As the world grapples with the increasing impacts of climate change, businesses everywhere are looking to carbon projects for an effective way of offsetting their emissions. As such, the voluntary carbon market is exploding, it’s value projected to reach a colossal $250 billion by 2030. But investing in carbon projects isn’t without risk. That’s where carbon insurance comes in.
Carbon insurance is designed to provide forward-thinking businesses with a risk-transfer mechanism. By providing businesses with the means to secure their investments, carbon insurance encourages participation in green sustainability initiatives while giving lenders the confidence to help make carbon projects a reality.
So as a carbon insurance broker, what do you need to know? This essential guide covers what carbon insurance is, core benefits and why carbon insurance is effective in carbon risk management—to help you navigate this fast-evolving landscape.
Why is carbon insurance necessary?
How carbon markets work
In the bid for net zero, the business world has a social responsibility to reduce its carbon emissions. But that’s not always possible—at least, not in the short term. For example, it can take time to pivot to more sustainable energy sources, when the world is calling for action right now.
Carbon markets have arisen as a method for businesses to answer the call for urgent action. By purchasing carbon credits in high-value projects, from reforestation to developing more sustainable fuels, businesses can do good for the planet while meeting growing regulatory pressure to offset emissions fast. Dealing in carbon markets is an effective part of any carbon offsetting strategy, and so is being actioned by businesses around the world.
Why carbon insurance is vital
While carbon markets are effective, they are also fraught with significant risk. That’s because carbon credits are an intangible investment tied to a project in a physical location, leaving them vulnerable to disruption due to natural catastrophes like flooding and earthquakes, financial fraud, political risks and so on. This can leave investors out of pocket by invalidating credits purchased, and so can hold up deals or stop them full stop. Fears have been borne out in high-profile failures such as the Rimba Raya Biodiversity Reserve Project in Indonesia, where the government issued an export ban on carbon credits back in 2022.
What is carbon insurance and who needs it?
With cases like Rimba Raya breeding distrust in the market and deterring future participation, businesses need a way of de-risking their investments in carbon projects. Carbon insurance provides the peace of mind the voluntary carbon market needs.
The best carbon insurance products will safeguard against the risks associated with the carbon market, providing investors will invaluable protection and facilitating the growth of high-value projects backed by science. By helping businesses to understand their value, the insurance industry can play a pivotal role in driving the climate transition, enabling capital to flow into the market.
Businesses that would benefit from carbon insurance include:
- Purchasers of nature-based carbon credits on a forward basis, where carbon insurance mitigates the risks of non-delivery
- Companies who own or have retired carbon credits, where the product safeguards against financial and management risks in the event of cancellation or invalidation
- Lenders to carbon projects
Why carbon insurance is vital
Carbon markets are still an emerging space, with teething issues bound to arise. But businesses can’t afford to lose their investments for nothing. As they become more involved in carbon markets, insurance should be integral to the planning process.
Here are five ways businesses stand to benefit from carbon insurance.
Enabling sustainable initiatives
Investing in carbon projects can take up a significant portion of resources, and the threat of credits not being delivered or being invalidated means it’s a decision that can’t be taken lightly.
Carbon insurance products have been specifically developed to fill this protection gap. With a comprehensive carbon policy, businesses are free to engage in carbon markets with confidence, offset their carbon emissions and help build a more sustainable future for everyone.
Strategic risk management
Taking out a carbon insurance policy means businesses can manage environmental risks proactively, to reduce risk and protect themselves no matter what’s round the corner.
By safeguarding against the risk of financial loss associated with the non-delivery of credits—be it due to the project falling foul of regulations, political intervention, financial mismanagement and so on—businesses can become more resilient and protect their bottom line.
Building business resilience
As environmental regulations become more stringent and public scrutiny on carbon emissions intensifies, businesses are facing increasing pressure to demonstrate environmental responsibility. Purchasing carbon credits is an effective way for businesses to comply with changing regulations, yet the risks involved can invalidate carbon credits and leave businesses worse off.
The right carbon insurance policy will help businesses comply with regulatory requirements by protecting their investments. And by showing they are responsible corporate citizens, they can strengthen their reputations.
Competitive advantage
Investing in green initiatives and proactively managing the risks involved not only does good for the planet, but it can also create a competitive advantage in the marketplace.
By showcasing your eco-values, that you take carbon offsetting seriously and your ability to comply with changing regulations, you’ll become more attractive to environmentally-conscious consumers, investors and stakeholders, helping you get ahead of the pack.
Long-term sustainability
Carbon insurance is not just about immediate risk mitigation; it helps to secure long-term sustainability and resilience.
By integrating carbon insurance into their risk mitigation and sustainability strategies, businesses can futureproof their operations against evolving environmental challenges and carbon insurance requirements.
Navigating the carbon market
In the carbon market the majority of deals go uninsured. But with climate risk rapidly climbing the agenda for governments, regulators and businesses worldwide, it’s time to close the protection gap and help drive the sustainability projects the world needs to thrive.
Carbon markets are still an emerging space. But the insurance products exist right now to support businesses in their projects, whether by lending crucial cover for financial loss or the expertise to pick the right project to invest in.
CFC conducted a global survey to investigate the current state of the carbon market. In our report you’ll learn:
- How the carbon market works
- Opportunities and risks you need to be aware of
- How insurance can help drive the carbon transition
Download it here.
