Expert Speak Raisina Debates
Published on May 18, 2024

Philanthropic organisations have a financial capacity beyond that of governments. Thus, governments should create conditions that enable the private sector to fund SDGs effectively.

Philanthropy as development finance: The new normal

Global development governance is at a critical crossroads. With the Sustainable Development Goals (SDGs) being the prime pillars of the global development governance, the inherent challenge with achieving the SDGs lies with financing and the yawning financing gap. The problem is not new. Just prior to the adoption of the SDGs, the annual investment gap numbers for the developing world stood at US$2.5 trillion, as per the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report. The numbers were found to have escalated to US$4-4.3 trillion during the mid-term review in 2023. The widening gap is predominantly due to the deficits during the interim periods since 2015, compounded by escalating demands arising from numerous global challenges. These include the COVID-19 pandemic and the trifecta of food, fuel, and financial crises exacerbated by the ongoing tensions in Ukraine.

On the face of it, the annual financing gap of US$4-4.3 trillion might sound gargantuan, but does the world lack the resources to bridge this gap? One number will clarify all doubts. Worldwide, the total net private wealth stands at an even more gigantic US$454.4 trillion by the end of 2022. By the end of 2027, the same is expected to rise by 38 percent reaching US $629 trillion. Therefore, all that will be required is essentially apportioning and mobilising even less than 1 percent of the private wealth for meeting the annual SDG financing gap till 2030. This is where philanthropy can play a role: mobilising components of the private wealth to meet the unmet developmental finance goals.

The widening gap is predominantly due to the deficits during the interim periods since 2015, compounded by escalating demands arising from numerous global challenges.

Philanthropic foundations are one such cog in the financing wheel that can not only mobilise resources but also operate as development actors in their own right. There are traditional investment plans that aim to maximise the rate of return which may or may not fulfil the larger global good. Then some investments are steered forward with objectives of positive social impact and outcomes. This is where ‘impact investments’ or ‘social impact investing’ come into the picture. 

Philanthropy and impact investing for sustainable development

The boundaries are slightly blurred between philanthropy and impact investing, however there does exist a difference. In the context of the international development and cooperation sector, private philanthropy refers to the transactions initiated by the private or non-profit sectors that aim to promote research, education, and the economic benefit of developing countries with the funds dedicated for philanthropic contribution usually originating from foundations. It usually does not focus on return and is more linked to a deep sense of purpose and service to humanity. As per 2023 report on private philanthropy released by OECD, about US$9.6 billion was mobilised as grants by the private philanthropic foundations in 2020 (Figure 1).

Figure 1: Private philanthropic flows for development (2009-2021)

Source: OECD, 2023

If one looks at the regional allocation of this finance, it is observed that countries in Africa and Asia received the largest volumes of philanthropic finance i.e., 61 per cent and 29 per cent respectively (Figure 2).

Figure 2: Regional allocation of private philanthropic flows (2018-2020) average

Source: OECD, 2023

Figure 3: Sector-wise allocation of private philanthropy (2018-2020) average

Source: OECD, 2023

For example, according to the Global Philanthropy Tracker 2023, the 47 countries covered contributed about US$70 billion as philanthropic outflows and US$ 841 billion when adding together all four cross-border resource flows—philanthropic outflows, ODA, individual remittances, and private capital investment. Yet, the funding offered by the philanthropes mostly are earmarked for certain sectors or projects. For instance, if one looks at US$ 70 billion sector-wise, it appears that health (SDG 3) and civil society (SDG 17) received much of the funding i.e., 56 percent and 10 percent respectively (Figure 3). This reflects a need for the philanthropic agencies to move from supporting specific projects to providing untied unearmarked general support towards the broader sustainability narrative. However, does philanthropic contributions actually represent the selfless act of doing good for the benefit of the larger society? In fact, there is a lot of uproar on the ‘no strings attached’ approach and shift to a more trust-based philanthropy’—this term, coined in 2014 by the Whitman Institute, refers to “an approach to giving that addresses the inherent power imbalances between funders, nonprofits, and the communities they serve […] On a practical level, this includes multi-year unrestricted giving, streamlined applications and reporting” Experts have pointed the necessity for flexible financing

Indeed, governments and multilaterals need to include philanthropic organisations in policy discussions for optimising the development results. In this sense, impact investments vary. As a relatively new concept, although these investments are performance-driven aimed at triggering positive social and environmental impact, there is an aspect of profit, accountability and measurability of effectiveness.

