Description

First-loss guarantees are a financial mechanism where a public or philanthropic investor agrees to absorb the initial losses in a portfolio of investments, protecting commercial lenders and institutional investors.

Why it matters

Clean fuel projects often face high perceived risks – from new technologies, uncertain policy environments, or unproven business models – which make investors hesitant to commit capital. This is particularly true for early-stage fuels such as green hydrogen or advanced biofuels, where uncertainty around costs and revenues is highest.

By taking the first loss, guarantee providers de-risk investments for private participants, improving the risk-return profile and crowding in private capital that would otherwise stay on the sidelines.

Advantages

First-loss guarantees can play a catalytic role in mobilizing finance for clean fuels by absorbing early losses, giving senior investors confidence and enabling blended capital stacks. This allows larger pools of finance to flow into projects that would not be bankable on commercial terms alone. They are particularly powerful in funds or portfolios, where they diversify risk across multiple projects and technologies and ensure that early setbacks do not undermine investor returns.

• De-risking and mobilizing private capital by absorbing early losses and improving the risk–return profile 
• Enabling portfolio diversification by supporting investment vehicles that spread risk across projects, technologies, and geographies
• Driving scale and innovation by making blended finance structures viable and supporting demonstration of emerging clean fuel technologies

Challenges

First-loss capital depends on scarce public or philanthropic funding and, if poorly structured, can encourage moral hazard or misallocate risk, leaving private investors overprotected and limiting market discipline

Climate Investor One – at a glance:

• Launched: 2015 (by Climate Fund Managers, a partnership between FMO (the Dutch development bank) and Sanlam InfraWorks)
• Scope: Renewable energy in emerging markets (wind, solar, hydro). Mechanism transferable to clean fuels
• Impact: Mobilised >USD 850 million for projects in >15 countries; blended finance structure has enabled multiple large-scale renewable energy plants in markets otherwise underserved
• Mechanism: Blended finance with first-loss capital – provide early-stage and subordinated capital to absorb higher risk, de-risking projects and crowding in private institutional investors

Case study

Climate Investor One (CIO) is a blended finance facility that accelerates clean infrastructure in emerging markets by applying a first-loss approach. Its Development Fund uses concessional capital to cover early-stage project costs, while its Construction Equity Fund provides subordinated capital to absorb higher risks. This structure reassures senior investors and enables blended capital stacks that would otherwise be unviable.

Since launch, CIO has raised over USD 850 million and financed more than 20 renewable energy projects across Asia, Africa, and Latin America, many in countries with limited access to affordable capital. The model shows how first-loss capital can de-risk portfolios and crowd in institutional investment at scale.

A prominent example is the Lake Turkana Wind Power Project in Kenya, one of Africa’s largest wind farms. CIO supplied equity and early-stage financing that helped attract commercial lenders to complete the 310 MW project, now delivering clean electricity to nearly one million homes. This demonstrates how first-loss blended finance can unlock large-scale renewable energy infrastructure in challenging markets.

CIO’s approach could be extended beyond renewables. The same model – using concessional first-loss capital to mobilize commercial finance – could support green hydrogen, sustainable aviation fuel, and advanced biofuels, where high upfront costs and unproven business models still deter private investment.