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Rising Conflict, Responsible Business: What Companies and Investors Need to Know About Operating in High-Risk Areas

Posted on June 23, 2023

Joe Attwood
Joe Attwood
Associate Director, Stewardship

In a world grappling with the highest number of violent conflicts since the second world war, the stark reality cannot be ignored.In 2021, the Uppsala Conflict Data Program recorded 170 conflicts affecting 60 countries, an increase of 32 countries from the previous year.This marked a clear shift from the declining trend of conflict fatalities observed between 2014 and 2019.3

With conflicts rising in an additional 10 countries in 2022,4 including the conflict between Russia and Ukraine, analysts are concerned that we may be seeing the start of a disturbing trend of increased conflict and loss of life.

Significantly, over one billion people, including 340 million of the world’s extreme poor, live in the 50 most conflict-affected and high-risk countries.5 This includes regions in a state of armed conflict or fragile post-conflict, as well as areas witnessing weak or non-existent governance and security.6 Such conflicts present challenges for organizations operating in high-risk regions.

Business for Social Responsibility (BSR), an organization dedicated to sustainable business, has identified a number of these challenges, including: ensuring adequate welfare of workers, preventing misappropriation of natural resources and land, avoiding the lure of cheap profit, and identifying and preventing corruption in business practices.7

So, how can businesses adjust to these environments and ensure they are not contributing to additional instability and conflict? How do they navigate the new risk landscape and ensure both business viability and credible corporate responsibility? In this blog we’ll look at how unstable states are classified and the associated business risk landscape, how companies can manage these risks, and how investors can engage with businesses operating in conflict-affected areas.

Characteristics and Classifications of Unstable States

High-risk areas are characterized by a multitude of issues that can lead to instability. In such regions, governance and the rule of law are weakened, resulting in a reduction in the normal functioning of day-to-day activities. Often, there is a gradual and debilitating rise in corruption, exacerbating vulnerabilities within the population, critical infrastructure, economy, and civil society.

A high-risk state does not descend into instability overnight. Rather, it is typically the culmination of years of political mismanagement, lack of investment, and economic decline. As instability deepens, new vulnerabilities emerge, inequalities widen, and potential conflicts materialize, further contributing to instability. Extreme cases, like Somalia in the early 2000s, witnessed the transformation of a country into fragmented territories governed by armed factions, resulting in massive population displacement and a complete collapse of governance.

Institutions like the World Bank classify unstable states based on public indicators such as policy quality and institutional functionality.8 The Fund for Peace, a non-profit organization that works to promote sustainable security, produces the Fragile State Index, which uses various indicators of fragility to classify countries into one of four categories: alert, warning, stable, and sustainable.9 In 2022, around 20 countries were classified under the warning and alert categories. Notably, there are a considerable number of high-risk states within the top 20 where multinational businesses operate, including the Democratic Republic of Congo (DRC), Ethiopia, and Nigeria.10

As instability rises, the risk landscape undergoes changes. Existing risks are heightened, while new and substantial risks are introduced. Consequently, businesses should prioritize risk management in these contexts, as conventional approaches suitable for stable environments may no longer be effective in unstable environments.

 

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What Businesses Should Do Differently in High-Risk Areas

Conflict-affected and high-risk areas present inherently challenging operating environments. Businesses typically have low leverage over government actors, lack reliable data to inform decisions, and must deal with significant employee safety risks. Recognizing that conflicts can intensify pre-existing vulnerabilities, there is a growing pressure on companies operating in high-risk and conflict settings to adopt responsible business practices.

The UN Global Compact (UNGC), alongside organizations like the Organisation for Economic Co-operation and Development (OECD) and the International Labour Organization (ILO), have put forward norms and standards for responsible operations. It is expected that businesses, particularly those who are signatories, adhere to these guidelines. Additionally, business investors are targeted by the Principles for Responsible Investment (PRI), which align with the UNGC and the UN Guiding Principles.

BSR highlights the importance of active engagement with local stakeholders in conjunction with risk management efforts. Collaborating with peers and non-governmental organizations (NGOs) creates a platform for establishing trustworthy information exchange in situations where trust may be eroding.

