Carbon insurance receives the attention it deserves at COP28
We have been closely following the outcomes of COP28 and now that the dust (sand?) has settled we’ve been able to sift through the many announcements, pledges and promises. One thing that stood out for us was the recognition from many different individuals and organisations of the part that insurance can play in scaling up carbon solutions.
Our entire vision and mission is built on the premise that insurance is an essential financial mechanism within the carbon markets, so it is gratifying to see the industry engaging with the concept more and more. Read on for a full lowdown of the references to the value of carbon insurance across COP28. And please drop us a line if we missed anything!
At the opening of COP28 King Charles III commented on the insurance sector playing “a vital role in incentivising more sustainable approaches and providing an invaluable source of investment to reduce the risks we face.”
At the Digital Innovation Pavilion, Verra, Aon Climate and Context Labs discussed insurance and data quality for scaling the carbon markets. These leaders recognise insurance as a risk mitigation and transfer tool fit for purpose. Insurance will be a requirement to grow the carbon markets to a massive scale and to help accelerate the journey to regulation. Regulation, in turn, should lead to an influx of capital to support carbon projects.
In the announcement from Gold Standard, Verra, ACR, CAR, GCC, and ART about their planned collaboration, one of their goals is jointly pursuing measures to extend the durability of carbon stocks "in particular through innovative insurance mechanisms.”
The Board of the International Organization of Securities Commissions released a consultation report on the VCM. There were a number of references to insurance:
“Insurance companies will be an important stakeholder in the future to promote private investments in VCMs. Insurance companies may help to create trust in these markets by covering risks along the value chain of VCMs, particularly those relating to fraud and negligence as they do in other commodities markets”. In addition, “insurance solutions would need to be bespoke, attending to the different industries and sectors involved in VCMs as well as the different needs of carbon credit buyers.”
“Carbon-crediting programs have been taking steps to manage permanence risks with climate change mitigation projects by establishing mechanisms to compensate reversals and putting in place requirements to lengthen the current assurance of permanence. One carbon crediting program is, for example, aiming for 100 years through a mixture of contractual obligations, long-term monitoring, compensation for any reversals through a buffer mechanism, and potentially insurance.”
CrossBoundary Group released its Carbon Finance Playbook which contains an entire section on insurance in carbon markets. It covers potential risks faced in carbon projects, where to seek out carbon insurance, and when you need a policy for political risk, physical risk, or something else entirely. One quote that stood out to us relates to the fact that perception of risk plays a part: “Risks may be alleviated through a variety of approaches and tools, but critically, both real and perceived risks matter.” As with other comments across COP28, there is also an understanding that insurance is a given across many traditional finance markets and industries but has yet to be universally taken up in the carbon markets: “Insurance is an important risk mitigation tool for large-scale projects in most industries, yet it is underutilised for carbon projects today”.
A recent report by McKinsey also mentions the importance of insurance as part of scaling a gigatonne CDR industry. The report highlights the need for suppliers to have insurance and that by seeking insurance to cover key risks, such as delivery or reversal, they can ‘reinforce market integrity’. Likewise, the report accentuates the opportunity for investors to build relationships with early suppliers, standards, regulators and insurers, to position themselves as a ‘go-to-funder of CDR initiatives’. At Kita, we are delighted that this report has recognised insurance as a key tool to scale the CDR industry to a gigatonne size. By de-risking transactions, insurance can unlock capital flows into carbon removal projects, enabling them to scale rapidly.
We wholly agree with the comments and statements identified above and we hope that insurance continues to be a topic of discussion and growth throughout the carbon markets. Alongside significant reductions in emissions, carbon removal is an essential stage of the mitigation hierarchy and insurance is an essential mechanism to scale carbon removal. Our bespoke insurance products offer additional due diligence, risk management and confidence to buyers, sellers and intermediaries across the sector; helping to drive more investment towards the carbon solutions that contribute to reducing CO2 in the atmosphere.