A Market for Peace   

Former chief executive of the PRI Fiona Reynolds says the SDGs won’t be achieved if investors don’t start to engage with peacebuilding.  

Fiona Reynolds, ex-chief executive of the UN-supported Principles for Responsible Investment (PRI), remembers the early days of her tenure at the organisation, when mainstream finance viewed them as “crazy tree huggers”, and she would be bumped to the lonely last slot at conferences to speak on the issue.  

Today, ESG and responsible investing are hot talking points in the investment community. There is growing regulatory and policy attention, steady capital allocation to ESG-focused products, and perhaps the surest sign of success – vocal enemies in the US’ anti-ESG movement.  

Now, Reynolds, who left the PRI in 2021, plans to use her experience in helping drive responsible investment to catalyse a new movement – peace finance.  

“I got started thinking about this through responsible investment and the UN Sustainable Development Goals (SDGs),” Reynolds tells ESG Investor. “We can’t solve for the SDGs, whether that’s climate change or inequality, if we can’t get capital flowing from the developed world to the developing world.  

“Seventy-five percent 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 we need new approaches to lower risks and create investment there.” 

Mind the gap 

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 US$4 trillion per year, up from US$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 like renewables have nearly tripled since 2015, the lion’s share of the money has gone to developed countries.  

Further, capital allocation remains low in other key SDG-investment sectors important for the Global South such as water and sanitation, agrifood systems, health and education. Investment activity in agrifood systems, vital for future food security, is lower today than in 2015 when the SDGs were adopted, according to UNCTAD. In fact, the number of projects in agrifood systems backed by international investment fell by 19% between 2015 and 2022, only growing modestly by 6% between 2021 and 2022.  

The report also finds that the cost of capital in the Global South represents a major disincentive for investors, and there is a need for international de-risking support at the country level with developing countries paying up to seven times more than developed countries to access international capital markets.  

Reynolds says part of de-risking will need to come through peacebuilding, especially in fragile and conflict zones, and finance can play a role.  

“Peace finance approaches can lower risk for communities, and thus investors, in ways that are bankable and materially additional,” says Reynolds.  

“We also can’t forget the opportunity developing and emerging markets have for investors – these are some of the fastest growing parts of the world. Peace finance is a way of opening these markets for investors but in ways that are fair and impactful for communities.” 

Uphill battle 

There are currently a handful of initiatives focused on the investment community and peacebuilding. Geneva-based TrustWorks Global works with different actors including investors to prevent conflict, promote stability and foster peace-positive development.  

Last year, it partnered with Swiss asset manager Pury Pictet Turrenttini, to support shareholder engagement activity with constituents of its Cadmos Peace Investment Fund, largely around heightened human rights due diligence and conflict sensitivity. The fund invests in global companies active in fragile and conflict-affected and engages with them to foster practices aligned with international normative frameworks. 

The top holdings in the Cadmos Peace Investment Fund include Microsoft, Apple and Nestle, and other global firms with a large global presence and a less-than-perfect track record on avoiding human rights harms.

All investors know engagement is an iterative process and some experts on minimising company and investment risks in conflict zones note there is oftem limited scope for meaningful impact.

“My experience is that it feels like a band-aid on a gaping chest wound as opposed to digging into the real issues,” they tell ESG Investor, noting that investors have struggled to get accurate information on investee firms’ exposure to and complicity with Russia’s invasion of Ukraine. Despite the concerns of NGOs and investors, consumer brands group Unilever has remained in Russia, and recently admitted that it would comply with new Russian conscription requirements.

They note that Reynolds is right in recognising her approach will be a long-term strategy, but with many investors and businesses even lacking a robust human rights policy, they feel it will be a hard uphill battle.

Reynolds says responsible investment was also a “long road” and that she is “thrilled” to contribute as inaugural Chair of Finance for Peace, a multi-stakeholder initiative that seeks systemic change in how private and public investment supports peace in developing and fragile countries.

“There is increasing demand from institutional investors for socially responsible investments in emerging markets where peace considerations are key to their risk mitigation and success,” she says.  

