There are stories that have a lasting impact on the image of non-governmental organizations (NGOs). Often they are the bad ones. One such case began in 2012 and dragged on over the turn of the year. The US Department of Justice announced one of the largest fines in US history. The British pharmaceutical company Glaxo Smith Kline was ordered to pay three billion US dollars. The company had pleaded guilty to bribing hundreds of doctors to prescribe the antidepressant Paxil to children - even though the drug was not approved for children.

Just a few months later, the British television station ITV showed a village in the steppes of East African Kenya. Two men in open collared shirts were talking to women farmers. One was Sir Andrew Witty, then CEO of Glaxo-Smith-Kline (GSK) - and the other was Frederick Forsyth, then head of the children's aid organization "Save the Children" in the UK. The two had just signed a 20 million euro partnership. And the question quickly arose: Is an NGO allowed to work with such a company? And if not, how should it finance itself and its projects? Many NGOs are faced with precisely these important questions on a daily basis and they have not yet found a panacea, also and precisely because things are often more complex than they appear from the outside.

The affair with GSK and Save the Children, for example. Although the story happened several years ago, Susanna Krüger, Managing Director and CEO of Save the Children Germany, still remembers it well. Save the Children was heavily criticized at the time, and the German media also reported on the case. Nevertheless, the NGO did not end its cooperation with Glaxo-Smith-Kline. Both sides are still working together today, partly because Krüger believes the impact outweighs the costs: "As part of the cooperation, a drug has been developed that reduces child mortality in Africa," Krüger defends the cooperation. The result is a chlorhexidine gel that prevents infections in the umbilical cord of newborn babies and can therefore prevent diseases that could otherwise be fatal. "GSK was able to develop its product and we were able to save the lives of thousands of children," says Krüger.

NGOs face a difficult balancing act

However, this example shows the constant balancing act that aid organizations face when working with companies. On the one hand, something good can be created, on the other hand, reputations can be tarnished. Save the Children therefore categorically rules out cooperation with certain companies, such as arms manufacturers. The NGO broke off a cooperation with Coca Cola. The reason why Save the Children works with companies at all is that the NGO can achieve results faster than without them. "Of course, we cannot check in detail whether the company is doing enough or not. But close cooperation allows us to see how serious the company is about its commitment," says Susanne Krüger.

According to its annual report, Save the Children raised around 2.2 billion US dollars worldwide in 2019. Although 31% came from private donors, only 11% from companies and 52% from public funds. However, the impact of a collaboration with a company is greater than the money of a single benefactor. A private donor cannot simply develop a new drug.

Only 43 percent of Germans trust

Collaborations can only have the detrimental effect that donors lose trust in the organization. Every year, the communications company Edelmann conducts a survey in Germany on trust in NGOs, the media, business and government in Germany. According to the survey, only 43 percent trusted German aid organizations last year. That is not much.

And as if that wasn't enough, NGOs are also finding it difficult to reach the younger generation. For years, the 70-plus generation has donated the most, as the German Donations Council notes in its look at the 2020 donation year. According to a survey by the Council, their share of the total volume is just under 43%. The 20 to 29-year-olds contributed just 4.2 percent, while the 30 to 39-year-olds accounted for 5.4 percent. "Many members are currently wondering how they can motivate the younger generations to donate," says Heike Spielmans from the umbrella organization Venro. "Many NGOs are increasingly relying on digital tools for this, and social media has become more and more important in recent years." According to Spielmans, another option is to integrate donations into everyday life. "For example, a portion of the purchase price automatically goes to an NGO." However, none of this has really hit the big time yet.

So what can be done to finance projects in the future and reduce dependence on potentially fatal partnerships? Krüger wants to move away from focusing purely on donations and combine NGOs with the trend towards impact investing. "Wealthy people in Germany and all over the world are currently looking for ways to invest their capital wisely. I think NGOs can also benefit from this," she says. But is this really a good approach?

Impact investing is on its way to becoming mainstream

Impact investing covers all investments that are intended to achieve a social impact in addition to an economic return for the investor. The Federal Initiative for Impact Investing commissioned a market study on the status of impact investing in Germany in 2020. Its core finding: impact investing is on its way to becoming mainstream. The market is currently worth a good 2.9 billion euros. If you add social responsibility investments or ESG investing to this figure, it even reaches 6.5 billion euros.

"This trend is really taking off now," says Andreas Rickert, founder and CEO of the charity-oriented analysis and consulting firm Phineo. Ten years ago, he and his company set themselves the task of bringing NGOs and foundations together with benefactors. Today, his consultancy sometimes also manages the money of individual philanthropists and tries to distribute it with the greatest possible impact. "The biggest driver is certainly the world situation," he says. All the crises, not least Covid-19, have made it clear to many citizens that they need to get involved, even with their own money.

Only impact investing presents NGOs with the difficulty of being able to demonstrate the social impact of a measure in addition to the financial return. "NGOs like Phineo can offer special tools for this," says Rickert.

Social impact bonds are one option. In this case, private investors pre-finance a project and, if successful, the state pays back the investment plus risk compensation. Applied to the NGO world, this means An NGO must promote a project to private investors and talk to the public sector at the same time. It then manages the money invested and is remunerated for this effort. "If I am committed to preventative measures in the area of youth welfare, for example, I can do this with the help of this type of model," says Rickert. If the NGO then manages to successfully complete the project financed by private investors and, for example, reduce youth unemployment in a certain region, the state would repay this investment plus a bonus.

Setting up a social impact bond is complicated

Rickert has already set up two such social impact bonds with Phineo himself - and it was "complicated", as he puts it. "The main challenge is developing impact targets and measuring the sustainable impact," he says. The negotiation process between those involved and the operational implementation were also demanding. "But I am convinced of the positive social and financial return," says Rickert.

Rickert advises NGOs to think more entrepreneurially, at least in some areas, and to look into impact investing. "In areas where social measures can be easily monetized, such as education, culture and health, NGOs can consider such approaches."

However, Susanna Krüger from Save the Children also knows that impact investing is not a panacea. "If we help children in Yemen, for example, it will probably never generate a return," she says. In such cases, NGOs can only continue to rely on donations.