According to Engineering News, Climate Fund Managers (CFM) has announced the final close of its Climate Investor Two (CI2) facility at nearly $1.07 billion, surpassing its initial $1-billion target and becoming the largest climate adaptation infrastructure fund focused on emerging markets globally. The fund secured new commitments of $190-million plus a €205-million European Fund for Sustainable Development Plus guarantee from the EU, blending public and private capital to invest in water, waste and oceans infrastructure across Africa, Asia and Latin America. Since its first close in 2021, CI2 has committed $339-million to 25 climate adaptation and mitigation projects including water supply in Vietnam and Philippines, desalination in Thailand and Kenya, waste-to-energy platforms in Sierra Leone, South Africa and Thailand, and the world’s largest debt-for-nature swap in Ecuador. The fund aims to provide safe drinking water and improved sanitation to 16.5-million beneficiaries and protect or restore 2.2-million hectares of ecosystems by the end of its life. This milestone represents a significant step in addressing the massive adaptation finance gap in developing countries.
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The Stark Reality of Adaptation Underfunding
The UN’s estimate of a $194-billion to $366-billion annual adaptation finance gap in developing countries reveals a critical market failure that traditional finance has struggled to address. While climate mitigation receives the lion’s share of attention and capital, adaptation remains the neglected sibling despite being equally crucial for vulnerable communities. Climate change adaptation involves preparing for and adjusting to current and future climate impacts, which is particularly urgent in emerging markets where infrastructure is often least resilient. The success of CI2 demonstrates that well-structured financial vehicles can begin to bridge this gap, but the scale needed requires replication across dozens of similar funds and mechanisms.
Blended Finance as the Key Enabler
CFM’s achievement highlights how blended finance structures can unlock institutional capital for traditionally high-risk markets. By combining public and private capital with strategic risk layering, these models address the fundamental mismatch between investor risk-return expectations and the realities of infrastructure development in developing countries. The development fund component provides crucial concessional capital for early-stage project development, effectively de-risking investments to make them palatable for private investors in the construction equity fund. This tiered approach represents a sophisticated evolution beyond simple grant funding or traditional project finance, creating a pipeline of bankable projects where none previously existed.
The Bridge-to-Bond Mechanism Revolution
The most innovative aspect of CI2 is the pioneering Bridge-to-Bond mechanism facilitated by Sanlam Investments. This structure represents a potential game-changer for climate infrastructure financing by creating a pathway for fixed income markets to participate. The bridge loan from Sanlam Alternative Investments, backed by the European Commission guarantee, is designed to be refinanced through climate bonds within a few years. This approach could dramatically expand the investor base for climate adaptation beyond the usual development finance institutions and impact investors to include mainstream institutional bond investors who manage trillions in fixed income assets. If successful, this model could be replicated across multiple funds and geographies, fundamentally changing how climate infrastructure is financed.
Execution Risks and Implementation Hurdles
Despite the impressive fundraising achievement, CI2 faces significant implementation challenges that will determine its ultimate success. Deploying $1 billion across multiple geographies with varying climate classifications and regulatory environments requires sophisticated local expertise and robust risk management. The fund’s focus on water, waste and oceans infrastructure involves complex projects with long development timelines, environmental permitting challenges, and potential community opposition. Additionally, the blended finance structure itself introduces coordination complexity between public and private investors with potentially conflicting priorities and reporting requirements. Successful execution will require balancing financial returns with measurable climate and social impacts across diverse cultural and political contexts.
Broader Market Implications and Future Outlook
CI2’s success signals a maturing market for climate adaptation investments and could catalyze similar funds from other asset managers. The achievement of ‘Pillar Assessed Entity’ status with the European Commission—previously held almost exclusively by European development finance institutions—demonstrates that private managers can meet the rigorous governance standards required for direct EU guarantee management. This precedent could encourage other specialized investment managers to pursue similar recognition, potentially unlocking billions in additional public capital for private climate funds. As climate impacts intensify globally, the demand for resilient infrastructure will only grow, making adaptation finance an increasingly attractive asset class for institutional investors seeking both impact and diversification benefits.
