Here’s why innovative finance is key for then SDGs and NGOs who support them.

I witnessed a remarkable thing at a meeting of one of MzN’s partners, whom we provide with funding support. We have been working together for about three years now, and while income was up and the grants pipeline was well managed, it was clear that there would never be enough money from grants to make a serious advance in their mission of poverty relief. Yes, the organisation was now sustainably financed, but its mission was not!

The remarkable thing was, the NGOs leaders did not “merely admire the problem” or accepted this “as a way things are”.  They faced the obvious conclusion: we need investors, not just their money, but their drive, expertise, and network to push our partners—and us—to scale. “It will change us, but business as usual means we will always work on the sidelines,” one board member summarized the conversation.

Non-profit organizations are increasingly facing a complex and changing financial environment, where traditional grants are not enough to meet their ambitious goals. Sticking to the grants-based funding model, which many NGOs have been built upon, is unlikely to ever scale their programs to a size where they can have a substantial impact. The need for sustainable funding has driven the adoption of innovative finance as a key strategy to achieve long-term impact and growth. This article explores the concept of innovative finance, how donor expectations are changing, practical examples of its use, and strategies for NGOs to effectively adapt and thrive.

The Changing Landscape of Humanitarian and Development Funding

The structure of humanitarian and development funding is undergoing significant changes. Donors are moving away from traditional grant-making toward more sophisticated types of financial support, such as conditional and catalytic funding, which focus on sustainability and scalability. These changes are accompanied by increased collaboration among governments, donors, and private funders to address the complexities of development. International Financial Institutions, donors, and larger foundations are actively pushing to reform the financial system to build mechanisms that are more inclusive, accessible to more stakeholders and streamline investments into the SDGs. In practice, this means that programmes now often involve blending public and private funds to promote inclusive development and maximize synergies, aiming to build financial momentum to fund the SDGs. This does flush more funding towards impact programmes. But it also makes them more complicated to manage. Programme implementers need to skill up for that.  

For NGOs, this shift means aligning with emerging trends, including engaging with the financial sector, partnering with investors, and having the ability to navigate complex financial instruments. The story from the board meeting illustrates that grants alone are not enough, and private investment can provide the additional push needed to achieve significant impact. 

Earlier this month, I joined the Hamburg Sustainability Conference. Panel after panel with SDG leaders,including even the Federal Chancellor of Germany, Olaf Scholz, were clear that there simply is not enough money in public funds to provide the capital needed to make scaling progress towards the SDGs. This much was clear for years.  What is new is a merger-of-sorts of the finance/investment world with that of NGOs/United Nations and other civic space leaders.  That does not go without friction.

Statements like “Climate adaptation needs to be invested in” indicate a major shift in the development aid world: we need to make the circle of expertise and capital working on the SDGs bigger, just as we recognized at the board meeting that investors must play a larger role. The board was well aware that this shift would mean a significant change for the NGO throughout, fundamentally altering how it operates and approaches its mission.

We will fail most SDGs without innovative finance

With only six years left, progress towards the SDGs is falling significantly short. The Sustainable Development Goals Report 2024 warns that without massive investment and scaled-up action, achieving the SDGs will remain elusive. The report reveals that only 17% of SDG targets are on track, while nearly half show minimal or moderate progress, and over one-third are stalled or regressing. This underscores the need for innovative financing approaches to bridge the funding gap and drive meaningful progress. Donor funding alone is insufficient, making it essential for non-profits to expand their funding strategies beyond traditional grants to include innovative finance mechanisms.

What Is Innovative Finance?

What Is Innovative Finance?

Innovative finance refers to non-traditional ways of mobilizing capital to address development challenges. These approaches include impact investing, blended finance, catalytic grants, guarantee-based funding, and insurance-based mechanisms, among others. As the illustration above shows, market rate investments on one hand and grants on the other are just two extremes on the scale of available funding types.  It’s the middle between these extreme, and their mixing in a programme that bears so much potential for funding and more impact. 

For NGOs, adopting these types of funding is crucial because they provide new opportunities to advance social impact projects.

