled since 2015, the lion’s share of the money has gone to developed countries.
Let’s look at the numbers available from 2021: If only 1% of global issuance in sustainable investment categories that year had been aligned with the Peace Finance Standard and Impact Framework, more than USD 16 billion of peace-enhancing finance would have been generated. This would be equal to a 60% boost of foreign direct investment into fragile and conflict-affected settings from 2020 levels, or four times total global food aid spending in 2021.
To begin boosting that foreign direct investment, as an immediate next step we have just employed our first Executive Director who will start in the role in late September. We are also forming a Steering Committee and a Peace Finance Standards Committee. Applications for the Standards Committee are open, both from the investor world and the peacebuilding community. In the coming months, we are also launching an industry body to help educate, inform and catalyse the private sector. We hope you will get involved.
For too long, the need for capital in the developing world has been discussed, but not actioned at the scale required, and our aim is to turn that talk into reality. No one is pretending it will be easy, far from it, but we believe this is the right approach to begin to move the dial.