As companies increasingly seek to decarbonise in light of evolving regulatory and stakeholder pressure, solutions such as carbon credits are gaining traction, bringing with them new and developing risks. Carbon credits are seen as a crucial part of the world's plan to limit global warming however the voluntary market (VCM) is unregulated and complex, exposing clients to challenging loss scenarios. The voluntary carbon market was estimated to be worth $2bn in 2022 and is expected to scale up to $40bn by 2030.
There are a range of risks associated with carbon projects and the carbon markets. From a buyer’s perspective, non-delivery represents a key concern as providers may be unable to deliver the reductions purchased, leaving businesses needing to find another solution at short notice, and higher cost, to meet their environmental commitments. For sellers of carbon credits, protecting the underlying means of carbon sequestration from natural catastrophes or weather events can be a significant concern. Insurance can help mitigate against such risks including non-delivery, reversal events or the risk of credit invalidation.
Currently the purchase of carbon credits is largely voluntary, however the pressure on businesses to find ways to reduce their carbon footprint is growing, and it is likely that for certain sectors this will be mandated in the near future as a way of reducing their environmental footprint.
Gallagher Specialty’s team of climate risk professionals will support clients with advice on how to manage this emerging risk and will develop tailored insurance solutions based on individual exposures. The team will be led by James Bosley, Head of Climate Strategy, Carbon Insurance & Parametric Solutions for Gallagher Specialty.
James said: “The size and scale of the carbon market is expected to increase significantly over the coming years and is being driven by a growing desire by firms to address their role in impacting the environment, and increasingly widespread reporting requirements.
“Since last year UK financial and listed firms have been required to report their strategies for transitioning to net zero and the EU’s Corporate Sustainability Reporting Directive will require companies to disclose their transition plans in the coming year. These are just two examples with many more requirements being implemented elsewhere globally - meaning that firms need to be transparent about how they will reach climate targets, and the purchase of carbon credits will play a crucial role in many businesses’ strategies.
“Carbon insurance provides firms with the ability to de-risk carbon credit transactions, including protecting against the risk of non-delivery, damage to the underlying asset, reversal of the carbon capture or the invalidation of the credit, enabling them to invest with confidence and deliver on their climate aspirations. Our team can advise clients on what insurance cover is available and by using insurance, clients will have an extra layer of security when purchasing or selling carbon credits.”
