War, conflict, political tensions, and climate change are driving humanitarian crises to alarming new heights. Just as alarming, however, is a global shortfall of funding for responses and solutions.
Governments are grappling with barely growing or declining resources. Meanwhile, traditional philanthropy has limited financial reserves to address the problems of displaced populations, poverty and fragility, and the environmental degradation that accompany humanitarian crises.
In 2023, the United Nations (UN) estimated that a record 360 million people were in dire need of humanitarian aid and support – a population greater than the United States. Last year, the UN’s Global Humanitarian Overview put the “ask” to provide basic life-saving support for people in need at $51.5bn. That’s up from $41bn in 2022.
For beleaguered government agencies and donors, demand simply outstrips the availability of funding and resources. In 2023, the UN put the humanitarian funding gap at $42bn: an untenable situation that is only set to worsen in 2024 as the crises in Ukraine, Gaza, Syria, Yemen, and elsewhere continue to evolve and ripple outwards. Then there is the protracted nature of the problem. Most people displaced by crises are unable to return home. The World Bank estimates that the median period of “exile” for emigrant families is 10 years. For many, that means a decade of living in temporary accommodation, shelters, or refugee camps. Servicing the needs of these people extends way beyond the day-to-day provision of food and water. These are long-term problems that require long-term solutions – and long-term financing.
With existing aid mechanisms proving inadequate, new pools of capital are urgently needed to meet growing demand. The question is: where do we go from here?
In our report, Humanitarian Impact Finance: Instruments & Approaches, we look at potential new pools of capital: investment and development funding options that mobilize private capital for humanitarian impact to provide scalable and sustainable solutions that go far beyond the limits of traditional aid.
The solutions we explore are financial, but they are also rooted in collaboration; partnerships that can help mitigate risk for investors and development institutions and drive financial returns, while simultaneously unlocking opportunities, jobs, and economic resilience in the most fragile of settings.
Grants are foundational in humanitarian finance. They offer no-strings-attached capital to meet urgent needs. But grants alone are not enough to bridge the resource gap. This is why debt financing, particularly through concessional or flexible loans, plays a critical role. By offering favorable terms, loans can be structured to incentivize private sector participation in large-scale humanitarian infrastructure projects. Take the Goma West Resilient Water Project in the Democratic Republic of Congo, for instance. Here a mix of grants and concessional loans will bring clean water access to over 500,000 people by 2026.
Guarantees and credit enhancement mechanisms, such as political risk insurance, ensure that investors are compensated in the case of non-performance. This makes investing in fragile contexts or high-risk projects—infrastructure building, say, or the provision of social services in crisis zones—significantly more attractive to private investors by protecting against potential capital losses. In Jordan for instance, the Classic Fashion project used a guarantee from GuarantCo that enabled Standard Chartered to provide a loan facility to Classic Fashion, Jordan’s largest garment manufacturer. The project has created around 1,000 jobs for refugees and local Jordanians while ensuring returns for private backers.
Equity investments enable private investors to purchase stakes in social enterprises or companies that address long-term humanitarian challenges. Though higher in risk, these investments can also yield high returns, both financially and socially. The rise of impact investors has broadened the pool of potential backers for humanitarian projects that focus on development and long-term stability, such as sustainable agriculture or health initiatives.
Meanwhile, outcomes-based financing brings together public-private partnerships to solve specific humanitarian challenges, with payments contingent on achieving measurable outcomes. This model has been successfully deployed in Sierra Leone, where the Education Outcomes Fund’s Sierra Leone Education Innovation Challenge (SLEIC) has impacted more than 55,000 students. The programs under SLEIC are implemented by five partners who receive upfront capital. However, if pre-agreed milestones are met, the implementation partners receive performance rewards from the outcome funder, ensuring accountability and efficient use of resources.
Insurance in humanitarian finance is a relatively new yet powerful tool enabling risk pooling to protect vulnerable communities, businesses, or even entire regions from unforeseen disasters such as floods, droughts, or conflicts. Models like microinsurance provide a powerful safety net for low-income communities. Where agricultural sectors are prone to climate risks, for instance, insurance tools can help stabilize food production and livelihoods by mitigating the financial impact of adverse weather events.
In addition, insurance solutions can be bundled with other instruments like debt and equity to improve the attractiveness of investments by offering risk mitigation to private investors. The microinsurance model, with its focus on low-income individuals, is becoming a key part of humanitarian finance, making risk protection accessible to the most vulnerable.
Carbon finance is another innovative and effective instrument, particularly in regions affected by climate change. This typically involves the creation and trading of carbon credits, which represent a ton of CO2 equivalent reduced, avoided, or sequestered. Carbon credits for things like renewable energy installations or reforestation projects can generate revenue, provide much-needed resources and jobs for local communities, and contribute to global climate goals by helping mitigate climate risk. For example, the Refugee Environmental Protection (REP) Fund, initiated by the UN High Commissioner for Refugees (UNHCR), aims to increase the availability of environmentally sustainable resources in displacement settings, providing more clean energy to power the water, schools, and health infrastructures used by refugees and host communities. In areas prone to conflict or instability, these initiatives can provide long-term resilience, supporting communities in their efforts to recover and build more sustainable futures.
“This kind of humanitarian impact finance offers a new paradigm: one that leverages public and private capital to support market-based, scalable, and sustainable solutions to intractable problems.”
Private and development capital delivered through innovative financial instruments has the flexibility and the potential to unlock new funding to meet short and longer-term needs and development goals and to catalyze lasting systemic change by addressing the underlying causes of humanitarian crises.
This kind of humanitarian impact finance offers a new paradigm: one that leverages public and private capital to support market-based, scalable, and sustainable solutions to intractable problems.
In 2016, the United Nations hosted a High-Level Panel on Humanitarian Financing led by former Vice President of the European Union, Kristalina Georgieva. That panel found that if people in need of humanitarian aid constituted a single country, that country would be the 11th largest on the planet. Just eight years later, the number of human beings experiencing dire circumstances exceeds the population of the United States. Today, that country would be the third biggest on earth.
Humanitarian crises are not going to resolve themselves any time soon. Governments and foundations alone do not have the resources to meet the complex and acute needs of displaced populations. We believe that by embracing innovative financing mechanisms, we can unlock new resources to meet the growing global need to meet humanitarian challenges. And that the future of humanitarian finance depends on our collective ability to engage private capital in ways that are both effective and ethically sound.
Humanitarian Impact Finance: Instruments & Approaches is published in conjunction with Fondation Lombard Odier, the Humanitarian Innovative Finance Hub (HIFHUB), and the ”la Caixa” Foundation. Download your copy of the report.
Within the IMD Driving Innovative Finance for Impact (DIFI) program, we dive deep into these concepts and introduce a financial structure decision-support tool for those looking to partner for humanitarian impact funding.
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