The humanitarian and private sectors may seem to be on opposite ends of the spectrum, but closer collaboration could provide solutions to the world’s biggest problems.
From CSR to ESG, the corporate world is increasingly seeking to engage in socially and environmentally beneficial activities. Meanwhile, humanitarian organizations are overwhelmed by rapidly growing needs that traditional funding cannot meet.
The World Humanitarian Report 2022 found that total funding for crisis response has plateaued despite historically high (and growing) demand. The report showed that the value of international humanitarian assistance reached around $31.3 billion in 2021. The World Economic Forum projects an increase to $50 billion by 2030.
The donors we currently rely on – mainly a core of governments – are too few and too precarious. We must increase and diversify our funding sources if we are to have any hope of meeting the level of projected humanitarian needs.
I believe it is possible to move towards a shared ownership approach, in which the private sector and humanitarian partners align their objectives, including financial returns.
Private sector responses to the conflict in Ukraine and the COVID-19 pandemic have shown their power in times of crisis. To date, this has been done mainly through grants, but the skills, knowledge and expertise of the private sector could be a real game-changer for the humanitarian sector.
Insurance companies are an example of where we have significant overlap as we delve deeper into our operations and objectives: we both face the impacts and consequences of loss and damage caused by crises and disasters.
Since 1985, the IFRC’s Disaster Response Emergency Fund (DREF) has functioned as a central pool that can be distributed quickly and transparently to support community action in countries facing disasters before or during where they occur.
Today, we are working with AON and the Center for Disaster Protection to structure an innovative insurance mechanism that uses commercial insurance markets to leverage contributions from traditional donors to increase DREF’s ability to respond. natural disasters to 100 million francs by 2025. We are aiming to set up the new insurance mechanism in 2023.
We’re taking a system that’s been proven for three decades and adapting it to an uncertain future. Through the insurance mechanism, instead of putting money in to fund disaster response, donors pay the premium. This stretches the value of their contributions and shifts the risk to the private sector if allocation demands exceed available resources. The approach uses reinsurance markets to manage the risks of excessive natural disasters and ensure that funds for response are available in a timely and reliable manner, even in times of excessive or unexpected demand.
Our ambition cannot be achieved through subsidies alone. We will need innovative financing that can leverage our resources and enable the private sector to meaningfully engage. Through our initiative, we are keen to demonstrate the value of structures that can be more sustainable, replicable and scalable to meet humanitarian needs.
Currently, we are exploring innovative financing options for our other flagship programs, including the possibility of using green bonds or climate bonds as well as impact bonds for our water, sanitation and hygiene programs.
We have implemented a pilot project with the Islamic Development Bank following the impact bond model which unlocks private capital through investors. Instead of donors paying for grants up front, they pay when results are proven. Investors provide the initial funding, while the bank acts as guarantor, reducing the cost of the bond and enabling true capital additionality.
In collaborative funding models, it is important to consider the value and approach of each partner: the private sector can engage in ways that generate social impact as well as benefits, governments can drive change by creating enabling frameworks, and humanitarian agencies can embrace greater agility in their operating models, all with the aim of mobilizing more private sector funding for humanitarian assistance and leveraging overstretched government donor grants .
We must also strike the right balance between risks and benefits and be sensitive to conflicts of interest, value for money and ethical issues. Today’s humanitarian needs demand that we create opportunities and conditions for private capital to augment funding, but it is essential that the product we develop is consistent with our principles.
This transition will take time and require difficult trade-offs and changes to our operating models. We will likely fail before we succeed, but unless we try – with a willingness to learn from our mistakes – our humanitarian investments will continue to be mere drops in a sea of need.
For the private sector, this will be an opportunity to design innovative solutions that align with their ESG approach and be at the forefront of a new, untapped market while saving the lives of millions.
Nena Stoiljkovic is Under-Secretary General for Global Relations, Humanitarian Diplomacy and Digitization at the International Federation of Red Cross and Red Crescent Societies (IFRC). His experience is in impact investing in emerging markets, change management and innovative financial instruments such as blended finance. Ms. Stoiljkovic has held several senior positions at the World Bank and the International Finance Corporation.
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