Risk to Reward 2025

Most investors surveyed take a senior equity position within the capital stack. This leaves a critical financing gap for riskier, early-stage or innovative projects that require patient, flexible capital willing to absorb higher risks and longer timelines. In this context, catalytic equity from multilateral climate funds – such as the Green Climate Fund (GCF), donor countries and philanthropic capital – is essential to bridge that gap. These actors can provide grants, guarantees, first-loss or subordinated equity to de-risk investments for senior equity investors. This approach insulates commercial investors from initial losses, thereby increasing their willingness to commit capital to projects that would otherwise struggle to attract commercial capital, such as climate adaptation projects. Concessional and philanthropic anchor investors can also send market signals that instil confidence in other investors, such as covering the portion of risk that MDBs are unable to cover due to shareholders’ restrictions. Their involvement helps build a more robust pipeline of investable projects, supports market development and fosters innovation ultimately unlocking larger volumes of private capital and accelerating climate action in EMDEs. For example, the Acumen Resilient Agriculture Fund demonstrates how concessional and philanthropic capital can serve as catalytic equity to de-risk private investment and mobilize additional funding in high-risk climate adaptation sectors (see Box 15). MDBs and DFIs are increasingly being called upon to provide catalytic equity and to focus on higher risk countries instead of allocating resources towards projects that are already attracting private capital. The International Finance Corporation’s Frontier Opportunities Fund is designed to fill this gap by providing first-loss, concessional or risk- tolerant equity to climate-related projects in low- and lower-middle-income countries.78 By offering equity rather than just loans or guarantees, the fund complements existing instruments and helps shift the financial structure of climate projects towards more sustainable, blended models.However, examples such as the Frontier Opportunities Fund are uncommon, as MDBs are often limited by their shareholders from taking higher risk to preserve credit ratings. Greater coordination among private investors, MDBs, DFIs and their shareholders is needed to minimize such frictions with capital providers. Nevertheless, within these constraints, MDBs can increase their provision of mezzanine-level catalytic equity, positioned between concessional capital in the junior tranche and private investors in the senior tranche. This layered capital structure helps absorb risk, reduces the risk of crowding-out senior equity providers, improves project bankability and attracts more private investment into EMDE climate projects.We need to be trilingual. We need to speak the public sector and the private sector language and now we need to add another language: the philanthropies language. Mahmoud Mohieldin, United Nations Special Envoy on Financing the 2030 Agenda for Sustainable Development Acumen Resilient Agriculture Fund (ARAF) BOX 15 The Acumen Resilient Agriculture Fund (ARAF) demonstrates how concessional and philanthropic capital can de-risk private investment in climate adaptation for smallholder farmers in Sub- Saharan Africa. With the Green Climate Fund providing $23 million in first-loss equity, the fund reduces downside risk for private investors and sends a market signal encouraging additional investment from development finance institutions and private actors, including the Dutch entrepreneurial development bank (FMO) and private foundations. Supported by a technical assistance facility, ARAF invests in early-stage agribusinesses, improving resilience for over 3 million smallholder farmers. This model shows how using concessional capital as catalytic equity can mobilize private equity in high-risk, high-impact sectors.79 Deploy more catalytic equity from donor countries, vertical climate funds, philanthropic capital and MDBs/DFIs Donor governments MDBs and DFIs Philanthropic/concessional providersSOLUTIONS: SHORT-TERM From Risk to Reward: Unlocking Private Capital for Climate and Growth 40