Here are some examples from our work earlier this year:

  1. A partner organization in Eastern Africa created a USD 15 million investment fund for small and medium enterprises (SMEs), with support from impact investors. This fund targets women-led SMEs and uses donor catalytic grants to cover transaction costs.
  2. In the Middle East, a humanitarian partner collaborated with infrastructure investors, providing consulting services on humanitarian aspects of projects—an arrangement that also generated fee income for the NGO.
  3. In Ukraine, a development partner used a guarantee mechanism to secure loans, ensuring that 3 out of 10 defaults would be covered (“first loss insurance”) . This mobilized private finance for the rebuilding of homes and farms destroyed by the ongoing war.
  4. In Western Africa, an NGO helped business owners plastic recycling sectors secure funding from impact investors.

These examples show how innovative finance can help mobilize new resources, create sustainable income, and drive positive social change. While program design often needs to change for an NGO to deploy innovative finance mechanisms, we nearly always found a way to step from a traditional grant-funded program into one that can be financed, or at least co-financed, through some of these mechanisms.

Strategies for NGOs to Use Innovative Finance

The rapidly changing funding landscape can be overwhelming, and many NGOs lack the strategic capacity to navigate these changes effectively. Here are some strategies that can help non-profits embrace innovative finance:

  1. Skill up & build capacity: As funding mechanisms become more complex, NGOs need to develop new skills and expertise. It is essential for non-profit teams to understand innovative finance methods. MzN offers both online and in-person training programs to address this knowledge gap, including our new Innovative Finance Day held, which helps build the internal capacity needed to understand and leverage different types of financial instruments.
  2. Reevaluating Mission Financing: Conduct a half-day workshop with key stakeholders to explore whether the organization’s mission can be financed differently. This exercise is vital for finding opportunities to integrate innovative funding models, much like the conclusion reached at the board meeting, where the need for investor involvement became evident.
  3. Developing Flagship Programs: Identify and create one or two flagship initiatives that are specifically designed to leverage innovative finance. Such programs can help the organization explore blended finance options and partnerships with impact investors.
  4. Bringing in Specialized Expertise: Because impact investment pitches are fundamentally different from traditional grant proposals, NGOs may need to hire or work with specialized business development experts. These professionals can create investment pitches that are concise, compelling, and focused on transactions, unlike traditional donor proposals.

Lessons Learned

Transitioning to innovative finance presents several challenges. Many of our non-profit partners struggle to understand investor terminology and behaviour and to operationalize new funding models. Here are some key lessons learned:

  • Engaging with Diverse Stakeholders: NGOs must adapt to working with a wide range of stakeholders, such as investors, banks, and insurance companies. This requires a different approach compared to working with traditional donors. The board meeting example highlights the need for more investor involvement, which requires NGOs to develop new ways of engaging with these stakeholders.
  • Localizing Financial Solutions: Innovative finance approaches are often more localized compared to traditional donor funding. This presents an opportunity for NGOs to use their grassroots networks to ensure that funding reaches communities directly.
  • Crafting Effective Pitches: An impact investment pitch is different from a grant proposal. NGOs must learn to succinctly communicate their projects and present a clear value proposition to investors, similar to how startups pitch to venture capitalists.

Building Sustainable Income for NGOs

A sustainable income strategy is essential for the success of any NGO, and it is also crucial for achieving the SDGs. Non-profits should explore multiple income sources, ranging from unrestricted funding to income-generating activities and service-based contracts.

Engaging stakeholders is also key to securing sustainable funding. By aligning the interests of donors, investors, and beneficiaries, NGOs can create a shared sense of ownership and accountability, which is essential for financial sustainability. One significant advantage of innovative finance mechanisms is that they are often inherently more localized than grants. This localization aligns well with one of the biggest strengths of most NGOs—their grassroots connections—which are key for many investors.

Without innovative finance, it’s unlikely we will get there!

The landscape of non-profit funding is changing, and with it, the strategies that NGOs need to stay effective. Embracing innovative finance offers non-profits a way to diversify funding streams, build sustainable income, and enhance their impact. This requires a proactive approach to capacity building, engaging with new types of funders, and designing programs that can be funded through innovative means. It is also the only viable way to use the remaining time effectively to make meaningful progress towards the SDGs.

Ultimately, non-profits that are willing to think creatively about finance will be better positioned to achieve their missions and contribute to a more just and equitable world. By investing in training, rethinking financing strategies, and fostering partnerships across sectors, NGOs can turn funding challenges into opportunities for greater impact.