Conflict Resolution Mechanisms for International Finance – A Modern Innovative Approach to Sustainable Business Practices at Reduced Financial Cost
34 Pages Posted: 17 Jul 2017
Date Written: 2017
The Equator Principles (EP) are considered the ‘gold standard’ in managing environmental, social and governance (ESG) risks that occur in the context of Project Finance (PF), Foreign Direct Investment (FDI), Public Private Partnerships (PPPs), and Structured Export Finance (SEF). The EP integrate environmental and social due diligence, review of management systems and governance review, stakeholder engagement, and project level grievance mechanisms to decrease and mitigate social and environmental risks, impacts and conflicts and make finance more resilient.
Reducing risk and ensuring better governance, both by extra-financial due diligence using a multi-stakeholder approach and directly integrating process-oriented conflict resolution mechanisms (CRMs) into the financing lifecycle, gathers increasing interest both in academia and among financial practitioners. Conflict resolution mechanisms (CRM), conflict analysis tools and mediation and how they contribute to conflict resolution is a nascent field of research and a nascent business practice. The interest in conflict resolution mechanisms is driven by a shared understanding that an effective CRM needs a constructive negotiation climate, a certain degree of trust between the affected communities and other stakeholders, overcoming a variety of country-specific systems issues, a multi-disciplinary approach to conflict mediation, and the courage to address cultural diversity in conflict patterns. Creating a CRM that is globally applicable, fair, accessible, and allows for conflict resolution along the entire lifecycle of the financed project, is highly desirable as it would offer a palatable solution to conflict situations that currently undermine FDI and create considerable social costs and hardship for the affected communities in locations alongside financial losses where sensitive investments take place.
This article asks whether it is reasonable to keep financial institutions away from dispute resolution or whether their participation could have beneficial effects, such as avoiding conflict, de-risking assets, avoiding reputational risk as well as real financial and social costs, and creating better relationships with the affected communities. Existing mechanisms used by various financial institutions are evaluated and the London 2012 Olympic Games Complaint and Dispute Resolution Mechanism (CDRM) is used as a blueprint for a workable private sector CRM for private banks and the Equator Principles Financial Institutions (EPFI) Association. Finally, the article will explore some potential benefits and opportunities, as well as risks and downsides, in using cooperative methods and mediation in conflict resolution.
Keywords: Equator Principles, EP, environmental, social and governance risks, ESG, Project Finance, PF, Foreign Direct Investment, FDI, Public Private Partnership, PPP, Structured Export Finance, SEF, conflict resolution mechanism, CRM, Complaint and Dispute Resolution Mechanism, CDRM, EPFI
JEL Classification: G11, G15, A13
Suggested Citation: Suggested Citation