Philanthropy – Designing the next generation of solutions

    In a world of increasing humanitarian problems, we look at how to design the next generation of global solutions, and harness the financing needed to meet the Sustainable Development Goals.

    This year has been a tumultuous one on the international stage. On the other hand, the Sustainable Development Goals (SDGs) are gathering momentum. But how can innovative financing help us meet them? 

    2017 – a wake-up call to the world?

    This year has been a tumultuous one on the international stage: Brexit negotiations, ‘Trumponomics1’, the ongoing war in Syria, and North Korea’s first intercontinental ballistic missile test, to mention just a few examples.

    On the other hand, the Sustainable Development Goals2 (SDGs) are now gaining momentum. One question is, how can innovative financing give us a hand in actually reaching the SDGs? Do we need to enlarge the toolbox? How?

    Financial innovation in context

    In the world of development, the term “innovative financing” first came onto the scene a little over a decade ago. Back in 2005, total Official Development Assistance (ODA) stood at 106.5bn US dollars (USD), and the Millennium Development Goals3 (MDGs) were the logical yardstick to measure progress. In focus were mechanisms to increase financing for development objectives from private sector sources. The Paris Declaration (2005) and the Accra Agenda for Action (2008)4 provided the context for deep thinking on how to improve the effectiveness of aid, and how to enlarge the capital pool.

    Learning from the first generation of solutions

    Finance whizzes then thought up a number of innovative schemes. These “first-generation” mechanisms focused mostly on redistribution, capitalising on the time value of money, and providing advance purchase commitments to lower the price point.

    Examples included levies on airline tickets to finance Unitaid, an international organisation hosted by the World Health Organisation to prevent, treat and diagnose HIV/AIDS, tuberculosis and malaria. Another was the International Finance Facility for Immunisation, where donor government pledges to fund vaccinations were monetised as bonds in capital markets.

    Designing the next generation of solutions

    A decade later, aid from all donors to all developing countries has risen to USD 131.6 billion. Compared to the magnitude of problems, however, ODA continues to be in short supply. Taking inspiration from the first wave of innovative financing, what are the fresh opportunities? What kinds of problems do we need to target, and how?

    First, consider the power of business process redesign. If one takes a look at, say, the 500 top non-governmental organisations (NGOs) worldwide published by ranking service NGO Advisor, there are quite a few with more than USD 100mn in annual turnover and strong balance sheets. These NGOs could take on debt. And regardless of how good an organisation has been historically at delivering a good or service, technical progress, including digitalisation, is opening up fresh opportunities everywhere.

    A while ago, I was able to witness this first hand in a project to upgrade textile and garment factories in Bangladesh. Introducing better available technologies, lean manufacturing principles and digital-based monitoring allowed a 10% reduction in chemicals use, a 20% reduction in energy consumption, and a 25% reduction in water consumption. In a manufacturing setting, the resulting bottom-line improvements make for short payback periods and can be financed under a profit motive, likely with some concessional capital to get the market mechanism going. For-profit textile manufacturers routinely use letters of credit to finance production; using them for factory improvement is a logical additional step.

    In a social sector setting, such gains enhance a program’s effectiveness. Yet the programme ultimately still needs to be grant-funded. Innovative financing is the pathway to render such redesign and productivity improvements possible in the first place. Donors are often risk averse, but they may well be open to purchasing a demonstrated better result, if impact investors field the up-front risk.

    Second, rethink complementarity and innovation. Rather than adding new actors to the development scene, traditionally, the role of innovative financing mechanisms has been to raise new funds for existing organisations. Yet today we are dealing with a number of problems that require radically new solutions. An incremental increase of an existing solution is often simply not good enough to solve our generation’s grand challenges.

