Humanitarian finance seeks liquidity after USAID collapse
Humanitarian organisations are looking to sustainable finance and the broader capital markets to mitigate the effects of a looming liquidity crisis as the impact of the United States Agency for International Development funding freeze continues to ripple through the sector.
US president Donald Trump ordered a 90-day pause on all foreign aid on his first day in office on January 20, which was followed by aggressive moves to gut USAID by his government efficiency tzar and world's richest man Elon Musk, who said in early February that he was "feeding USAID into the wood chipper".
Prior to the freeze, USAID provided about US$40bn of aid per year to 177 countries.
"The collapse of USAID is a hugely significant event for the humanitarian sector," said Simon Meldrum, executive director at the Humanitarian Finance Forum. "USAID was the sector’s single-biggest donor, so up to half of the sector's income has probably disappeared."
"USAID has implications for financial markets and the sustainable and social bond market," he said. "We need private sector banks and institutions to think about how they might provide liquidity to the UN and other humanitarian organisations."
The implications for ESG deals and dealmaking will ripple across many areas of the markets.
"The recent suspension of USAID's foreign aid programmes has created a significant funding gap in climate finance, particularly affecting vulnerable populations in developing countries," said Annette Detken, head of the InsuResilience Solutions fund at the Frankfurt School of Finance & Management. "Diversifying funding sources and financial instruments can help mitigate this gap and reduce reliance on traditional donor finance."
InsuResilience works to mitigate the impacts of climate change and is funded by KfW on behalf of the German government.
Meldrum added: "A hammer blow has now arrived that will force humanitarian organisations to figure out how to work with capital markets very quickly."
Prearranged
Even before the hit to USAID, a push was already underway to scale up pre-arranged crisis finance such as contingent loans, contingent grants and insurance that activates when triggers are met to ensure rapid and predictable financial support.
In January, the High-Level Panel on Closing the Crisis Protection Gap, which consists of 20 finance and development specialists, said in a report that to meet increasingly frequent and severe shocks across the world, pre-arranged crisis finance needs to increase tenfold – especially for least developed countries and small island developing states.
Of the US$76bn spent on crisis finance in 2022, less than 2% was pre-arranged, according to research by the Centre for Disaster Protection.
The humanitarian sector has also been working on new innovative financing tools to fund disaster responses as well as its longer-term work in fragile and crisis-torn states.
The application of insurance for emergency response is gathering speed – including parametric insurance, where payouts are triggered by specific data points and traditional indemnity insurance, as well as sovereign regional risk pools such as the African Risk Capacity and the Caribbean Catastrophe Risk Insurance Facility, which are supported by donor and sovereign capital.
The International Federation of Red Cross and Red Crescent Societies put a groundbreaking indemnity policy in place in September 2023, which increased its Disaster Response Emergency Fund’s capacity by donors funding premiums and passing risk to the private sector. Insurer AON developed the policy, which paid out a year later when super-typhoon Yagi in the Philippines tipped the emergency fund's spending over the insurance trigger threshold.
AON is now having similar discussions with other organisations, including the World Food Programme and the United Nations Office for the Coordination of Humanitarian Affairs. It also completed a US$350m insurance programme to accelerate new capital investments and economic recovery in Ukraine last June.
The Global Shield against Climate Risks, an initiative put in place at COP27 in 2022 by a group of 20 vulnerable countries and the G7, is working to give partner countries access to climate and disaster risk finance and insurance mechanisms that include climate risk insurance, contingent credit, guarantees, shock resilience debt instruments and debt clauses.
Capital markets
Other organisations are also looking at the capital markets' success of the International Finance Facility for Immunisation’s vaccine bond model, which smoothes its donor funding. IFFIm has raised nearly US$6bn since 2006 by issuing bonds against sovereigns' capital pledges.
A range of financing approaches are also being explored that could create new capital markets issuers. These include governments and the public sector working to leverage guarantees and new blended finance structures and funds that will help lenders and investors to take more risk. Securitising donor pledges could provide upfront funding.
One new financing initiative is Human Planet, a global impact accelerator that aims to bridge the gap between private capital and high-impact development sectors. It was launched by impact finance firm KOIS and MzN International, a social enterprise that supports humanitarian organisations, at the Humanitarian Finance Summit in London on February 14.
"I believe that this disruption [to USAID] will foster innovation and if we do it well and align all parties together, hopefully at scale, then blended finance and innovative financing in the impact investing space with local organisations that are operating on the ground will be fruitful," said Florian Kemmerich, a managing partner at KOIS Advisory.