Today, the world faces a vicious cycle of conflict and underdevelopment. By most measures, armed conflict and violence are close to an all-time high. This cycle of conflict is the core driver of poverty. In total, 1.9 billion people live in the world’s 60 fragile and conflict-affected countries, representing almost three-quarters of the world’s extreme poor. It is no coincidence that only 18% of these countries are on track to meet the Sustainable Development Goals. This fragility trap is formed in part due to investment risk related to fragile markets, leading to underinvestment and persistent underdevelopment, underpinned by conflict.
Readers of Devex will have heard these statistics before. Likewise, many development policy observers would be familiar with calls for the international community to “better leverage,” “catalyze,” or “tap” the private sector to unlock the SDGs. Yet, a dissonance seems to prevail — this call to engage the private sector omits arguably the number one barrier facing private sector investment — persistent fragility, conflict, and violence.
Development and fragility overlap so closely that it is not possible to speak of leveraging the private sector for the SDGs without including fragile and conflict-affected places in the equation. However, according to the Organisation for Economic Cooperation and Development, the world’s least-developed countries have only attracted 6% of all private finance that official development assistance has catalyzed.
The number could be even lower in fragile and conflict-affected places. Even more problematic is that many private investments have traditionally been concentrated in extractive industries and land-intensive activity, which, if not managed appropriately, can contribute to conflict dynamics.
We need a new approach to link peace and investment
Peace and security are necessary conditions for sustainable development and provide the minimum investment environment required to attract private and public investments. Peace, therefore, is a public good, and all parties that benefit from it should also contribute to maintaining it.
For too long, this responsibility has been left with governments and the peacebuilding community, and while awareness of the interlinkages between peace, security, and development has increased over the past years, much more needs to be done.
Research shows that meaningful investment cannot find its way to places of great need and opportunity because of risks related to peace, whether real or perceived. Herein lies the key challenge — the peace actions that could reduce conflict and fragility risks and open countries to greater investment are underfunded and poorly aligned. We need to fundamentally rethink how peace and development finance can come together and how private investment can better reduce risks for both investors and communities. There is the prospect of a win-win: lower risk offers greater returns on investment, and greater investment sustains more development and peace.
Solving this challenge is at the core of the upcoming fifth Africa Resilience Forum, or ARF 2023, titled “Financing Security, Peace and Development for a Resilient Africa.”
Hosted by the African Development Bank, this year’s edition, to be held from Oct. 3-5, 2023, in Abidjan, Côte d’Ivoire, will advance discussions with regional economic communities, African governments and private investors around the bank’s Security-Indexed Investment Bonds, or SIIBs, endorsed at the African Union heads of state summit in February 2022. The SIIB initiative presents the most ambitious effort by a multilateral development bank to support financing for peace and security.
A new approach to peace finance needed
Some 73% of the world’s extreme poor live in fragile and conflict-affected countries. Only 18% of these countries are on track to meet targets on basic needs, SDG goals 1-7.
Private sector investment seldom finds its way to the least-developed countries. According to OECD, LDCs have attracted only 6% of all the private finance that ODA has mobilized.
The forum will seek to build on momentum created by other partnerships in this space, such as Interpeace’s Finance for Peace initiative as well as the Investing for Peace, or I4P, Initiative, both supported by the German Federal Foreign Office.
Interpeace and AfDB will sign a memorandum of understanding during the forum, setting out their shared vision for scaling up sustainable peace finance in Africa, and calling for partners to join this mission.
Africa to lead the way
The Finance for Peace initiative seeks to work with development finance institutions, such as AfDB, to leverage development finance for the peace finance agenda. To date, financing peace and security for development on the continent has not featured prominently on national agendas, or as a top priority for development financiers on the continent.
Yet, Africa’s most fragile regions are missing out on the investments they so urgently need. ODA, development finance, climate finance, foreign direct investment, or FDI, venture capital, etc. are not reaching the most vulnerable communities at the scale required. FDI in Africa declined by 44% between 2021 and 2022.
Private investors are unfamiliar with fragile contexts and are too often deterred by their perceived high-risk levels despite the potential offered by fast-growing populations and markets in these regions. At the same time, private investment, especially extractive and land-intensive investment, can contribute to violence and conflict if it fails to navigate community risks. This not only undermines peace and security but also its own investment success.
Interpeace has been working with partners such as AfDB to mainstream these considerations into the bank’s business model. AfDB develops innovative financial structures to reduce the risk premiums associated with investment in fragile contexts and promotes investments to build resilience to tackle the structural causes of conflict and insecurity.
Creating new partnerships and standards, and aligning incentives to peace outcomes
As part of its mission to create a trusted market ecosystem for peace finance, the Finance for Peace initiative of Interpeace has developed new standards, guidance, research, market intelligence, and partnerships.
This includes a benchmark for defining and guiding peace impact called the Peace Finance Impact Framework, as well as the Peace Finance Standard, including peace bond and peace equity standards that will help private and public investors align their bond and equity investments to peace-positive outcomes.
These approaches will embed inclusive peace actions into specific asset classes, build community and market trust, and de-risk investments for both communities and investors. Existing peace bond feasibility work has shown that these approaches can diversify income sources for peacebuilding and lower risk premiums which research shows are largely not working in Africa. By aligning the incentives of the private sector with communities, everyone wins.
The Finance for Peace initiative and AfDB are exploring new peace finance investment structures for Africa. The approach is being piloted in regional member countries such as Mozambique, leading to the creation of a much-needed pipeline of peace-positive public and private investment projects to which investors can contribute, and which will ultimately form the basis for peace bonds issuance.
Solutions are possible
The ARF2023 comes at a critical time — the need for new approaches to finance peace, security, and development is greater than ever.
Peace finance approaches can de-risk investment for both communities and businesses in ways that embed peace impact into wider private sector investment. Not only can this promote peace and conflict prevention, but it can accelerate progress towards achieving the SDGs.
We believe there is significant potential in pursuing such an approach — but it requires new, innovative partnerships and sustained support across all stakeholders.
Visit www.financeforpeace.org for more information and sign up for our newsletter here.
The author, Daniel Hyslop, can be reached at hyslop@interpeace.org
About the author
Daniel Hyslop
Daniel Hyslop is the head of research and senior peacebuilding advisor at Interpeace, an international organization for peacebuilding headquartered in Geneva. He leads Interpeace’s Finance for Peace initiative that seeks to catalyze more peace-promotional and lower-risk private sector investment in fragile countries through new financial structures, standards, frameworks, and partnerships. For several years, he led the development of the Global Peace Index and has contributed to several flagship studies on international peacebuilding policy. He has also consulted for the United Nations Development Programme, the World Bank, and Commonwealth Secretariat and worked with various U.N. agencies on their peacebuilding approaches.
