Co-authored by David Albertani, CEO, Catalytic Finance Foundation, and Cristina Clopatofsky, Programme Manager Catalytic Cities, Catalytic Finance Foundation

With climate funding under pressure, everyone is talking about guarantees. But are they truly the game changer blended finance needs, or just the latest buzzword?

Concessional guarantees are emerging as one of the most powerful tools to bridge the climate finance gap effectively, mobilizing up to six times[1] more private capital than loans or equity. Acting like insurance, they protect financiers from specific risks, showing that “risky” projects in emerging markets often are not that risky after all.

As concessional funders seek greater leverage amid shrinking development budgets, guarantees now account for roughly a third of all blended finance transactions[2]. Yet, despite the growing trend, few climate-focused guarantees are reaching the ground. Why?

Since 2023, the Catalytic Finance Foundation, with support from Bloomberg Philanthropies, has been developing a credit de-risking solution to accelerate the deployment of electric buses across Latin America, starting with over 1,700 e-buses in Brazil. The initiative, part of the Catalytic Cities program, has surfaced four key lessons for designing blended finance guarantees that deliver real impact.  

1. Guarantees should be temporary. 

Donor-funded guarantees should be used to unlock private capital, reducing the gap between real and perceived risks in emerging markets and incentivising financial market development.

Contrary to perception, credit risks in emerging markets are not dramatically higher than in developed markets – the World Bank finds default rates only marginally higher[3]. Used temporarily, guarantees can be proof-of-concept tools: de-risking early-stage investments in unfamiliar sectors or regions and demonstrating a viable business case.

Once the risk profile is validated, private financiers are more likely to participate in future transactions without further concessional support, paving the way for long-term market development and private capital mobilization.

2. Guarantees work only when financiers want them.  

Unlike loans or equity, guarantees dont flow directly to projects, they de-risk someone else’s capital. That means success depends on strong demand from financiers.

This demand isn’t obvious. Development banks often deploy guarantees to protect their own portfolios. However, independent guarantee facilities, must respond to clear market gaps. That means rigorous consultation and risk assessments, talking with banks, investors and borrowers to ensure the guarantee is relevant, usable, and additional.

3. Guarantees cannot alone make projects commercially viable.

While guarantees are sometimes perceived as a silver bullet to increase project bankability in emerging markets, they cannot address drivers impacting projects’ business models nor wider fundamental concerns, such as KYC and regulatory constraints. Technical assistance and capacity building are needed in combination with guarantees to tackle wider measures. This narrows the eligibility of projects, focusing on those that financiers would consider bankable with some additional credit reassurance offered by the guarantee mechanism.

4. Structure is everything.

Getting the structure right means navigating three main challenges: 

• Cost - Like insurance, guarantees have fees –  upfront, when triggered, and ongoing. If poorly structured, these costs can trickle down to borrowers, raising instead of lowering the cost of capital. Properly designed, concessional guarantees should reduce the cost of capital to reflect their subsidy element.

• Coverage - The right level of risk coverage is a careful balancing act. While some facilities offer up to 100% coverage, this can crowd out private risk-taking and reduce additionality. Investors need to have “skin in the game” but coverage must still be attractive enough to bring them into deals they would otherwise steer clear of because of credit risk concerns. A lower coverage would also offer higher leverage ratios to concessional finance providers.  Striking this balance often requires iteration and market testing, with the coverage ratio also influencing the facility’s leverage and impact.

• Structure and Regulation: Legal and regulatory frameworks are crucial for guarantee mechanisms. In some markets, setting up special-purpose vehicles (SPVs) can be costly or even prohibited. Navigating these hurdles requires local expertise and careful design to ensure compliance, efficiency, and credibility.

Putting it into practice: Brazil’s E-bus De-risking Fund

These lessons shaped the Brazil De-risking E-bus Fund, launched with partners including Bloomberg Philanthropies, BTG Pactual, the Mitigation Action Facility, WRI Brasil, and C40 Cities.

The Fund uses a first-loss tranche to absorb risk and demonstrate the bankability of electric bus business models. It was designed in close consultation with Latin American financiers, and targets projects that meet strong readiness criteria but need additional de-risking to access better finance terms. Complementary technical assistance led by WRI Brasil will strengthen the enabling environment and project pipeline.

Catalytic’s goal is to scale this model to across other countries and sectors, potentially extending into other areas of e-mobility and clean infrastructure. A broader, more diverse portfolio can further boost investor confidence and spread risk, creating a virtuous cycle of private capital mobilization.

Getting guarantees right

The buzz around guarantees is justified but so are the barriers. Market-driven guarantees can significantly accelerate climate finance in emerging markets, giving higher leverage to concessional funders and enabling emission-reducing projects

However, they must be targeted and strategically designed to close gaps in the market. In some cases, simpler blended finance mechanisms may deliver similar outcomes with less complexity.

Getting guarantees right is difficult, but when it works, the payoff is transformative: cleaner buses on city streets, stronger local markets and a new model for climate finance that scales.

[1]Systemiq Earth (2022) 'Guarantees in climate finance for emerging markets'. Available at: https://www.systemiq.earth/guarantees-climate-emerging-markets/  (Accessed: 16 October, 2025)

[2] Convergence (May, 2025). State of Blended Finance Report. https://www.convergence.finance/resource/state-of-blended-finance-2025/view (Accessed: 15 October, 2025)

[3] Symbiotics Group (October, 2024). Misperception of Risk in Emerging Markets. Symbiotics_Misperception-of-Risk-in-Emerging-Markets_2024-1.pdf (Accessed: 16 October 2025)