While it is true that businesses risk being absorbed into conflicts – and potentially perpetuating them – they can also serve as catalysts for stability. At the local level, this can be achieved through supporting supply chains, providing financial security, or maintaining critical infrastructure. On a national scale, engagement and cooperation with state and non-state actors can focus on reducing the scale of the conflict or mitigating its impact.

The Importance of Good Stewardship for Businesses Operating in High-Risk Areas

Active stakeholder engagement plays a pivotal role in encouraging businesses operating in high-risk areas to adopt responsible business practices. As part of its global reach, Sustainalytics' Stewardship team engages with businesses operating in conflict-affected or high-risk areas, particularly those involved in controversial activities related to potential human rights violations. Violations can occur directly through these businesses’ activities, such as hiring armed guards, or indirectly through association with conflict parties known for human rights violations, such as providing financial support to political parties.

The primary objective of this engagement is to comprehend how businesses are responding to these new norms and to assess their efforts in identifying and preventing future controversies. For companies, the focus should be on building corporate resilience by leveraging sector best practices, case studies, and advice to enhance policies, governance, procedures, and risk reduction strategies. Additionally, the engagement extends to advising businesses on effective community and stakeholder engagement practices, fostering a stronger connection with the local communities affected by their operations.

However, the goal is not merely to ensure compliance with UN and OECD norms and standards. It also involves working with businesses to foster their role in promoting long-term stability. By considering their own footprint and supply chains, as well as their interactions with local communities, businesses can help to facilitate long-term change, leading to stability and security. This approach is not just an idealistic concept. It is already being put into practice today.

Businesses recognize that without stability, their long-term operations are compromised. Those who exploit labor or natural resources under conditions of insecurity and eroding laws and standards may initially gain quick profits, but soon face escalating operational costs, such as security measures, and the loss of trust from workers and communities. Consequently, their reputation suffers, and they become focal points of conflict, posing risks to both shareholders and the local communities in which they operate. Conversely, businesses that understand the heightened challenges in conflict-affected and high-risk areas, and proactively mitigate the negative impacts, can be a conduit for long-term positive change.

 


References

  1. United Nations. 2023. With Highest Number of Violent Conflicts Since Second World War, United Nations Must Rethink Efforts to Achieve, Sustain Peace, Speakers Tell Security Council. January 26, 2023. https://press.un.org/en/2023/sc15184.doc.htm   
  2. Upsalla Conflict Data Program. “Department of Peace and Conflict Research.” Accessed on June 13, 2023. https://ucdp.uu.se/ 
  3. Uppsala University. 2022. “Major increase in conflict-related deaths.” June 27, 2022. https://www.uu.se/en/news/archive/2022-06-27-major-increase-in-conflict-related-deaths?id=19098&typ=artikel
  4. Upsalla Conflict Data Program. “Department of Peace and Conflict Research.” Accessed on June 13, 2023. https://ucdp.uu.se/  
  5. Baier, J., Davidsen, S., Kristensen, M.B. 2021. “Poverty and Fragility: Where Will the Poor Live in 2030?” April 19, 2021. Brookingshttps://www.brookings.edu/blog/future-development/2021/04/19/poverty-and-fragility-where-will-the-poor-live-in-2030
  6. European Commission. “Commission Recommendation (EU) 2018/1149 of 10 August 2018 on non-binding guidelines for the identification of conflict-affected and high-risk areas and other supply chain risks under Regulation (EU) 2017/821 of the European Parliament and of the Council.” August 10, 2018. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018H1149
  7. Business for Social Responsibility. 2021. “Business in Conflict Affected and High-Risk Areas.” November 2, 2021. https://www.bsr.org/en/reports/business-in-conflict-affected-and-high-risk-contexts
  8. The World Bank. 2022. “Classification of Fragile and Conflict-Affected Situations.” July 1, 2022. https://www.worldbank.org/en/topic/fragilityconflictviolence/brief/harmonized-list-of-fragile-situations 
  9. Fragile States Index. “Measuring Fragility.” Accessed on June 13, 2023. https://fragilestatesindex.org/
  10. Ibid.

 

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