This briefing note sets out an overview of one type of risk mitigation instrument that has the potential to improve the financial profile of REDD+ investments. It looks at loan guarantees in the specific context of REDD+. Loan guarantees are a well-established instrument for de-risking investment, by using public funds to underwrite part of the potential losses on a loan, or portfolio of loans. Lowering the risk to a financial institution should theoretically allow it to lend more to a sector at lower rates of interest. This lowers the cost of capital for any activity in that sector and in turn, increases the number of activities that are commercially viable given expected returns. By only covering a percentage of the potential risk, the loan guarantee limits ‘moral hazard’ and the selection of poorly designed or uneconomic activities, as commercial banks using this instrument share a portion of the financial risk of a loan.
To find out more about loan guarantees and how they could be implemented to mobilise private sector finance at scale, please download the file below.
|IFF_Loan guarantees_07.pdf||772.05 KB|