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Building Resilience Through Humanitarian Investing

Related Expertise:Business and Society, Principal Investors & Private Equity

Building Resilience Through Humanitarian Investing

23 Januar 2020 By Douglas Beal , Carl Brinton , and David Young

We often think of humanitarian needs as those created by events such as earthquakes, famines, or wars. But in fact they extend to the nearly two billion people living under tenuous conditions and those at high risk of crisis—people with very low incomes, people enduring long-term conflict, and people who are newly susceptible to or have been displaced by forces such as climate change. In many of these situations, traditional donation-based assistance via relief organizations is essential, but as crises lengthen and communities become more vulnerable, it is increasingly insufficient. Likewise, development mechanisms cannot fix all the conditions under which such people live and meet all their needs.

New resources are therefore needed to avert or mitigate the next crisis and to build resilience in preparation for those crises that will inevitably occur. Humanitarian investing offers a way to bring in those resources at scale. And the good news is that a growing number of investors want to deploy their own assets to address these pressing challenges while achieving financial returns. In fact, impact investment assets under management are now estimated at $500 billion globally.

Humanitarian investing focuses on building resilience and self-reliance. Opportunities for impact-driven investors range from pay-as-you-go solar power companies (allowing off-grid communities to buy clean energy only when they need it or can afford it) to loans to refugee entrepreneurs (who tend to pay them back more frequently) to microfinancing for small-holder farmers (enabling them to cope with the effects of climate change). Redirecting just a fraction of the trillions of dollars in the capital markets to investments such as these could go a long way toward strengthening the resilience of fragile communities, releasing far more public, donor, and philanthropic capital for high-risk, high-need purposes than is feasible with private-market investing.

Building a Humanitarian Investment Ecosystem

A recent discussion of the approach in a white paper from the World Economic Forum (WEF), the World Bank, the International Committee of the Red Cross, and BCG provides an opportunity for the right partners to come together to build a humanitarian investment ecosystem by facilitating deals, determining good practices to enable cross-sector collaboration, and setting standards to ensure that help reaches those in greatest need.

The number of existing and potential humanitarian investing projects, as well as their breadth and size, is increasing. An “opportunity platform” developed by BCG and WEF to track the size and nature of the market indicates that there are already thousands of projects in the works that collectively are worth many billions of dollars.

Humanitarian investing operates across different sectors and regions. For example, SunFunder, a solar finance company, works with major debt funders to fill gaps in funding and guidance for SMEs and to help investors diversify their portfolio. With $135 million raised to fund solar projects across sub-Saharan Africa and other regions, SunFunder demonstrates that it is possible to invest in underserved energy markets, often in fragile contexts, while achieving attractive returns.

Meanwhile, InFrontier, a private equity firm that invests in frontier markets, has investments of more than $39 million in Afghanistan and recently opened offices in Pakistan and Uzbekistan. It subjects its investments to due diligence and compliance standards, as would a private equity firm investing in developed markets, adding to this a triple-bottom-line measurement of impact. InFrontier’s investors are a mix of public and private investors, such as CDC Group, the Netherlands Development Finance Company, and high-net-worth individuals. With current expected returns of 10% to 15%, the firm has proved that blended financing can establish an equity investment mechanism at a reasonable scale in some of the world’s toughest markets.

In cases such as these, different funders and investors play different roles in supporting and developing the humanitarian investment ecosystem. Development finance institutions, among the largest institutional investors working in fragile and conflict-affected areas, can use their access to capital at concessionary rates as a catalyst to bring in other investors and build the humanitarian investment market.

Donor governments, private foundations, development banks, and regional organizations can provide funding and guarantees to de-risk opportunities, while working to convene participants and influence policy to improve the collective capacity of key organizations and the ecosystem. Governments and international organizations can set policies and regulations that will encourage more humanitarian investing capital to flow in.

Investors, in addition to providing return-seeking capital, can co-develop investable opportunities by sharing their expertise and perspectives to build a pipeline of attractive projects for syndication. At the end of the chain, companies and other organizations execute the humanitarian projects, raising funding through loans or by offering to sell equity in the business.

The Challenges

With the right support, this model of humanitarian investing is viable. But while appetite among investors is growing, a number of hurdles currently prevent scale-up. Principal among them is the need to expand the pipeline of genuinely investable opportunities that can meet the standards of willing investors. As they are structured today, projects tend to be too small, to lack acceptable collateral, or to be excessively risky owing to political conditions or poorly functioning markets. Moreover, limited data makes it hard to identify potential projects and to benchmark the opportunities against other investments.

Further, too few of the existing development and crisis response organizations possess the skills needed to create, de-risk, and syndicate sufficiently large projects. Nor do they adequately draw on the skills of potential investors in co-developing opportunities. This hampers the growth of the market and therefore its potential impact.

Other challenges include gaps in the operational capacity of potential partner organizations—particularly in difficult contexts—to manage projects at the scale needed to attract significant investment, which can often be $100 million at a minimum.

The Way Forward

Despite these challenges, we believe it’s possible to expand the flow of humanitarian investment capital and create a link between its positive impact on at-risk communities and the financial performance of investable assets. To scale up this model, a number of supportive actions are needed, which can both build on existing efforts and establish new collaborations.

Donors, development banks, development finance institutions, and NGOs should embrace their role in promoting collaboration among stakeholders, in engaging private-sector impact-oriented investors in the development of a pipeline of investable opportunities, and in de-risking those opportunities.

Meanwhile, raising awareness of humanitarian investing could help establish it as a model that goes beyond other forms of sustainable and frontier-market investing. This will attract impact-driven investors specifically interested in building resilience among those in greatest need and help expand the pipeline of potential investable opportunities.

Investment-related data, especially regarding risk and the means to mitigate it, will be crucial. So will defining clear ethical standards that are based on the principles of “first, do no harm,” neutrality, independence, and impartiality. This will ensure that investable opportunities are truly defined by the needs and interests of people and communities.

New Funding for Impact

If these support mechanisms are put in place, we believe the humanitarian investing market can expand from occasional one-off deals to an increasing number of large-scale commercial transactions and a broader offering of syndicated and securitized investments, providing investors with a more diverse range of options.

Building an investment market will have direct and indirect impacts. The direct impact will be to close critical funding gaps for resilience and recovery, freeing a larger number of people from high-risk living conditions. The indirect impact will be to create new sources of investment capital, which, in sufficient volumes, will free up a meaningful portion of public, donor, and philanthropic capital for humanitarian and development purposes where it’s needed most.

Markets create incentives to improve performance and foster innovation, and harnessing their power will allow some of the inefficiencies and distortions of traditional aid delivery systems to be addressed. And an investment market will provide greater flexibility of capital, which can often be subject to budgetary constraints and shifting political priorities.

Above all, by funding solutions that respond directly to a community’s needs, humanitarian investing can reinforce the dignity and agency of its members. Market competition will transform fragile communities from passive recipients of aid dollars into customers with power and choice.

Many donors and investors are already taking up these opportunities. As more and more organizations see the potential, they can engage, collaborate, and work to build a market and a system that is robust, ethical, and sustainable. This will enable capital to be harnessed at scale, creating resilience, self-reliance, and a sense of dignity for some of the world’s most vulnerable people.

Building Resilience Through Humanitarian Investing | BCG

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