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Technical assistance (TA) grant

TA can be used to bring additional quality and higher standards to the projects. It can also be used to fund studies such as ESIAs and climate vulnerability and risk assessments, although these cannot be claimed as bringing additionality if these studies are mandatory under the regulations of partner countries or of the financial institution.

In the case of intermediated finance, when the lead FI relies on local financial partners, TA can be used to assess gaps in the local partners environmental and social management systems against international standards, strengthen capacities and promote learning by doing. This can include the strengthening of environmental and social management policies and processes of intermediary financial institutions (such as those involved in MSMEs financing or co-investors in infrastructure projects).

Investment grant

Investment grants can cover or reinforce specific components of a project, beyond basic compliance of regulations. For example, an EU grant can be used to implement sustainability features of a road (cycling lanes, biodiversity corridors) or to climate-proof certain infrastructure components (such as nature-based solutions for flood risk management in case of increased flood risk under climate change projections).

Interest rate subsidy

In the case of interest rate subsidy, the same practice as for investments grants will apply. It may be used to make the adoption of clean technologies or renewable energy more attractive, especially when more polluting technologies and energy sources are subsidised.

Risk sharing instruments (funded guarantees & equity)

In the case of risk sharing instruments, the EU contribution may be provided to cover sector-specific risks. Another option is to use the EU contribution as seed capital to create specific financial vehicles with development purposes. As these structures are meant to crowd-in additional co-investors, attention to the Environmental and Social Management Systems (ESMS) in place in the LFI is important, as well as within the potential financial vehicles which will be created, and within the additional partners that will join the initiative. As an example, the EU has invested risk capital (junior equity) in several structured funds based in Europe that aim to support the development of local MSMEs or renewable energy and clean technology projects and attracting private sector financing for such investments in partner countries. These funds in turn can offer different types of financial products, depending on market needs. In addition to the financial services needed, these funds also provide diverse sustainability and development features. In particular, they have put in place a sustainability framework at governance and operational level, policies, a risk management system integrating environmental and social (E&S) international standards and use their TA facilities to promote these practices among the beneficiaries or support the greening of the financial system in the partner country. Some of them also offer financial products in local currencies, to best support MSMEs. These funds are aligned with the European sustainable finance strategy, they comply with the SFDR (Sustainable Finance Disclosure Regulation) and bench- mark their activity against the European taxonomy and other international standards and practice (UN Principles for Responsible Investment). Sustainability standards are ensured by the governance model of the funds, with representatives of IFIs and trustee of the EU sitting on the board of directors and the investment committee. 

EFSD+ unfunded (or budgetary) guarantees

The above considerations on blending also apply for budgetary guarantees, and the importance of paying attention to the Environmental and Social Management Systems in place in the lead FI is underlined by the expected leverage effect. Indeed, the target is to crowd-in external private capital in an ambitious proportion from 1 to 10, which implies that a large part of the impact will derive from external funding. It is thus crucial that the LFIs not only apply environmental and social standards on their own investment, but also have specific provisions concerning intermediated finance, which rule their relationship with partner co-investors.