Insurance broker Howden, carbon finance specialist Respira International and reinsurance risk expert Nephila Capital have announced joint plans to launch insurance products addressing the risk of carbon credit invalidation.
Howden, Respira International and Nephila Capital will launch insurance products to cover the risks associated with purchasing carbon offsetting credits.
As corporate demand for carbon credits continues to rise, insurance products could provide the security needed to increase buyers’ confidence.
Establishing trust in voluntary carbon markets will help accelerate the sector’s growth, mobilising capital for carbon reduction or removal projects.
International insurance broker Howden has partnered with Respira International and Nephila Capital, an investment management firm specialising in reinsurance risk, to launch insurance products covering voluntary carbon credits. The project aims to boost buyers’ confidence in the market and mobilise investment towards high-quality carbon reduction and removal projects.
What will the insurance products offer?
Respira co-founder and CEO, Ana Haurie, has explained to SG Voice that the products being developed will provide coverage for the reduction or invalidation of carbon credits caused by fraud, neglect or other forms of wrongdoing.
When projects are impacted by these factors, insured purchasers will receive a monetary pay-out covering the value of their investment.
Howden has already developed a similar product for energy providers operating within the mandatory United States carbon market, differentiated by its pay-outs taking the form of offset replacements, but will now be able to accommodate the voluntary market too.
The insurance will be wrapped around credits currently owned by Respira under long-term, high-volume contracts. The provision of such comfort to potential buyers adds credibility, and therefore value, to Respira’s credits. To date, Respira has invested in 11 projects, which are aggregated into diverse portfolios that credit purchasers can buy into on a multi-year basis with certainty over ongoing supply.
Current projects include forest carbon, blue carbon, soil carbon, afforestation and energy efficiency schemes in Africa, Asia and South America.
Each project is verified by reputable bodies, such as Verra and Gold Standard, with Haurie acknowledging the importance of securing the utmost trust when mobilising private capital in support of projects in emerging economies.
Who is carbon credit insurance for?
The voluntary carbon market can be complex and intimidating to new buyers, who may be reluctant to invest in products subject to so many risks.
Despite its current risk, the voluntary carbon market is expected to be worth around $50 billion by 2030, having already seen rapid growth in the early 2020s.
Carbon credits are becoming part of everyday strategy for an increasing number of businesses, as the volume of companies establishing specific net zero targets continues to grow. This trend is being led by some of the world’s largest companies, with 76% of Fortune 100 and 60% of Fortune 500 firms having already set climate goals.
One of the challenges for the voluntary carbon market is the reputational risk associated with low-quality credits. Corporations are unlikely to invest in carbon offsets that could damage their reputation or that fail to conform to regulation. They will not buy offsets without substantial assurance that they will be protected from risk.
Howden’s head of climate risk and resilience, Charlie Langdale, explains that “buyers need to be able to trust that the carbon credits they are buying are removing the promised volume of carbon from the atmosphere. The added layer of security provided by this product, combined with independent verification from established, reputable bodies will help buyers to purchase with confidence and should drive more buyers towards high-quality projects like those in Respira’s portfolio.”
That being the case, insurance products could be the key to enabling the projected growth of the voluntary carbon market.
How big an impact will carbon credit insurance have?
Haurie was clearly excited about the potential for growth when describing Respira’s partnership with Howden as a “really big deal in the marketplace”. She explained how insurance could underpin buyers’ confidence and support the mobilisation of capital towards carbon reduction and removal projects with multiple environmental and social benefits.
It is worth mentioning, however, that offsetting projects come with additional risks that will not be covered by the new insurance products.
Ongoing efforts to develop standards for the integrity of offsetting schemes could result in regulatory changes that cause purchased credits to become invalid, while natural factors such as forest fires, disease or pest infestation can wipe out reserves.
Haurie suggests that insuring against such risks may be more appropriate for project developers themselves, but acknowledges that the more risks can be covered, the better.
Howden is reportedly developing a full suite of products that would serve the voluntary carbon market, details of which have not yet been disclosed.
The trio claim this approach to be the world’s first carbon insurance offering, but there are many options being explored by the market. UK start-up Kita, for example, secured £350,000 in a pre-seed funding round closed in December 2021 to create insurance around additional carbon credit risks. Its focus is on carbon removal and credit delivery, using parametric instruments that offer immediate pay-outs when predefined events such as extreme weather events occur.
