Investing in Communities Affected by Conflict and Crises

Aug 2016
Global, August, 24 2016 - How the private sector, governments, and others can use impact investing to better support sustainable social change in humanitarian emergencies.

The widely shared image of Omar Daqneesh, a young Syrian boy injured during an airstrike, is a distressing reminder of the devastating impact conflict has on the lives of families who live amidst war every day. And while it’s easy to despair in the fact that protracted conflicts like those in Syria are becoming the “new normal,” the global community has an obligation to invest in and support the livelihoods of people who are too frequently reduced to statistics.

In fact, the magnitude of humanitarian emergencies, whether resulting from natural or manmade causes, continues to rise. Currently, 65.3 million people have been forcibly displaced around the globe. Ninety-one million people receive aid in 40 countries, while the total number of people in need is 130 million.

Yet as of May this year, the humanitarian community faced a funding shortfall of $16 billion, in part because the average length of a humanitarian response is now seven years, despite the fact that humanitarian organizations—and their rapid-response funding models—are geared toward shorter-term responses in the immediate aftermath of a crisis. As a report by the Global Humanitarian Assistance notes, “Timely humanitarian action depends on timely funding.”

It’s within this context that a report from the High Level Panel on Humanitarian Financing—a nine-person group appointed by the UN Secretary-General to close the gap between humanitarian needs and resources—states: “Innovative financing for recurrent and protracted humanitarian costs, such as green or social impact bonds, call for creativity, risk-taking, patience, collaboration and resources.” In other words, we need a new approach if we are to meet these increasing demands.

Impact investing can narrow the funding gap by directing resources to preparedness and prevention, sharing risks between the public and private sectors, and increasing the speed with which funding is available in the onset of an emergency. The private sector can invest in sustainable social change through microinsurance, mutualization of risk, humanitarian impact bonds, and humanitarian venture capital. The humanitarian community, from donors to field volunteers, can facilitate these investments by acting as market catalysts, institution builders, anchor investors, and deal generators.

So far, governments and humanitarian organizations have used the aforementioned impact tools in response to natural phenomena, such as drought and storms. But we believe the greatest need and opportunity stems from bringing these tools to conflict settings, where the livelihoods of people may be further hampered by both manmade and natural disasters.

More than 80 percent of humanitarian resources address these kinds of multidimensional crises—or “complex emergencies.” But while natural disasters tend to be cyclical—lending some level of accuracy to the development of risk models—manmade disasters resulting from political and economic instability are considerably more challenging to forecast. As a result, they require more support, and thus, a greater opportunity for impact investment.

Impact Investing in Humanitarian Contexts: What We’ve Seen So Far

Although the following four investment vehicles tend toward addressing the impact of natural events, investors have used these vehicles with success, and further research could reveal opportunities to purpose these tools in emergencies that have a stronger conflict dimension.

Mutualization of Risk: African Risk Capacity (ARC), an agency of the African Union, pools funds from participating states to insure against weather risk, such as drought. Mutualization of risk schemes like this link the effects of natural hazards to payments from a common pool of funds. This incentivizes agencies like ARC to hold governments accountable for taking steps to mitigate the effects of natural hazards. ARC requires that participating states develop contingency plans, detailing how they will use payments to protect the livelihoods of beneficiaries. These contingency plans ensure that payments from ARC reach beneficiaries as fast as possible.

Microinsurance: All India Disaster Mitigation Institute (AIDMI) began offering Afat Vimo (“disaster insurance” in Gujarati) in 2004. Afat Vimo provides liability coverage up to $1,560 in exchange for an annual premium of about $4.50. When Cyclone Phailin made landfall in India in 2013, it affected 13.2 million people, many of whom were Afat Vimo customers. A follow-up study by AIDMI after Cyclone Phailin found that those who had purchased insurance were able to use the post-disaster liquidity it provided to rebuild their livelihoods. Those who did not have insurance had to hope for government or NGO support, or turn to moneylenders charging steep interest rates, which often locked them into an unsustainable spiral of high-interest debt. By transferring risk to the private sector, microinsurance increased the capacity of communities to absorb shocks themselves.

Humanitarian Impact Bonds: Social impact bonds (SIBs), a type of pay-for-success financing that transfers program risk to the private sector, were first piloted in the UK in 2010 and have since expanded to 23 countries around the world. In January 2016, the International Committee of the Red Cross (ICRC) announced the development of the first humanitarian impact bond. The impact investing firm KOIS Invest designed the bond, which will fund physical rehabilitation programs in “fragile environments.” Governments are backing the bond and will repay investors up to 28 million euros (about $31 million) depending on the objectives the ICRC meets. If successful, the bond will serve as a proof of concept for investments in areas previously seen as too risky for private capital.

Humanitarian Venture Capital: There is a “missing middle” in financing humanitarian innovation. A couple of initiatives, including the Humanitarian Innovation Fund and the UNICEF Innovation Fund, provide seed capital to conduct pilots for evidence-based innovations, but few have been brought to scale and even fewer financing mechanisms have funded the scaling process. A humanitarian venture fund that provided capital to scale proven, evidence-based innovations could help fill the gap, but making this type of investment work would require effort from all parts of the system, including investors, humanitarians, and communities affected by crises.

Turning the Corner: Finding Impact Opportunities in Conflict Settings

Investing in complex emergencies is a significant challenge. It is difficult to quantify the risk of political instability, and the potential for a country or region to denigrate into conflict. It’s similarly difficult to forecast when a conflict might end. But the fact is, most humanitarian agencies are serving populations affected by conflict. It is therefore imperative that solutions to ensure economic prosperity and well-being focus on stabilizing communities economically in the immediate aftermath of a catastrophe.

The impact investment space is broad, and different investors have different goals on the spectrum of social and financial returns. Remittances channelled by diaspora groups, microbusiness loans, and other investments from private sources, including foundations, present further opportunity. In our experience, people affected by crises aren’t typically looking for handouts—particularly for the long-term—but rather, for opportunities to contribute to their own long-term economic betterment. These types of investments empower affected communities to rebuild their own homes and livelihoods.

The humanitarian sector also needs to change the way it works so that lower- and middle-income economies are incentivized to invest in preparedness and prevention, rather than wealthy donor governments shouldering the cost of emergency response. By contrast, insurers of mutualization of risk schemes hold their participants accountable for taking proactive action to mitigate the effects of emergencies. Such measures could also be extended to include manmade crises.

As a starting point, the humanitarian system would benefit from research and analysis on the part of the impact investing community to identify viable investment vehicles that provide new sources of capital with a specific focus on conflict settings. Conversely, the impact sector would likely benefit from increased education about the humanitarian sector: its needs; its principles; its relationship with longer term political and economic programs, traditionally termed “development”; and the types of actors involved at all levels, including the United Nations, NGOs, business, government, and community members.

The Sustainable Development Goals (SDGs) present another opportunity for investors to align with broader humanitarian objectives. Broad-reaching and ambitious, the SDGs seek to engage all countries and stakeholders to achieve a sustainable and resilient path forward. Finding opportunities for investment impact in complex emergencies presents an opportunity to achieve the SDG Agenda.

When we consider whether the risk of investing in communities and households affected by conflict is worthwhile, we should consider the potential impact we can have on lives like Omar Daqneesh’s. We have a range of vehicles already at our disposal, and we could certainly develop more. Doing so requires that we build strong partnerships between conflict-affected communities, investors, NGOs, and the United Nations. Only then can we develop a truly sustainable model for meeting these critical needs.


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