Innovative finance – How securitization tools can mobilize private capital for climate finance

Building the legal and financial architecture necessary for a new, innovative financing mechanism dedicated to climate finance.

A new capital markets issuer made its debut on the London Stock Exchange this month: The Climate Investment Funds (CIF) Capital Markets Mechanism or CCMM issued its USD500 million inaugural bond on January 22, 2025, which was six-times oversubscribed. CCMM is the first pure play climate issuer and the first multilateral climate fund to access the capital markets. This is the culmination of an 8-year journey from when the Clean Technology Fund or CTF, one of the two funds within CIF and a key multilateral sources of climate finance, explored how to operate in a more financially efficient manner.

Since 2008, CTF has financed innovative technologies and clean energy projects, delivering emission reductions of 39.3 Mt CO2 annually. CTF works through its partner multilateral development banks (MDBs), including the World Bank, the International Finance Corporation, the African Development Bank, the Asian Development Bank, the European Development Bank and the Inter-American Development Bank.

However, even as the demand for CTF financing increases, CTF faces scarcity of capital resources. As of today, almost all of CTF’s total USD6.3 billion of donor contributions has been committed to clean energy projects through long-dated, multilateral development banks acting as CTF’s implement entities.

CTF therefore needed to mobilize alternative sources of capital using market-based financing structures to continue delivering on its mission and objectives.

CTF’s asset base is made up largely of reliable reflows from long-dated loans in middle-income countries, which are executed by MDBs in their capacity as CTF’s implementing entities. Accessing the capital markets to bring forward these reflows is the most straightforward way to help mobilize additional resources for CTF.  Private sector financiers regularly apply securitization principles to raise additional financing in similar situations – why not CTF?

Tools applied in traditional securitization markets, however, are not easily adaptable to CTF’s unique facts and circumstances. Two challenges are worth noting here.

First, CTF is a financial intermediary fund housed in the World Bank, with the World Bank acting as its Trustee and providing host services to CTF Secretariat. Under these organizing principles, CTF is a fund established under international law which lacks the legal personality necessary to access the capital markets or issue bonds itself.  

Second, CTF’s portfolio consists of loans made through its MDB partners based on their respective policies and procedures. These loans thus lack governing law provisions and other standard terms necessary for a market-based structured finance transaction. Although MDBs have similar policies and procedures, there are still a multitude of differences. Ultimately, the portfolio of loans underpinning CCMM were in a form that are non-market standard, diverse, non-homogenous and consequently not easy to securitize.

Innovative legal structuring was essential to overcome these challenges and adapt traditional securitization principles and technologies to suit CTF’s profile.

• A first foundational step in legal structuring was introducing CCMM as a new, separate, legal entity that would be responsible solely for issuing bonds and accessing the capital markets on behalf of CTF.
• A contractual relationship between CCMM and  CTF’s loan portfolio became the second foundational backbone to pass loan reflows from CTF to CCMM and bond issuance proceeds from CCMM to CTF (see figure). An assignment, sale, or other form of legal transfer to CCMM of CTF’s loan portfolio or receivables would not work given CTF loans are made by six different MDBs. 

These legal innovations gave the World Bank, as CCMM’s Treasury Manager, a platform to build the financial framework for a robust, new issuer with prudent financial management policies. Specifically, with the introduction of CCMM, CTF operates on a more financially efficient, solvency-based financial model supported by a 24-month liquidity policy.

Legal and financial innovations in CCMM enables private sector securitization principles to be applied together with prudential MDB financial management. However, this was still a somewhat atypical structure for market participants. For instance, CCMM itself does not have a balance sheet indicating its assets and equity as of its inaugural bond issuance date. Indeed, the economic interests supporting CCMM are held in a combination of special purpose accounts prepared by the World Bank as Trustee for CTF and on the balance sheets of CTF’s respective partner MDBs. Ultimately, the legal arrangements underpinning the structure as a whole, but especially the pass-through, became a critical point of assessment for rating agencies, regulators, and investors alike.

Conclusion

Innovative finance is just one solution in a toolbox of options available to stakeholders looking to diversify, increase, or improve their financing. Each development target requires a tailored solutions and, as seen with CCMM, legal innovation is a fundamental aspect of structuring and developing solutions.