    Here, technological progress is opening up completely new possibilities. But we need to test before we go to scale. Take the ongoing conflict that has displaced over 11 million Syrians5. Before the civil war, 25% of Syrians aged 18-24 were enrolled in higher education. That number now stands at less than 10%. Non-profit, tuition-free, accredited, US online education provider University of the People, a not-for-profit organisation Lombard Odier supported in the context of its annual employee year-end donations, estimates that there are over 100,000 qualified Syrian students currently left out of higher education.

    Every war ends eventually. The Syrian people will then have to rebuild the country. This will require skills, and a cadre of individuals with tertiary and technical education. Whether the current cohort of students become Syria’s lost generation or Syria’s great generation depends in part on designing the right financing mechanisms. Online education is the easiest way to overcome the barriers that stand between refugee students and higher education. Structured as tuition scholarships, the flow of funds would be relatively straightforward.

    Innovative financing could hold the solution. Consider granting the funds to build a low-cost, quality online education program in Arabic and running a first “test” batch of 2,000 students. Provided the pilot worked, to subsequently design vintages of a payment by results scheme that could be scaled up is an interesting proposition. Private investors could take the upfront risk to be reimbursed with financial return by outcome funders, once the results have been delivered.

    Impact, data and the SDGs

    Capital markets can help solve the grand challenges of our times, provided we give ourselves permission to come up with the solutions. So where next for innovative financing? Compared to a decade ago, there are three new factors that condition the constraint-opportunity set.

    First, people’s and institutions’ propensity to align their investments with their values has increased dramatically. The term “impact investing” was coined only in 2007. A decade on, asset transformation by investing for impact is fast becoming the guiding principle for investors. They demand quality investment content in multiple asset classes, public and private debt and equity. Some are open to contingent return products such as social impact bonds.

    Second, the power of data processing and analysis is now enabling us to take a much deeper look into what works, and to understand the externalities of the conduct of business, all at lower cost. This information can guide resource allocation decisions, help price risk, and enables business process redesign. And we are only at the beginning of rendering the power of Big Data relevant for sustainable investing and impact.

    Finally, the advent of the more ambitious SDGs as a sequel to the MDGs is currently unfreezing established practices. As the SDGs are being interpreted for execution, this provides a window to rethink how we conduct and finance development.

    Lombard Odier and innovative financing

    At Lombard Odier, we believe that banks and asset managers must work together with NGOs to solve the world’s most pressing problems. Today, we are working at the frontline of new financing models, often in partnership with pioneering external players, including the International Committee of the Red Cross (ICRC) and impact investment specialist Affirmative Investment Management.

    One example of this is our work with the ICRC to develop and co-sponsor the world’s first humanitarian impact debt transaction (similar to a social impact bond). This private debt instrument aims to secure financing for three physical rehabilitation centres for people with disabilities in Africa. In a partnership between the ICRC, banks, social investors, institutional funders and governments on a “pay for results” basis, the loan aims to deliver a positive financial return, as philanthropy crosses over into the impact investing space.

    As the nature of global problems, financing models and investors’ mind-sets change, we believe that we can offer superior financial and social returns without compromise, via solutions that fit easily into our clients’ portfolios.

    1 The economic policies of US President Donald Trump
    2 In September 2015, world leaders adopted 17 SDGs at a United Nations Summit. The SDGs aim to end all forms of poverty, to protect the planet, and to ensure that all people enjoy peace and prosperity. They call for countries to act together, and assume that ending poverty is best achieved by strategies that foster economic growth and address a range of social needs.
    3 Precursors of the SDGs, these were eight goals set forth in the Millennium Declaration of world leaders signed in 2000, to address issues such as poverty, education, child mortality, HIV/AIDS and environmental sustainability.
    4 Two forums on aid effectiveness, hosted by the Organisation for Economic Co-operation and Development
    5 Please note that Syria is currently subject to comprehensive sanctions and that Lombard Odier fully complies with the applicable programs, including those from the US Treasury’s Office of Foreign Assets Control, and has defined prohibited/restricted rules of business with Syria.

    Important information

    This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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