First and Second Loss Facilities

The document defines first-loss facilities as tools that absorb the earliest layer of losses to reduce risk for senior investors, while second-loss facilities provide an additional protective layer after the first is depleted. These instruments are particularly relevant for adaptation, resilience, and nature-based solutions where projects often have variable returns and limited track records. The text details the roles of commercial and public providers, the impact on debt sustainability, and the internal and regulatory capacities required for governments to integrate these structures. It also outlines challenges to uptake, such as limited technical expertise in Ministries of Finance and high transaction costs for adaptation projects.

• First-loss facilities reduce risk for senior lenders and investors by absorbing the earliest losses through donor capital, concessional equity, or subordinated debt, which can substantially change a transaction's risk-return profile.
• Second-loss facilities act as a further protective layer using mezzanine equity, guarantees, or subordinated debt to absorb losses once the first-loss tranche is exhausted, thereby increasing investor confidence in high-risk or underdeveloped sectors.
• These facilities are especially critical for adaptation and resilience projects, which typically struggle with smaller sizes, limited track records, and variable returns.
• While generally off-balance-sheet and not directly reducing sovereign debt stock, these tools can create contingent liabilities if provided by governments or state-owned enterprises, which must be reported as they reduce fiscal space.
• The document identifies several specific blended finance examples: the Infrastructure Climate Resilient Fund (ICRF) uses a USD 253 million junior first-loss equity investment from the Green Climate Fund in Africa, and Climate Investor One aims to mobilize at least USD 2 billion in private finance for renewable energy in developing countries using donor capital in a first-loss position.

APA

Climate Policy Initiative (n.d.). First and Second Loss Facilities. https://www.climatepolicyinitiative.org/wp-content/uploads/2026/01/First-and-Second-Loss-Facilities.pdf

Chicago

Climate Policy Initiative. First and Second Loss Facilities. n.d. https://www.climatepolicyinitiative.org/wp-content/uploads/2026/01/First-and-Second-Loss-Facilities.pdf.

Wikipedia

{{cite report |author=Climate Policy Initiative |title=First and Second Loss Facilities |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2026/01/First-and-Second-Loss-Facilities.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{climatepolicyinitiativendfirst, author = {{Climate Policy Initiative}}, title = {{First and Second Loss Facilities}}, institution = {Climate Policy Initiative}, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2026/01/First-and-Second-Loss-Facilities.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }