Humanitarian and Resilience building: Why should the private sector get involved?

Katherine Garrett-Cox, CEO of GIB Asset Management joined a panel of distinguished leaders to discuss how to counter COVID-19 shocks in fragile contexts. This was part of the World Economic Forum’s Sustainable Development Summit 2020.

Other panelists on the session were:

• Filippo Grandi, High Commissioner, UNHCR
• Wissam Rabadi, Minister of Planning and International Cooperation of Jordan
• Sigrid Kaag, Minister of Foreign Affairs of the Netherlands
• Peter Laugharn, President, Hilton Foundation

The session was moderated by Catherine Cheney, West Coast Correspondent at Devex. Opening remarks were provided by Klaus Schwab, the Executive Chairman of the World Economic Forum.

The session was extremely insightful, with panelists sharing their contributions on a variety of topics including how COVID-19 has amplified the risks faced by fragile communities such as migrants, the internally displaced and refugees; the need to act both locally as well as globally; the challenges faced by the private sector in dealing with humanitarian crises; and the role that philanthropy can play in the long term recovery of communities in need.

While the panel touched on the role that the private sector can play in alleviating crises and the challenges faced by the private sector that hinder rapid progress, the panel did not address an important topic – why should the private sector get involved in humanitarian and resilience-building activities? This commentary focuses on this point.

1. The finance gap

One reason that calls for the private sector to get involved in the humanitarian and resilience space is that humanitarian responses alone are insufficient to meet the complex and growing humanitarian needs. These include:

• Approximately two billion people live in countries affected by fragility, conflict and violence (FCV)
• The number of people living in fragile states is forecasted to increase by more than 27% by 2030:
  • This will result in more than two-thirds of the world’s extreme poor living in FCV settings
• The World Bank estimates that the COVID-19 could push 71 to 100 million people to extreme poverty, 10 million of which would be in FCV settings

In 2019, donors provided a record USD 18.1 billion to UN humanitarian agencies. Despite this, there was a gap of USD 12 billion. To make matters worse, COVID-19 is expected to add an additional 20% to the world’s humanitarian bill.

This calls for alternative sources of capital, including the involvement of private sector investors.

"We need to bring actors together – across the humanitarian, development and private sectors” Katherine Garrett-Cox

2. The need for innovative finance

The finance gap illustrates that philanthropy alone is insufficient to meet humanitarian needs, build resilience and focus on the long term needs of communities affected by crises. However, it could play a critical role in helping to catalyse investment capital.

Seeking both donor funding and private sector investment is known as blended finance. Blended finance is used as a way to de-risk investment and thus attract private sector investment.

Such innovative finance mechanisms are important in the context of humanitarian and resilience issues. For example, the Airbel Impact Lab of the IRC identified innovative finance as a means to achieve four overarching goals in the context of humanitarian assistance:

• Shrink the need – This can be done through ‘innovations that mitigate conflict drivers and accelerate the progress towards self-reliance’
• Improve delivery – This can be done through enhancing the impact of currency available. This can be achieved by ‘more timely, longer-term and less distortionary crisis finance’
• Deepen and broaden resource base – This can be done through attracting new sources of investment capital
• Enhance the equitable use of resources – This is done through ensuring that crisis finance is sensitive to the needs of the relevant stakeholders

3. Attractive benefits to the private sector

In addition to the need for the private sector to get involved in the humanitarian space, we argue that involvement in humanitarian and resilience building space can provide attractive benefits to the private sector.

Meeting or exceeding target returns

Investing in impact could be attractive for investors. A survey conducted by the Global Impact Investing Network found that 90% of impact investors surveyed reported meeting or exceeding their financial expectations in frontier markets. Further, among a self-reported sample of 18 investments, average gross returns reached 15% among investors seeking market rates of return and 11% among those seeking below-market returns.

However, achieving high returns does not come without risks. In humanitarian context specifically, risk may manifest itself in a variety of forms including:

• Contextual risk – Such risks are inherent in the wider context and include:
  • Political and social risks such as political instability and intensified conflict
  • Economic and development factors such as high inflation, market failure and the collapse of state service infrastructure
  • Wider security issues such as organised crimes
• Programmatic risk
  • Risk of potentially causing harm to others such as the risk of fueling a war economy

Low correlation with traditional asset classes

Humanitarian aid flows are often robust to recessions in donor countries in the short-term, and can even be countercyclical. Between 2014 and 2018, international humanitarian assistance grew by 30% to reach USD 28.9 billion. In a context of rapidly escalating need, demand for productivity-enhancing investments throughout humanitarian supply chains could strengthen considerably.

Higher diversity, productivity and employee retention

Research shows that companies that are on the top quartile when it comes to diversity are 35% more likely to have higher returns than their industry median. Hiring refugees is one way of enhancing workforce diversity while at the same time contributing to humanitarian and resilience building. Indeed, research suggests that amongst others, refugees contribute to business diversity and thereby productivity. In addition to diversity benefits, and in certain countries such as the USA, refugees tend to be of working age and exhibit higher employment and entrepreneurship rates than their local counterparts. For instance, in 2015, over 181,000 refugee entrepreneurs generated USD 4.6 billion in business income. Further, refugees tend to have a lower turnover rate than other employees thereby reducing recruitment cost for employers.

Despite the benefits that hiring refugees bring, hiring refugees does not come without challenges. For example, employers often cite uncertainties about the legal framework and the applicant’s length of stay as a barrier to hiring refugees. Other barriers include access to information, the applicant’s language proficiency, difficulties in matching skills and qualifications and sometimes the additional costs associated with hiring refugees and asylum seekers.

The gap in private sector involvement

Despite the need for private sector involvement in the humanitarian and resilience space and the benefits associated with it, private sector involvement remains limited. This is due to a number of factors including shortcomings in the available data.

“The big hurdle is the lack of data to enable investors to look at these issues and make the right assessments” Katherine Garrett-Cox

Members of the Humanitarian and Resilience Investing Initiative, including GIB Asset Management, are working on identifying the data barriers to private sector involvement and the improvements required.