New Member: Finance for Peace

Meet Finance for Peace, one our newest members at the Eveleigh site. We sat down with their Executive Director Daniel Hyslop to learn more about what they do.

What is Finance for Peace?

Finance and Peace is an independent, not-for-profit foundation that is trying to build a market for peace aligned investment. So just like the green bond market or other thematic markets, we want to do the same for peace: To basically help better connect investors to peace positive investments so private capital can positively impact peace, especially in conflict affected fragile places, but also in developed places.

And the logic to this is not charity. The logic of doing this is that if you work as an investor [being] more aware of the risks, more responsive to the local environment, or consider how inclusive your investment is, you will actually mitigate the risks affecting your investment.

So the idea is a de-risking element as well as a a positive social one. And we’re working with a lot of different investors, researchers, and local civil society partners to develop examples of how an investor working in a more peace positive way [and] a more inclusive way, can lower the risks on their investment and then crowd it in to the places that need it most. And that’s how you build a market.

The principal thing that Finance for Peace does though is create standards to do that. So it’s a standard setting entity.

What does this mean in practice?

At the moment our core ambition is to develop peace bonds and to build a market for them. So if you know what a green bond is, it’s an investment that might finance a renewable energy plant, or something that’s for a sustainable outcome. We want to do the same thing for peace. And what that means is that would be an investment that results in more inclusive outcomes, more socially beneficial outcomes. It may address particular trust issues between society and the and the government. It may also address political issues and a peace process.

The main example of this is we’re working with the various multilateral development banks at the moment, so they can issue peace bonds as a part of financing their own balance sheet. What they would do is go to the market and borrow $1 billion let’s say, and market that bond as a peace bond. Investors would buy that, and they would take that money and invest that in peace positive ways, which would be aligned to the peace standard that we have created, and that our independent finance standards committee certifies. The standards are mostly about how the investor invests. So do they consult the communities before they invest? Are they employing inclusively? Are they a conscious of the local political dynamics? Are they working with local partners to help on that? It could mean a whole range of things, but it’s fundamentally about building trust between people and those in the government.

Can you give an example of this?

We’ve worked on is a feasibility study in Ghana for a solar investment. Big renewable energy projects take up a lot of land. And one of the key barriers to these investments is land acquisition. It’s often not clear who owns the land. It could be tribal chiefs. It could be indigenous communities. It could be the government. And actually, no one agrees on that. Often these places have what is called hybrid governance, so it’s a hybrid between tribal, indigenous, local government governance. And so one of the big barriers to a lot of investments is that land acquisition process is really poorly done.

So the investor might only talk to one actor. It might only engage with the government and doesn’t talk to the local communities that are actually impacted. And so what ends up happening a lot of the times is investments get blocked and those blockages cost a lot of money. And it’s a lot of the reason why investment in Africa and many developing places is priced at a very high risk premium.

With banks for instance, if you’re lending money to an investor in Ghana, the risk premium is around 20%. Now this particular solar project that we supported a private company on is a $50 million investment. They had to finance that with 70% debt. So they had roughly about $35 million of borrowing that they needed to make this investment possible. So they needed a bond. They needed a $35 million loan. And instead of just doing a normal loan, they proposed to different investors to do a peace bond. It earmarked a whole bunch of benefit sharing mechanisms for the local communities, and also a more inclusive land acquisition process. And the investors, instead of investors lending at 20% interest, they would lend at a slightly lower premium 18%. It’s very modest. And 18% is still extremely high. But that on a $35 million loan is millions of dollars every year.

And when you amortize it over many years, which is how a lot of bonds are paid back, you’re creating tens of millions of dollars of value, and you can invest that into the communities and get better social and economic outcomes. And the company benefits: They get lower borrowing cost and the risk is lowered. So that’s a schema of how these things are designed to work. We want to do that in many different places. It can apply to many different sectors, themes, geographies, different ticket sizes. But we’re at the beginning of this market, and we’re working with different investors to try and do more of these basically.

And if we can do more of them, then there’ll be a market for this. And then the demand for these sort of structures will become more organic. And then over time, one presumes if it works, more investors will be wanting to align to this particular standard. And when standards reach a certain kind of point, they become mainstream, and then you have a systematic catalytic impact. So that’s the basic idea.

Why do we need these standards?

This is an oversimplification, but a lot of the world’s liquid money and capital is in the US, Europe, Canada, Japan, Australia. Now when you look at where the money is held, it’s mostly in institutional asset managers or pension funds. And they need to invest right in stocks, equities, bonds, and all sorts of different assets. At the moment, very little money goes to the world’s developing markets, and it’s basically where the great majority of the world’s people live. So if you look at foreign direct investment — let’s just take Africa — less than 1% of that money of that liquid money goes there.

Now, there’s lots of reasons for that. It’s not just because these countries are a bit more risky: Less is known about them, there’s less investing opportunities. But the main one is that the risk premium is really high, and it’s very much about the social and political risks associated with those societies. So what we’re trying to do is saying if you can lower those risks, you can lower the risk of investing in these countries. And the most catalytic thing you can do is to unlock investment in these places.

What are bonds?

A bond is just like a loan. It’s just like your mortgage or your car loan. It’s just a document that says, “Okay, I’ll lend you $100.” Let’s say in exchange, you pay me back $10 a year. The interest rate, i.e. the “coupon,” will be x, y, z.

And what’s different about a bond is that other investors can buy those obligations or that debt. And there’s a market for bonds. People sell bonds in the global capital markets, or in private bond markets where there’s a marketplace for buying this debt and these obligations.

So bonds are like tradable debt — basically they’re like mortgages. It’s like your mortgage can be traded by other people. But in order for that market to work, there’s a whole market infrastructure of issuers of the debt of investors, of second and third party opinion providers, of rating agencies. There’s a whole bunch of infrastructure to make that market work. So people can understand what the risk is on that loan, right.

Just to give you a sense [of things], the market for green bonds and social bonds is at about $7 trillion of assets totally issued. Last year it was about a trillion. So we all we want to do is capture a slice of the sustainability-linked and social and green bond labeled market. And if we do even just 1% of that, you can have a really big impact on peace but also on unlocking capital into the poorest parts of the world.

Why was FFP established in the first place?

A lot of the world’s conflicts and are really fundamentally about access to resources, who gets what, how they get it. The big problem is that a lot of peace building work doesn’t address those inequalities. So that’s where the idea for this started: We need [new] mechanisms: we need new tools, new structures, new approaches to try and build a more peaceful, inclusive world. And one of the big things that’s not being leveraged right now is how international investment works.

Mu background is in economics and also development and peacebuilding. So this is something people at that intersection have seen as necessary for some time. It’s being funded by the German government and by the Swedish government at the moment. There’s a lot of countries recognizing that this is a big gap. There’s a lot of demand amongst investors and pension funds. They want to get access to these markets. There’s a lot of the development banks which allocate billions of dollars a year on behalf of their shareholders, which are governments.

They are mandated to do more of this. They need to invest more in these countries. And I’ll give you the stats: 75% of the world’s extreme poor people live in about 60 fragile conflict areas. So it’s about 2 billion people. All the world’s poor people live in countries where there’s basically conflict and violence, more or less. And the reason why that continues is because there’s no investment. There’s a lot of political conflicts. There’s a lot of social conflicts. A lot of those conflicts are related to lack of development. So if you can address those things, you can address some of the biggest problems in the world.