At the Mitigation Action Facility, concessional loans are increasingly being used as part of a broader blended finance approach to support climate action and accelerate implementation of Nationally Determined Contributions (NDCs).
This news piece is the second in a series exploring the financial mechanisms used across the Mitigation Action Facility portfolio. Following an earlier focus on grants, concessional loans represent another important instrument helping to bridge financing gaps, de-risk investments, and support the transition towards low-emission development pathways.
Concessional loans in the portfolio
Concessional loans represent 15% of the Mitigation Action Facility’s Financial Cooperation (FC) portfolio. Combined with technical assistance and co-financing from public and private actors, the broader project portfolio involving concessional loans amounts to EUR 174.8 million in support.
While grants remain an important tool, the Facility is increasingly combining concessional finance with technical cooperation and private co-investment to create more sustainable, market-oriented financing structures. This reflects a broader shift within climate finance towards blended finance approaches that can mobilise larger volumes of capital while strengthening long-term market viability. Energy and industry projects account for the largest share of concessional loan support, while Agriculture, Forestry, and Other Land Use (AFOLU) projects are also playing a growing role (see Figure 1).
Tailored finance for diverse climate actors
The Mitigation Action Facility concessional loans are being tailored to the needs of different beneficiary groups, including SMEs, smallholder farmers, households, entrepreneurs, and large industrial companies (see Figure 2).
For SMEs and farmers, barriers often include limited access to formal financial services, high collateral requirements, low financial literacy, and lengthy bank approval processes (see Figure 3). Commercial lenders frequently regard these groups as high-risk clients.
To address these constraints, the Mitigation Action Facility works with specialised development finance institutions such as Thailand’s Bank for Agriculture and Agricultural Cooperatives (BAAC) and the Small Industries Development Bank of India (SIDBI), which already have trusted relationships with target groups.
Larger companies face a different set of challenges. While often financially viable, many industrial projects involve emerging technologies with uncertain commercial returns. Banks may lack the technical expertise to assess risks associated with green steel, low-carbon manufacturing, or novel energy systems, resulting in limited appetite for project finance. In these cases, Mitigation Action Facility concessional loans help de-risk investments and encourage co-financing from commercial institutions (see Figure 3).
Concessional loans in action: Strengthening rice sustainable value chains in Thailand
The Thailand – Rice project combined concessional loans with technical assistance to provide farmers with training, certification systems, and financing to support the transition towards climate-resilient and lower-emission rice cultivation.
Lessons learnt: Concessional finance works best within broader ecosystems
Experience across the portfolio shows that concessional loans can play a catalytic role, but their effectiveness depends heavily on project design, timing, and local partnerships. Some lessons include:
- Delays in securing concessional finance can reduce impact, particularly when market conditions shift or alternative financing options emerge. In some cases, loan approval processes can take more than a year, causing projects to miss critical investment windows.
- Working with institutions that already understand local target groups and value chains can facilitate implementation and improve outreach.
- Complex disbursement structures involving multiple intermediaries can increase administrative burdens, create delays, and raise transaction costs.
- Expanding partnerships beyond traditional banks to include non-banking financial institutions, cooperatives, traders, and private companies embedded in local supply chains can help improve the efficiency and effectiveness of concessional finance delivery.
Looking ahead
Rather than acting as standalone subsidies, concessional loans are increasingly being integrated into blended finance structures that combine public and private capital, technical assistance, and policy support.
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