Zurich, January 5, 2023 - In late December 2022 a climate investment vehicle managed by responsAbility received a USD 15m investment in junior shares from BMWK - The German Federal Ministry for Economic Affairs and Climate Action, to finance projects that reduce carbon emissions in developing economies. With this investment, BMWK increased its commitment to the vehicle to roughly USD 95m.
Junior shares represent the ‘first loss tranche’ in blended finance structures such as this one; any losses arising out of impaired investments are deducted first from this tranche, effectively reducing the risk of investment for other investors. A higher junior-tranche volume allows a blended-finance vehicle like this one to grow over time by increasing allowable volumes invested in other share classes, and makes such a structure more attractive to risk-averse private investors. Mobilizing private capital to finance climate change mitigation is essential for reaching global net zero targets by 2050.
The investment will be used to tackle the shortage of financing for low-carbon projects in developing economies, which otherwise would be difficult to finance because of their scale or the inherent risks associated with the projects. The strategy financed with this investment was set up as a public-private partnership in 2009, when climate change was still an emerging topic, and has been managed by responsAbility since 2014. It focuses on financing energy efficiency and renewable energy projects for Small and Mid-Sizes Enterprises (SMEs) and private households, primarily in cooperation with local financial institutions, but also directly. Through its Technical Assistance Facility, the structure provides know-how and project support for partner institutions to develop and scale their green lending portfolios.
Although USD 15m may not seem like a large amount, junior capital is difficult to raise, and is a critical element of blended finance structures. The additional investment by BMWK demonstrates the relevance of such vehicles in providing climate solutions in developing economies.
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