This article was originally published on fortune.com
The humanitarian and private sectors may appear to be at opposite ends of the spectrum, but closer collaboration could yield solutions to the world’s biggest problems.
From CSR to ESG, the corporate world has increasingly sought to engage in socially and environmentally beneficial activities. Meanwhile, humanitarian organizations are overwhelmed with rapidly increasing needs that traditional funding cannot keep up with.
The Global Humanitarian Assistance Report 2022 found that total funding for crisis response has plateaued despite historically high (and rising) demand. The report showed that the value of international humanitarian assistance reached an estimated $31.3 billion in 2021. The World Economic Forum anticipates an increase to $50 billion by 2030.
The donors we currently rely on—primarily a core group of governments—are too few and too precarious. We need to grow and diversify our funding sources if we are to have any hope of keeping up with the level of humanitarian needs forecast.
I believe it’s possible to move toward a shared ownership approach, whereby both the private sector and humanitarian partners align their objectives, including financial returns.
The private sector’s responses to the conflict in Ukraine and the COVID-19 pandemic have shown its power in times of crisis. To date, this has been mostly through grants, but the private sector’s skills, knowledge, and expertise could be the real game changers for the humanitarian sector.
Insurance companies are one example of where we have significant overlap when we drill down into our operations and goals: We are both dealing with the impacts and consequences of loss and damage caused by crises and disasters.
Since 1985, the IFRC’s Disaster Response Emergency Fund (DREF) has worked as a central pot of money that can be quickly and transparently distributed to support community action in countries facing disasters before or when they hit.
Now we are working with AON and the Centre for Disaster Protection to structure an innovative insurance mechanism that uses commercial insurance markets to leverage contributions of traditional donors in order to increase the capacity of the DREF for responding to natural disasters to CHF 100 million by 2025. We are aiming for the new insurance mechanism to be in place in 2023.
We are taking a system that’s been proven over three decades and adapting it to an uncertain future. Through the insurance mechanism, instead of putting up the money to fund disaster responses, donors pay the premium. This stretches the value of their contributions and transfers the risk to the private sector if allocation requests exceed available resources. The approach uses reinsurance markets to lay off the risk of excessive natural hazards and ensure funds for response are available in a timely and reliable manner even in periods of excessive or unanticipated demand.
Our ambition will not be possible to achieve through grants alone. We will need innovative financing that can leverage our resources and allow for 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 address humanitarian needs.
Currently, we’re exploring options of innovative finance for our other flagship programs, including the potential to use green bonds or climate bonds as well as impact bonds for our water, sanitation, and hygiene programming.
We’ve set up a pilot with the Islamic Development Bank following the impact bond model that unlocks private capital through investors. Instead of the donors paying grants ahead, they pay when the results are proven. Investors provide the upfront funding, while the bank acts as the guarantor, which reduces the cost of the bond and enables true additionality of capital.
In collaborative financing models, it is important to consider the value and approach for each partner: The private sector can engage in ways that drive social impact as well as profits, governments can lead the change by creating enabling frameworks, and humanitarian agencies can embrace more agility in their operating models—all with the goal of mobilizing more private sector funding for humanitarian assistance and leveraging overstretched government donors’ grants.
We also need to strike the right balance between risks and rewards and be alert to conflicts of interest, value for money, and ethical questions. Today’s humanitarian needs demand that we create opportunities and conditions for private capital to come in to scale up funding, but it is paramount that the product we develop is in line with our principles.
This transition will take time and require making difficult compromises and changes to our operating models. We will likely fail before we succeed, but unless we try—with the will to learn from our mistakes—our humanitarian investments will continue to be mere drops in an ocean of needs.
For the private sector, this will be an opportunity to design innovative solutions that align with their ESG approach and to be at the forefront of a new untapped market while saving the lives of millions of people.
Nena Stoiljkovic is Undersecretary General for global relationships, humanitarian diplomacy, and digitalization at the International Federation of Red Cross and Red Crescent Societies (IFRC). Her background is in impact investing in emerging markets, change management, and innovative financial instruments such as blended finance. Stoiljkovic has held several leadership positions at the World Bank and the International Finance Corporation.