According to Reynolds, a key part of the work of Finance for Peace, which is currently being incubated by Geneva-based Interpeace as it makes it way to independence, will be defining consistent standards for bond issuers, enterprises and equity funds related to peace.  

“This will help them better mitigate risks, improve the bankability, certainty and trust related to their investments,” she says. “It will also be foundational for achieving impact in other areas of ESG or SDG alignment.  

“If only 1% of 2021’s global issuance in sustainable investment categories was aligned with peace finance standards and impact frameworks, that would represent more than US$16 billion of peace enhancing finance, that 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. 

“Thus, even very modest success in catalysing existing private bankable finance in ways that realise peace outcomes could be significantly impactful.” 

The Finance for Peace initiative, which is supported financially by the German Federal Foreign Office, is currently consulting on frameworks for peace-aligned investment, which it calls the Peace Finance Impact Framework. This includes the Peace Bond and Peace Equity Standards. The initiative will also set up a Peace Finance label, building on the work of successful labels in the responsible investment space, such as the labelling from the Climate Bonds Initiative (CBI).  

“The CBI started with verification and standards which helped the green bond market to grow and continue to grow greatly,” Reynolds says, adding that she envisions a similar journey with peace bonds.  

“In the early stages I see us working with development finance institutions (DFIs), and then eventually high-net worths, impact investors.”  

Linking development and peace  

There are signs that some DFIs are starting to think seriously about peacebuilding. At the first conference of the African Union in Morocco last year, a speech delivered on behalf of the President of the African Development Bank, Dr Akinwumi Adesina, called for better linkage between peace, security and development efforts.  

The African Development Bank is currently working on a security-indexed investment bond platform to mobilise public and private resources for addressing the root causes of insecurity, build institutional capacity and community resilience, and rehabilitate infrastructure that would have been affected by conflict. 

Peace Finance is building on the work of a current peace bond, supported by the UK Foreign and Commonwealth Development Office, to input into its frameworks for peace finance. The bond, which finances a renewable energy project in Burkino Faso, includes peace enhancing mechanisms as part of the project financing, where local populations and authorities are engaged. This engagement could lower the potential risk of the investment through addressing key conflicts and peace. A feasibility study conducted by Interpeace and Nordic bank SEB has calculated this reduces the risk premium on the debt financing from 19% to 17%.  

Sir Ronald Cohen, a pioneer of venture capital and private equity, and now impact investment, says “connecting in any way that we can, positive outcomes to financial instruments and improvements in their risk/return profile makes huge sense”.   

Cohen has been integral in the development of bond products which link positive social and environmental outcomes to returns for investors such as social impact bonds and health impact bonds, which support women with diabetes in Palestine, for example.  

For the past 20 years, he has been working on peacebuilding through economic development between Palestinians and Israelis through his initiative the Portland Trust.  

“Creating a rising economic tide helps people psychologically think about and be hopeful of the future,” he says.  

The Portland Trust works hard on building strong partnerships on both sides, being able to negotiate on projects with both the Palestinian Authority and the Israeli government. 

“The fact that we focus on economics enables us to connect on both sides of the conflict and at the same time contribute to both sides in an effort to unite those who want to resolve the conflict,” he says.  

Cohen stresses that although the Portland Trust is apolitical, its “clear political destination” is aligned with a two-party state solution.  

He compares the organisation’s work over the past 20 years in peacebuilding through finance and economic development to that of the labours of Sisyphus.  

“You’re pushing the boulder up one side and you are in front of the boulder on the way down.”   

However, despite the clear and complex challenges in driving positive outcomes in a fragile context – change is possible.  

A figure involved in peacebuilding describes positive developments in the West Bank, driven by venture capital.  

“It’s fascinating the challenges [venture capital] faces in terms of drawing investment. It’s really hard for investors to make those investments because the returns aren’t going to be quite as good as the risk that is attached to it – but movement is happening.  

“I was shockingly surprised with how positively things in the West Bank have developed on that front. It’s really grown up a bit and I’m hopeful that others will see that as well and be able to make investments that are helpful.”  

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