First and Second Loss Capital Facility

This guide describes the First and Second Loss Capital Facility, a credit enhancement tool designed to attract investment into high-risk climate sectors by using concessional or donor capital to absorb initial losses.

• First-loss facilities use donor capital, concessional equity, or subordinated debt to absorb the earliest layer of investment loss to encourage co-investors. Second-loss facilities provide a subsequent protective layer via mezzanine equity, guarantees, or subordinated debt, which activates after the first-loss tranche is depleted to further increase investor confidence in underdeveloped or high-risk sectors.
• The tool is particularly applicable to nature-based solutions, distributed renewables, climate-resilient infrastructure, agri-SMEs, and adaptation projects that lack long-term returns and stable revenue. Its impact on finance includes crowding in private finance, reducing the need for sovereign guarantees, and expanding fiscal space, though it may create contingent liabilities if a sovereign provides the first-loss capital.
• Implementation timelines vary by entity: existing blended funds take 6–12 months, MDB/DFI platforms take 6–18 months, and new national funds take 12–24 months. Donor capital is noted to reduce senior returns by 3–8%.

APA

Climate Policy Initiative (2025). First and Second Loss Capital Facility. https://www.climatepolicyinitiative.org/toolkit-instrument/first-and-second-loss-capital-facility/

Chicago

Climate Policy Initiative. First and Second Loss Capital Facility. 2025. https://www.climatepolicyinitiative.org/toolkit-instrument/first-and-second-loss-capital-facility/.

Wikipedia

{{cite report |author=Climate Policy Initiative |title=First and Second Loss Capital Facility |date=21 October 2025 |url=https://www.climatepolicyinitiative.org/toolkit-instrument/first-and-second-loss-capital-facility/ |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{climatepolicyinitiative2025first, author = {{Climate Policy Initiative}}, title = {{First and Second Loss Capital Facility}}, institution = {Climate Policy Initiative}, year = {2025}, month = oct, url = {https://www.climatepolicyinitiative.org/toolkit-instrument/first-and-second-loss-capital-facility/}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }