No More Reliance on Donor Funding Alone, It Seems
There has been a lot of talk over the last few months across people and institutions in traditionally grant-funded sectors about the shifting weights of donor-based funding versus social finance and investment vehicles as a complementary (and even primary) tool to continue addressing sustainable and equitable social impact work.
Much of this discourse has centered on the sudden reduction of US-based ODA. It’s easy to forget that domestic organizations and the private sector have also had to contend with a loss of US-government subsidies and grants alongside budget cuts. With all this, there’s a valid argument that the shift in how we’re collectively talking about financing impact work is borne out of necessity and survival among mission-based organizations aiming to achieve SDGs or similar principled targets.
And much of the discussion has been focused on leveraging various types of social financing. But these vehicles are not new. Some may say social finance is relatively young with tons of room for growth, and I would agree after hearing this several times at this year’s GIIN Conference in Berlin. The opportunities for continued impact in traditionally grant-funded sectors are huge if the incorporation of social finance is done right. Yasmina Zaidman wrote Impact Europe’s October 23rd email, acknowledging “the explosion in enterprises and investment vehicles that structure impact into their bottom line”, also noting more and more “use of (relatively) small amounts of catalytic capital to make impactful models viable and scalable”.
So whether “development” is local and domestic to you (including the US since there are plenty of environmental and social needs there as well) or you see it more on a global scale, there is opportunity to leverage finance and markets to continue working towards a specific mission.
Social Finance Offers A Different Model and Approach…for those with specific goals
With the former funding model dramatically altered, many see socially-driven financing through the private sector as a future key player in helping organizations and governments that aim to achieve a range of goals related to the SDGs—from jobs creation, to health and climate change adaptation and mitigation. And it’s true that the private sector was often on the periphery of these conversations while governments and big NGOs and nonprofits took on huge grant-making or public funding responsibility for achieving these goals.
Recent calls to engage the private sector have taken many forms including public-private partnerships, impact investing, and increased availability of socially-based lending mechanisms. A key component is the agreed desire and need for measurable social and environmental outcomes from the financing vehicle or investment (traditional ESG investing doesn’t fit this since it doesn’t measuring outcomes other than financial). And it seems there is serious potential growth for private markets in these spaces.
There have also been some big moments lately, from the Accra Reset to lots of conversations around better using the private sector at this year’s World Health Summit, that are putting more eyes and ears on this dynamic.
It also seems from these conversations that, as painful as this year has been, not many people are looking back.
This rapid change has doubly acted as a catalyst for long-needed transitions and shifts in both domestic and global donor-recipient power dynamics, improving the “local” in locally-led initiatives, and providing more autonomy and voice to recipients and beneficiaries of funds. For example, with the Accra Reset, countries are defining what they seek from the future of their own development rather than waiting for large institutions or governments of wealthier nations to define priorities for them. And they’re eyeing the private sector.
We can’t forget that some things require government funding and grants.
While this is all really exciting and fresh to those of us more habituated to the old-guard donor model, I and surely many others are also watching with a cautious eye in hopes that this transition is managed methodically, ethically, and with a whole-system, learning-based approach that keeps real social impact front and center. We have to be honest that the private sector can’t fix everything.
Indeed, Yasmina’s guest newsletter for Impact Europe also goes on to strongly acknowledge that there’s no way philanthropy and the private sector alone can fill the current ODA gap. According to her stats, bi-lateral aid to Sub-Saharan Africa is expected to fall 16-28% and health is estimated to be down 60% from its 2022 peak—both of which are tragic. And these numbers aren’t even considering funding gaps within US-based entities that relied on government grants or budgets.
As excited as I am about the growing focus on and potential to increasingly leverage the private sector for sustainable development and impactful outcomes, we need to maintain advocating for some government and grant funding. Things like emergency responses and other necessary social interventions that may not be capable of generating strong revenues or profit margins will require some level of aid and public funding. Managing these two together is what I mean when I say we have to keep sight of a whole-system funding approach.
I really hope, and believe, that collectively we can use this rough period as one of growth and improvement across many aspects of the old grant and aid model. Looking to social finance as a fix all is wrong, but so is not using it to its fullest potential, just like government funding can’t do it all.
We need both to thrive and achieve the principled goals and missions we in the impact space have set out to achieve.