4.2 Concessional capital is the unsung hero of green finance
· 9 min read
This article is part of the Sustainable Finance Guide, a new series by Globalfields in collaboration with illuminem. Together, we provide readers with clear, educational insights into where sustainable finance stands today and how it is evolving to support nature, regeneration, and long-term resilience.
Concessional capital underpins many of the climate investments that move first in difficult markets. By accepting below-market returns or higher risk, concessional providers fundamentally reshape investment economics, enabling climate-positive projects that would otherwise be deemed unbankable.
In contexts characterised by policy uncertainty, currency volatility, shallow pipelines and weak credit fundamentals, private capital alone is often unwilling to engage. Here, even a small amount of catalytic concessional capital can alter the perceived risk-return balance and crowd in commercial capital that may not have materialised independently.
The practice of ‘blending’ concessional with commercial resources has matured into a set of techniques and market norms. Multilateral development banks, development finance institutions, and climate and philanthropic funds are guided by a clear policy rationale that links mobilisation to the Paris Agreement’s call to make finance flows consistent with low-emission and climate-resilient development.
For businesses operating across emerging and transition markets, understanding the concessional capital world is a critical enabler of early-stage market entry, a signal of credibility to investors and regulators, and a key mechanism through which climate ambition can be translated into an investable reality.
The OECD defines blended finance as “the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries.”
Central to this definition is the concept of ‘mobilisation’, also referred to as ‘leveraging’, referring to the causal link between the public intervention and the incremental private capital raised [1].
In this way, concessionality is not an end in itself but a means to achieve that mobilisation with a high standard of additionality: the requirement that concessional finance must generate outcomes that would not have occurred otherwise.
In practice, this spans across two dimensions. Financial additionality refers to private investment being mobilised that would not have materialised on purely commercial terms. Development additionality captures the extent to which concessional support enables higher-level development and climate impacts than market finance alone could deliver [2].
Blended finance involves a range of stakeholders on both the public and private sides. On the public or concessional side, this includes governments (through their development agencies and aid budgets), multilateral institutions such as the World Bank and regional development banks, dedicated climate funds like the Green Climate Fund, bilateral development finance institutions (DFIs), and philanthropic foundations.
Additionally, a distinct but critical role is played by credit enhancement providers, such as the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), which underwrites non-commercial risks through instruments such as partial or full guarantees, risk-sharing facilities and protection against non-honouring of public obligations [3].
Commercial participants include banks, institutional investors, impact investors, and corporates, each contributing based on their mandate and balance sheet. Climate and philanthropic funds typically provide first-loss tranches, absorbing initial losses to improve the risk-return profile, while also financing project preparation and technical assistance [4]. Multilateral and bilateral DFIs often supply mezzanine or senior tranches on near-commercial terms, structuring transactions and enforcing safeguards. Institutional investors and banks provide senior debt or equity once the risk profile aligns with their fiduciary constraints.
The organising logic is to use scarce concessional capital where it is most catalytic, minimising the subsidy while maximising the probability that private finance arrives at scale. The policy rationale is anchored in Article 2.1c of the Paris Agreement, which calls for making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
Concessional and blended finance are key tools for aligning financial flows with policy commitments, especially in regions or sectors where traditional market finance is hesitant to lead the way. These mechanisms unlock critical investments, driving progress where it's needed most.
Concessional finance is a powerful tool that mitigates risk where traditional investors are reluctant to step in. By using subordination, junior equity or subordinated debt tranches absorb first losses, this structure protects senior investors and lowers their required returns. As a result, projects that would otherwise be unbankable can shift from negative to positive net present value, especially in high-risk developing markets [5].
Junior tranches, often funded by donors or climate funds, are designed to cover specific risks identified during due diligence, ensuring concessional capital is deployed where it’s most catalytic.
Climate Investor One provides a prominent example. This blended-finance platform accelerates renewable energy in emerging markets by creating a Development Fund backed entirely by concessional capital to fund pre-construction activities. Once these risks are reduced, DFIs and institutional investors enter through the Construction Equity Fund (CEF). This multi-tiered approach allows for capital recycling after operations begin, shortening timelines and reducing costs while absorbing early-stage risk.