Why pilot philanthropy as development finance?

Philanthropy carries a congenial potential of eliciting positive financing from private foundations and not-for-profit organisations for addressing the challenges of meeting the sustainable development goals. Given their roots are based on the ethics of doing overall societal good, philanthropy can explore the dynamics of grant funding towards specific goals, targets and projects. There is a shift observed in recent years towards flexible financing for building trust not only amongst the beneficiaries but also for general support for the sector. Though infrequent, flexible financing is gathering momentum among the philanthropes. For example, about 16 percent of their overall donations between 2016-2019 were tuned flexibly to tackle the urgent needs of the society. Further, based on historical data from 20 large international philanthropic donors, the OECD report detected a recent upward trend towards more flexible giving, peaking at 20 percent of yearly giving in 2021 on an average. Figure 3 illustrates the state of flexible financing as per an OECD study conducted in 2021. Out of 64,948 grants or projects selected, only 10,117 which is US$ 6.8 billion and 16 per cent, were unearmarked or for general purposes. On the other, US$30 billion was allocated for specific projects or programmes. While around 16 percent of the grants or projects are designated as general budget support, these flexible donations account for roughly 19 per cent of the total donated.

Many philanthropic organizations, work in tandem with governments, businesses, think-tanks and civil society to generate knowledge for public consumption and use the strategic insights for better mobilisation and divestment of their funds.

It need not be reiterated that apart from providing direct financing, philanthropy fosters partnerships that help leverage additional resources and expertise. Many philanthropic organizations, work in tandem with governments, businesses, think-tanks and civil society to generate knowledge for public consumption and use the strategic insights for better mobilisation and divestment of their funds. This also has its impacts felt in capacity building and advocacy. Philanthropic support for advocacy efforts also ensures that critical issues remain on the global agenda, influencing policy and encouraging further investment from both public and private sectors.

Figure 3: State of flexible financing in private philanthropy for development (2016-2019)

Source: OECD, 2024

However, challenges persist. Issues of misalignment of interests between the philanthropy foundation and the beneficiary/grantees, criteria for selection of grantees by the foundation, popularity of specific funded grants etc. create a visible barrier to financing for development. 

Economic rate of return vs social rate of R\return

Philanthropic organisations and individuals have the necessary financial bandwidth and the disposition to take risks that often surpass governmental and institutional capabilities. This agility allows them to innovate and implement solutions that can be scaled up and adopted by larger entities. More importantly, there are domains where multilateral institutions and development financial institutions are often wary about putting their buck. This has largely been the case with climate adaptation financing which has often received a step-motherly treatment in the development and climate financing portfolios of DFIs and MFIs as they often result in creating “public goods” without concomitant returns on investment (RoI). Despite an imperceptible or low economic rate of return in the short run, such projects reveal a high social rate of return in the long run. These are some of the domains where philanthropy has to plunge with its financial muscle and risk-taking propensity and help bridge the yawning gap between the escalating demand and dwindling supply of development funds.

Philanthropic organisations and individuals have the necessary financial bandwidth and the disposition to take risks that often surpass governmental and institutional capabilities.

To conclude: Roles of the governments

While these are crucial points, governments need to create enabling conditions for the asset-rich private sector to engage in such philanthropy for the same and channelise financial resources towards SDG funding. It is not sufficient to bring about innovations in fiscal domains only through providing exemptions in taxation. It is important to create enabling factors for philanthropies to have easier entry and exit norms into an economic system, easier norms to operate and use their finances wisely, reward them for exemplary performances in the SDG domain through acknowledgements of their efforts, and also help bring about exciting product innovation in the domains of blended finance where philanthropic money can find an easy channel to be mobilised.


Nilanjan Ghosh is a Director at the Observer Research Foundation

Swati Prabhu is an Associate Fellow at the Observer Research Foundation

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Authors

Nilanjan Ghosh

Nilanjan Ghosh

Dr Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF) in India, where he leads the Centre for New Economic Diplomacy (CNED) and ...

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Swati Prabhu

Swati Prabhu

Dr Swati Prabhu is Associate Fellow with the Centre for New Economic Diplomacy at the Observer Research Foundation. Her research explores the interlinkages between development ...

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