14 November 2024

Beyond trust: How philanthropy should move towards more flexible funding to maximise impact

Foundations support development in many ways. What they fund and support is important. But how they provide this support is critical to achieving impact. In recent years, philanthropy has increasingly scrutinised its own methods of giving. Flexibility, agility, and risk-taking are intrinsic to philanthropy’s values and has been put forth as a distinct comparative advantage. Flexible funding, defined as “grants or financial support given without strict restrictions or pre-defined conditions on how the money should be spent,” allows grantees to allocate resources according to their evolving needs. The benefits are clear: An OECD report reveals that grantees with flexible funds felt empowered to innovate and adapt their activities based on real-time needs (OECD, 2024).

Furthermore, grantees reported enhanced financial stability, enabling them to focus on long-term objectives rather than short-term project demands (MacLeod, 2021). Yet, as highlighted in a recent OECD report, only 5% of philanthropic giving was considered flexible in 2000, despite evidence that flexible funding yields better long-term outcomes. Yet, flexible funding among large philanthropic donors has increased significantly over the last two decades – from around 5% in 2000 to 20% in 2021 (OECD, 2024). This shift underscores a growing recognition of the value that unrestricted support brings to grantees and their ability to effect change at the front lines. However, this rise still falls short of its potential and remains limited to a few organisations. According to a 2023 Grantmaker Survey, only 47% of granters reported moving toward more multi-year grantmaking, and just 35% indicated that the majority of their grantmaking was both unrestricted and multi-year. This shows that mainstreaming flexible funding remains a challenge (Trust-Based Philanthropy Project, 2023). Why does most philanthropic funding remain restrictive?

The current funding dynamics exacerbate the imbalance between funders and grantees, fuelling a debate on the importance of “trust-based philanthropy.” This concept advocates empowering grantees, reducing burdensome reporting, and providing flexible funding. Indeed, over 300 grantseekers surveyed in 2017 felt that reporting requirements often reflect a lack of trust in their capacity to achieve goals, perpetuating power imbalances (PEAK Grantmaking, 2017). Flexible funding and trust-based philanthropy are often used interchangeably while they are clearly distinct. Trust-based philanthropy involves building more balanced relationships between funders and grantees, allowing organisations to use funds based on their expertise and contextual understanding. However, trust alone, without a focus on monitoring progress, results, and impact, is insufficient. The debate within philanthropy must not only address trust but also how success is defined and achieved in the context of global goals like the United Nations’ Agenda 2030 (United Nations, 2015).

Taking stock of philanthropic flexible funding

Looking into the modalities and the ‘’philosophy’’ of philanthropic giving, one must acknowledge the gap between ambitions and reality. As mentioned earlier, flexible funding is infrequent, with only 1 in 6 philanthropy-for-development grants being characterised as flexible between 2016 and 2019 (OECD, 2024). Often, philanthropic organisations require grantees to submit detailed reports on fund usage, which signals that ‘’trust-based philanthropy’’ is far from the norm. Grantees experience power imbalance in their relationship with funders, due to the stringent requirements attached to non-flexible funds. Despite many funders’ intention to foster more equality in their relationship with their partners, resistance from boards and trustees remains a significant obstacle. The 2022 Community Survey revealed that only 17% of boards said they are fully committed to trust-based philanthropy, while 34% of respondents stated their board members were “fairly invested” (Trust-Based Philanthropy Project, 2022). However, far from pushing back, many philanthropies aspire to empower their grantees, aspire to further focus on locally-led development, and acknowledge the benefits of flexible grants.

So why is flexible funding still the exception? Shifting the trustee-grantee dynamic through funding presents significant challenges. Many foundations are bound by their Boards’ requirements, which demand detailed reporting and oversight on the funds disbursed. While many philanthropies trust their partners, they want to be involved throughout the project cycle, including setting KPIs that grantees must meet. Some foundations with numerous projects across geographies and small grant teams struggle to build trust and monitor projects, which results in stricter oversight. A RAND Corporation study found that non-profit organisations spent 11% of their annual budgets and 44% of staff time on compliance-related tasks, such as writing reports, tracking data, and attending meetings (Lara-Cinisomo & Steinberg, 2006). This burden is a direct result of tight funding restrictions and contributes to the power imbalances between funders and grantees. Furthermore, reputational risk is major obstacle to more flexible funding. Many foundations, including family and corporate ones, shy away from ‘’core’’ or flexible funding to maintain control and mitigate reputational risk. Many philanthropic organisations remain very risk-averse despite the rhetoric, and want to avoid having funds misused or diverted, which leads to tighter controls over funding. Finally, most foundations in the global North, lacking local offices, face even greater difficulties in building trust and relinquishing control. The use of intermediaries often leads to tighter grants and additional restrictions. The debate around trust-based philanthropy and flexible funding highlights the urgent need to shift power relations between trustees and grantees.

Yet, achieving true equality in philanthropic partnerships might not be realistic, as the relationship is not equal. There will always be some degree of power imbalance between those who have and provide funding and those who receive it and whose organisational survival depends on these funds. While partnerships can certainly be more balanced, they will never be on equal footing. Acknowledging this imbalance and the concrete obstacles to providing flexible funding is essential to find ways to support grantees and to empower them. So how do we walk that talk?

Moving Forward

The case for flexible funding is compelling: involving local actors and encouraging autonomy in resource allocation can increase project success (The Global Fund for Community Foundations, 2013).  To foster more equitable and results-driven philanthropy, an OECD report suggests that philanthropic donors should carefully evaluate whether their use of flexible versus earmarked funding aligns with their objectives and effectively supports their grantees (OECD, 2024). This involves analysing how different funding types impact grantees’ operational capabilities and adjusting the balance as needed. To improve efficiency and impact, philanthropists should streamline grant agreements and reporting processes to reduce administrative burden and compliance costs, while ensuring transparency from any re-granters or intermediaries about fund usage. This approach will help maintain trust, accountability, and effectiveness in philanthropic efforts.

Ultimately, beyond trust, philanthropy must emphasise a shared focus on impact between donors and grantees. Embracing flexible funding is a crucial step in this direction, enabling local actors to prioritise impact over rigid compliance. This shift requires a transformation in funder behaviour and greater involvement from all stakeholders, including boards, local communities, and grantees. By involving all parties in decision-making, philanthropy can support their partners in the frontlines more effectively, strengthening ownership and accountability while striving for meaningful outcomes.


Sources

This article is part of a series marking the one year anniversary of the international edition of ‘Philanthropy Back the Drawing Board‘. Guest curated by the book’s author, Rien van Gendt, the series shares insights on the prevailing topics and trends in the philanthropy sector:

Authors

Bathylle Missika
Head of the Networks, Partnerships and Gender Division, OECD