The CEF is structured with three tiers of financing: first loss, subordinated, and senior equity, with USD 864 million from 18 investors. Public investors, including the Netherlands Ministry of Foreign Affairs, European Commission, and GCF, dominate the first-loss tier. DFIs and private investors take on the subordinated and senior tranches, demonstrating how limited concessional capital can mobilise much larger private investments [6].
Guarantees are another key element of concessional finance. Instruments like political risk insurance, credit guarantees, and liquidity backstops help private investors manage risks in volatile markets. The Multilateral Investment Guarantee Agency (MIGA) issued USD 12.3 billion in guarantees to 77 projects in 40 countries in its first year, highlighting the growing role of guarantees in mobilising climate investments at scale [7].
Concessionality also comes in the form of interest rate discounts, maturity extensions, grace periods, or repayment subordination. The level of concessionality is market-specific, with deeper support often necessary in immature markets. OECD guidelines emphasize that concessional features should be justified by additionality and calibrated to avoid market distortion [8].
Finally, technical assistance is essential in turning promising ideas into bankable projects. It funds feasibility studies, environmental assessments, financial structuring, and capacity building, addressing key bottlenecks in climate finance and helping projects scale by standardizing processes and building local capabilities.
Mitigation remains the dominant use case for blended finance by volume.
Utility-scale renewables, grid upgrades, and storage in emerging markets are proven contexts where first-loss equity or concessional development funding unlocks commercial construction capital. In these settings, blended structures address early-stage development risk, reduce financing costs and enable scale. (See Article 3.1 for more detail on mitigation)
By contrast, climate adaptation has historically struggled to attract private investment, since many adaptation benefits (e.g. flood protection, climate-resilient agriculture) are public or hard to monetise. Nevertheless, blended finance is increasingly being used to spur investment in resilience. (See Article 3.2 for more information on adaptation)
The Green Climate Fund (GCF) demonstrates how concessional resources drive real-economy outcomes across mitigation and adaptation. GCF invests in eight key areas, from reducing emissions in energy, transport, and land-use to boosting resilience in infrastructure, ecosystems, and livelihoods. This outcome-based approach ties financial instruments to risk and cash flows, mobilising private investment. Recent GCF reports highlight a continued balance between mitigation and adaptation, with a significant share of adaptation funding directed to the least developed countries, small island states, and African nations - regions where concessional instruments are crucial [9].
Importantly, concessional capital is not restricted to any one technology or sector.
It is a tool to address risk-return gaps. In mitigation, it is commonly used where tariff and offtake risks are unresolved, grid integration is complex, or local capital markets are shallow. In adaptation, it is concentrated where beneficiaries are public or diffuse and where impact monetisation is indirect. The choice of instrument follows from those realities, with first-loss equity and grants for technical assistance typically tailored to venture-like adaptation models, and guarantees and subordinated debt for mitigation projects with more identifiable cash flows.
Check out our exclusive case study on artisanal mining and blended finance here.
The global climate finance gap is staggering. Despite record growth, the flow of climate finance remains far below the levels needed to meet Paris-aligned pathways. Multilateral Development Banks (MDBs) reached USD 137 billion in 2024, but annual investment needs are estimated at USD 8 trillion, rising to USD 10 trillion post-2030 [10].
The problem is not only scale, but distribution. Less than 3% of global climate finance reaches the least developed countries, and only 14% goes to emerging markets (excluding China). These regions are where risk is highest and where concessional capital is most needed to unlock private investment.
Blended finance, however, holds the key to systemic change. By de-risking investments in new sectors or high-risk markets, it shifts perceptions and paves the way for pure commercial finance. These interventions are catalytic, helping projects become self-sustaining over time.
While phasing out concessional support can be difficult in high-risk sectors like climate adaptation in conflict-affected countries, it remains essential for ensuring projects like resilient infrastructure in least developed nations are financed. Concessional capital helps align financial flows with the climate goals of the Paris Agreement, turning ambition into action.
As blended finance scales, the focus must shift from how much capital is mobilised to what that capital actually achieves. Without clear, credible ways to measure sustainability outcomes, concessional finance risks becoming a financing solution in search of impact. The next article looks at the sustainability metrics that matter most and why getting measurement right is essential to turning finance into lasting climate and development impacts.
The views expressed are for informational purposes only and do not constitute financial, legal, or investment advice.
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