First and Second Loss Facilities

This fact sheet from the Climate Policy Initiative explains first- and second-loss facilities as credit enhancement tools used to de-risk climate and energy transition investments. It details how these layered capital structures absorb initial losses to attract private investment into high-risk sectors, the institutional capacities required to manage them, and provides examples of blended finance vehicles operating in emerging markets and developing economies.

• First-loss and second-loss facilities are credit enhancement tools designed to absorb losses to encourage investor participation. First-loss facilities absorb the earliest layer of losses using donor capital, concessional equity, or subordinated debt to reduce risk for senior lenders. Second-loss facilities provide a subsequent protective layer via mezzanine equity, guarantees, or subordinated debt after the first-loss tranche is exhausted.
• These facilities address specific risks to improve the investability of climate projects, particularly in adaptation and resilience where projects often have smaller sizes and limited track records. They mitigate credit risk for early-stage borrowers or unproven technologies, market risk in sectors with uncertain demand, and liquidity risk for long-dated or small-scale projects.
• The document identifies several blended finance vehicles utilizing these structures: the Mirova Sustainable Land Fund 2 (target size EUR 350 million) for sustainable land use; the Infrastructure Climate Resilient Fund, which includes a USD 253 million junior first-loss equity investment from the Green Climate Fund (GCF) in Africa; and Climate Investor One, which had USD 412 million in commitments at first close to mobilize at least USD 2 billion for renewable energy.
• Regarding debt sustainability, these facilities are generally off-balance-sheet and do not directly reduce sovereign debt stock. However, if governments or state-owned enterprises provide the first-loss capital, it creates contingent liabilities that must be reported and can reduce fiscal space.
• Implementation faces technical, market, legal, and institutional challenges. Technical hurdles include limited expertise in Ministries of Finance (MoF) or National Development Banks (NDB) regarding layered structures. Legal challenges involve restrictions on subordinated public investments and unclear fiscal treatment.

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} }