Navigating Uncertainty: Innovative Finance for (I)NGOs in a Shifting Political Landscape

WHITE PAPER, JANUARY 2025
Dr Stefania Knecht-Turkanik, Nina Berculo, Björn Vennema

Summary

Non-governmental organisations, especially their finance and fundraising teams, are being thrown into the deep end. The shifting political and economic landscape is putting their systems under pressure and threatening their survival. The good news? Despite declining government subsidies, there is still enough capital available to fund development and humanitarian aid. The bad news? NGOs must rethink how they operate and secure funding. Thankfully, there is also a growing pool of options through innovative financing and outcomes-based approaches that can help them navigate those challenges. The sector has faced challenges before, but with funding constraints tightening across the board, NGOs now face a clear choice: sink or swim.

Changing political landscape with financial consequences

On 12 November 2024, Reinette Klever, the newly appointed Dutch Minister for Foreign Trade and Development Cooperation, announced a significant policy shift: subsidies for development and humanitarian aid provided to NGOs will be reduced from €1.4 billion to €0.4 billion between 2026 and 2030. While financial constraints play a role, the rationale extends beyond budgetary concerns. The government aims to encourage NGOs to reduce dependency on subsidies, prioritize efficiency, and focus on direct community funding to ensure aid is more effective and less entangled in complex organisational structures.¹ ‘Minister Klever voor Ontwikkelingshulp bezuinigt 1 miljard op ngo’s’, NOS, 11 november 2024, https://nos.nl/artikel/2544059-minister-klever-voor-ontwikkelingshulp-bezuinigt-1-miljard-op-ngo-s. Partos, the Dutch trade association for development cooperation refers to these cuts as drastic, noting that they also undermine the Netherlands’ reputation and reliability as an international partner. Individual organisations are also voicing concerns and confusion. Cordaid Director Heleen van den Berg, among others, describes the cuts as a fundamental threat to democracy and human rights globally, as well as to the Netherlands itself.²Nikki Veerbeek, ‘Jetten haalt uit naar bezuinigingen van Klever: “Egoïstisch, Nederland staat voor lul”’, Metronieuws.nl, 2024, https://www.metronieuws.nl/in-het-nieuws/binnenland/2024/11/jetten-bezuinigingen-klever/

This new policy is emblematic of a rapidly changing aid and development landscape, one that presents mounting challenges for NGOs. Not just in the Netherlands, global adverse forces are mounting for the development and humanitarian aid sectors. Global financial pressures, disengagement among younger donors, rising costs, advancements in technology (including AI), and increasing demands for financial, social, and ecological accountability are testing the resilience of traditional funding models.³For more information on challenges, see: ‘Global Economic Prospects – June 2024’ (World Bank Group, 2024). Challenges & Opportunities for 2024, & How Fundraisers Will Need to Respond’, European Fundraising Association, 2024, https://efa-net.eu/features/special-focus/challenges-opportunities-for-2024-how-fundraisers-will-need-to-respond. Coupled with a volatile political environment and a perceived trade-off between climate action and development assistance, these dynamics necessitate a shift in how NGOs operate and fund their work.⁴See, for example: Modeer en Lemma, ‘Navigating the Waters of Global Development’.

At the same time, the need for humanitarian and development aid has never been more pressing.⁵ ‘SDG Investment Trends Monitor’ (United Nations (UNCTAD), 2023), https://unctad.org/system/files/official-document/diaemisc2023d6_en.pdf. Conflicts, climate change, and economic crises have widened the funding gap for achieving the Sustainable Development Goals (SDGs) in developing countries to a staggering $4 trillion annually — a 60% increase since 2015.⁶‘2024, a Challenging Year for the Humanitarian World’, ReliefWeb, 2024, https://reliefweb.int/report/world/2024-challenging-year-humanitarian-world. ‘Climate Change Is a Matter of Justice – Here’s Why’, UNDP Climate Promise, 2023, https://climatepromise.undp.org/news-and-stories/climate-change-matter-justice-heres-why.Climate Justice Public finance or philanthropy alone will not be able to finance the trillions that are needed to close the SDG financing gap.⁷‘Why trillions more are needed to bridge the SDG financing gap’ (DAVOS (World Economic Forum), 2023), https://www.weforum.org/stories/2023/09/why-trillions-more-are-needed-to-bridge-the-sdg-financing-gap/. Addressing this shortfall requires a more strategic and collaborative approach among stakeholders. As the UNDP aptly highlights, “the onus is on policymakers, donors, and development practitioners to adapt, innovate, and collaborate more effectively than ever before.”⁸Ulrika Modeer en Tsegaye Lemma, ‘Navigating the Waters of Global Development: A Shifting Economic and Aid Landscape’, UNDP (blog), 2024, https://www.undp.org/blog/navigating-waters-global-development-shifting-economic-and-aid-landscape.

So, what does adaptation and innovation look like in this context? It involves diversifying funding sources, implementing programmes more efficiently and involving different partners. Innovative finance is a tool that contributes to all the above. This white paper explores how NGOs can leverage innovative finance mechanisms to navigate a shifting political and financial landscape while driving meaningful progress toward global development goals. The time to rethink funding models and partnerships is now.

Innovative finance goes beyond traditional tools to create impact

Innovative finance involves engaging non-traditional partners, often from the private sector, to mobilize resources and enhance the effectiveness of funding for social or environmental challenges. It refers to financial instruments that go beyond philanthropic donations and subsidies and involves new funding players to generate or optimize capital for impactful solutions. ⁹An example for a new product is the Development Impact Bond (DIB), where private investors provide capital to implementing organisation and are reimbursed by outcome payers (typically institutional donors) if certain pre-agreed outcomes are delivered within a specific period. Re-purposed products are for example index-based weather insurances, where subscribers are compensated for production losses when certain indexes are triggered (rather than according to actual losses).

The essence of innovative finance lies in its focus on achieving measurable outcomes in the most efficient and impactful way possible. By restructuring incentives and aligning financing with results, innovative finance offers a transformative approach to addressing the funding and operational challenges faced by NGOs. ¹⁰‘Innovative Finance for Development: A Guide for International NGOs’ (InterAction, 2018), https://www.interaction.org/wp-content/uploads/2019/02/Innovative-Finance-for-Development-A-Guide-for-International-NGOs.pdf.

NGOs can adopt innovative finance through models ranging from debt- or equity-based instruments such as impact investment funds, to outcomes-based finance instruments, like Development Impact Bonds or Outcomes Funds. For instance, Educate Girls successfully linked funding to measurable improvements in education outcomes. ¹¹Lee Mannion, ‘This innovative tool put Indian girls through school – and made a profit’, World Economic Forum, 2018, https://www.weforum.org/stories/2018/07/this-innovative-tool-put-indian-girls-through-school-and-made-a-profit/. In contrast, blended models combine catalytic funding from governments or foundations with private capital, helping to mobilize finance for high-risk projects. For example, Water.org’s WaterEquity initiative mobilizes private investment to fund safe water and sanitation projects, blending philanthropy with market-driven solutions. ¹²‘WaterEquity: Impact investment asset manager’, WaterEquity, geraadpleegd 23 januari 2025, https://waterequity.com/. To raise these funds, NGOs could set up social enterprise, financial vehicles or funds that would allow them to access investments under financial regulation. What they all have in common, though, is that NGOs start thinking more entrepreneurially about what they want to achieve and what works.

Putting partnerships and outcomes first

There are several ways in which innovative finance can offer advantages to traditional approaches to funding. According to Rob Mills from Social Finance UK, traditional grants or subsidies often include inflexible timelines, budgets and activities set by donors. These donors are most often in the Global North and are as such often less in touch with the local situation. As such, traditional financing can entrench colonial structures of power (“the Global North decides over the Global South”) and organisations can be left implementing ineffective programmes “challenged via bureaucracy that forces service providers to focus on compliance rather than results.”¹³ Rob Mills en Jonathan Ng, ‘How “Productizing” Innovative Finance Hurts Development’ (Stanford Social Innovation Review, 2023), https://ssir.org/articles/entry/how_productizing_innovative_finance_hurts_development. Innovative finance, on the other hand, aims to disrupt these entrenched patterns:

• Innovative finance fosters a partnership approach, bringing together diverse stakeholders—donors, NGOs, and governments—to collaborate on shared goals. This creates opportunities for more strategic support and creative solutions that are not dependant on public funds or subsidies. For example, the Education Outcomes Fund in Ghana demonstrates how this approach ensures the effective use of development funds while strengthening local ownership. The Ghanaian government is repaying the fund once the agreed-upon outcomes, aligned with local contexts and priorities, are achieved.
• The majority of innovative finance instruments focus on measurable outcomes, allowing for continuous learning, adaptation, and evidence-based decision-making. This approach shifts the focus from activities (“training on basic business skills”) or outputs (“200 individuals trained successfully”) to specific, measurable outcomes (“increase in household income by 10%”), promoting more effective interventions.
• Innovative finance offers flexibility and adaptive management, which is especially relevant in high-risk environments. This model allows for programme adjustments based on real-time evaluations, offering space to refine strategies and better respond to changing circumstances.
• Innovative finance instruments help NGOs leverage their deep local knowledge and networks to navigate cultural and political challenges, helping to reduce costs and risks while enhancing investment outcomes in complex regions.

Experts agree that engaging with innovative finance models and the private sector is becoming essential.¹⁴Internal interviews (Social Finance NL, 2024). Governmental subsidies are decreasing, yet many regions still face chronic under-investment. Additionally, individual donors are becoming increasingly weary of the responsibility of financing solutions to global problems. As a result, donors are expecting NGOs to explore innovative, co-financed solutions that involve the private sector or development funding mechanisms. In times of declining resources, it is crucial to align financial resources with outcomes to ensure more effective use of funding.

Confronting rather than avoiding the inevitable challenges of innovative finance

Given the many benefits of innovative finance, it raises the question: why aren’t more NGOs using it? The answer lies in several challenges organisations face when trying to work with innovative finance.

• One major issue is a lack of information. An InterAction survey showed that the main reason NGOs provided for not engaging in innovative finance is a lack of information about different financing instruments and how they work, as well as a lack of information about innovative finance for development opportunities and partners.¹⁵‘Innovative Finance for Development: A Guide for International NGOs’.
• Embracing innovative finance requires a shift in organisational culture towards a more entrepreneurial working manner. It requires confronting assumptions, questioning established practices, and re-thinking processes towards what creates long-term, sustainable change. NGOs are often less familiar with financial markets, the terminology surrounding capital and investment, and are cautious about exploitative schemes, particularly those that may affect the communities they serve. Constructively engaging with scepticism, addressing biases and combating misinformation about innovative finance are also key aspects of this transition.
• A change in organisational culture also demands investing in internal capacity and extra workload. Especially in early stages, innovative finance takes more time and effort to implement. It requires collaboration with external partners, stricter impact measurement and evaluation, and additional staff hours. On top of that, it demands financial resources, specialized expertise, and compliance with complex legal requirements. NGOs simply do not have the staff, resources, or expertise needed to explore or adopt innovative financing options. They may lack the skills or experience to feel confident diving into this unfamiliar territory.
• There is also the perception that innovative finance is risky. Many NGOs believe it comes with higher financial risks compared to traditional grants. However, a survey of implementing organisations found that 73% thought the risk was either “roughly the same” or even “less” than with traditional funding methods.¹⁶‘Innovative Finance for Development: A Guide for International NGOs’.
• Finally, finding the right fit can be a struggle. For many NGOs, understanding the different types of innovative finance can feel like learning a new language. Figuring out which tools, funders, or investors are suitable—and how to implement them effectively—can be overwhelming. Without clear guidance or the right frameworks, navigating this space becomes a major challenge.

The question arises whether can afford to overlook innovative finance. The related challenges are not insurmountable if there is unified support among NGO leadership to carefully consider appropriate instruments and mechanisms. Considering a declining government subsidy landscape, NGOs must explore new ways of working to retain their existing donor base and attract new supporters, focusing on increased transparency and the ability to demonstrate impact – two aspects that innovative finance enables.

Innovative Finance: The Holy Grail?

Does this mean that NGOs should abandon traditional funding and solely embrace innovative finance? The short answer is no, innovative finance is not the holy grail, and it cannot fix all financing or fundraising problems.¹⁷Innovative finance alone cannot be the solution—there needs to be a restructuring of the global financial architecture. However, achieving this systems change requires a broader conversation involving a wider range of stakeholders and extends beyond the scope of this publication. ‘Strong calls for innovative financing and reform of the international financial system to achieve the Sustainable Development Goals in Africa’ (United Nations (Economic Commission for Africa), 2024), https://www.uneca.org/stories/strong-calls-for-innovative-financing-and-reform-of-the-international-financial-system-to.  However, it can radically shift the way NGOs are currently implementing programmes or financing their operational costs. Practically, this could mean re-thinking which rights holders to work with, how to bridge the aid-development nexus, or which outcomes to focus on — and to determine which outcomes are realistically attainable.

The catch? Innovative finance cannot become a goal in and of itself.¹⁸Mills en Ng, ‘How “Productizing” Innovative Finance Hurts Development’. ‘Popping up like daisies: Innovative financing instruments for development’ (Partos, The Spindle, 2020), https://www.partos.nl/wp-content/uploads/2021/05/Innovative-financing-instruments-for-development-Popping-up-like-daisies.pdf. Providing services that lead to lasting, long-term impact must remain the goal, and innovative finance can be a helpful means to achieving this. Keeping an impact-mindset also means that NGOs must promote interventions that are backed by evidence rather than seek to display a new financial product for publicity.¹⁹According to Mills, productization makes the product the end instead of a means. It places funders’ attention more on the form and label of the funding than the social outcome they aim to achieve. It can also conflate the efficacy of the underlying intervention with the funding structure that sits on top, fostering claims, for example, that “a development impact bond helped alleviate poverty.” Mills en Ng, ‘How “Productizing” Innovative Finance Hurts Development’. This impact mindset means that the needs of the rights holders must remain central, rather than the priorities of funders.

Amid the evolving political and economic landscape that challenge NGOs with funding uncertainties, it is worth remembering that the emphasis on creating lasting impact is also growing. The GIIN estimates that there are $1.571 trillion USD in impact investing assets under management (AUM) worldwide, representing 21% compound annual growth of the total impact investing market since 2019.²⁰Dean Hand e.a., ‘Sizing the Impact Investing Market 2024’, GIIN, 2024, https://thegiin.org/publication/research/sizing-the-impact-investing-market-2024/. As the drivers of change, NGOs now have a unique opportunity to re-think assumptions, forge innovative partnerships, and re-shape both funding models and implementation strategies, and in the process become less dependent on government subsidies.

NGOs: time to swim!

NGOs must take a strategic and thoughtful approach when considering innovative finance. While the landscape may seem overwhelming, many other organisations have already started this journey. Intermediaries, such as Social Finance NL, are available to help NGOs think through the long-term impact they aim to achieve and explore which innovative finance models might be suitable for advancing sustainable development goals more quickly and efficiently.

The time to act is now—those who choose to swim and embrace this challenge can pave the way for a more sustainable and impactful future.