Risk and Reputation Management Strategies in the Carbon Markets

Engagement with the Carbon Markets is essential if we are to prevent the worst impacts of climate change. But the sector has faced increased scrutiny over the past few years, leading to concerns about reputational risk and/or financial implications.

What can market participants do to reduce these risks while continuing to ensure that investment reaches the high-quality projects and technologies that are having the most positive impact? We recently co-hosted a webinar that brought together experts in insurance, law and PR to offer guidance and strategies for navigating potential crises in carbon credit transactions.

Read on for insurance advice from Natalia Dorfman of Kita, PR perspectives from Narda Shirley of Wilful Group and legal insights from Nigel Brook of Clyde and Co. The conversation was moderated by Julien Jacob, Offtaker and Investor Solutions Manager at Puro.earth.

The webinar considered the actions that carbon market participants can take at various stages in a carbon project lifestyle to prepare for potential crises, manage a crisis should it occur and rebuild in the aftermath of something going wrong. In every market, there is inherent risk and it is an issue of good governance to be ready with a robust plan in the event of a risk occurring.

READINESS:

What should you consider in advance to ensure you have done everything you can to be prepared for the possibility of an adverse outcome?

Natalia Dorfman, Kita: A useful way to think about this is to project yourself five years into the future and ask if you can provide evidence that with the knowledge you had, you did everything in your power to protect against possible risks.

Insurance helps you do your due diligence: is the risk being shared in an appropriate way? How do you quantify your risks and then how do you mitigate them?

Nigel Brook, Clyde & Co: Projects can and will go wrong, regardless of whatever steps you take. You can’t manage the risk away. Have you surfaced all the risks? It’s no good applying a standard checklist. The list will change and the risks will evolve: from advancements in the science to the impact of geopolitics. Risks can not be fixed: you need to be proactive at tracking how the risks are changing.

Some risks are covered by insurance, some risks can be addressed by the contract, have you structured the contract in a way that makes it ‘insurance-friendly’? Is everything as clear as it can be?

Reputational risk is a major consideration. Do the best effort you can in the circumstance so that if something goes wrong, you are less likely to be at fault.

Narda Shirley, Wilful Group: What consitutes a threat to reputation? This will be dependent on your business and service: what are you promising vs what is actually happening? Part of the ‘readiness’ aspect of crisis preparation is to have drills. Good crisis communication strategy = robust, well-understood scenario planning so that you are not wasting time in the event of a crisis. Can you surface the risks and prepare facts, stats and data points.

The best way to respond is to put a human being forward (not just a statement). Who is the ‘person’? Are they ‘prepped’? This is good, basic governance that should be in place from the start.

Take into account that you may be operating in an international marketplace. The crisis may not affect just a single market. Localisation may be an issue - do you need different teams handling different communications for different markets - the more work you can do upfront the better.

Don’t do this work once - it is a fast-moving market, you need to regularly iterate the plan for response based on changing risk exposure and changing circumstances.

The better prepared you are in advance, the more methodically and calmly you will be able to handle any crises in the future.

Julien Jacob, Puro.earth: Don’t hide from the risks: assess them properly, document them, prepare for them and continuously update the processes and people.

RESPONSE:

In the event of a crisis or issue arising, what happens now?

ND: Assuming that you have invested in insurance, the main benefit is that your claim will be paid.

However, regardless of this, there are other benefits. The majority of our policies cover multiple years. It is not in our best interest to sell a policy and then forget about the client or the project. We continue to monitor the project throughout the policy period so that we know if there are any problems or issues that could potentially impact the performance of the carbon credits. Therefore, if we see a cause for concern, we can alert our client before it becomes a crisis.

Our insurance policies come with a ‘waiting period’: a window in which all parties can assess what is happening and figure out whether there is a solution - the solution might be a claim but it could also be an agreement around delayed delivery or another resolution that meets the approval of those involved. There is not a knee-jerk response but rather a considered process that ensures that all outcomes are taken into account.

In the event that a claim is paid, there is the option to be reimbursed in cash or in replacement credits. This comes down to the motivations and needs of the Insured. Replacement credits enable the Insured to uphold their climate commitments which can be an essential factor when it comes to reputation management and stakeholder relations. If the Insured requires financial reimbursement, this is also an option.

NB: Should a crisis occur, the first step in response is to take legal advice. This is partly to work out what has gone wrong but also to figure out what to do next. The contract terms will outline options for recourse.

You should also consider the implications on a wider scale: what are the specific implications for the company? What do you need to consider in terms of reporting? How urgently do you need to seek out substitute credits? Time might be of the essence so it should be high priority to reach out to legal counsel.

NS: To use an analogy, if the building is on fire, you call the fire brigade: you don’t try to put it out yourself with a bucket of water. Crises always last longer, do more damage and suck up more resources than you ever think they will. Ensure that you have mechanisms in place that can be implemented quickly and without delay. Don’t silo the response to a particular department: it is unlikely to be ‘just a comms issue’. Get everyone in the room: the senior leadership team, your lawyer, your insurer, your comms agency.

Though engaging with the media might feel like the highest priority and most essential action, do not forget your other stakeholders. The media may filter your response according to their agenda - you have less control here. However, with other stakeholders, you can be 100% in control of the content, frequency and the way in which they interact with the news. Let your customers and clients know what is happening: offer reassurance, honesty and clarity.

Don’t forget the staff: share information with all staff members across your organisation so that they do not feel that they are being kept in the dark. Be clear in terms of who is and isn’t speaking to the media and explain the social media policies that are relevant to the situation.

If possible, avoid a situation where you respond with “no comment” as this may give the impression that you have something to hide. It is better in this scenario to offer a short statement. You may not yet have all the information but if you are able to share some sort of response you may be able to buy some time while you find out more about the facts.

RECOVERY:

What can be learnt in the aftermath of a crisis? How can you best recover and move on?

ND: Although carbon insurance does not explicitly cover reputational risk, it acts as a proxy by demonstrating that you undertook all the due diligence at your disposal to try to preempt and avoid any issues. This stands you in good stead in the event of a crisis and enables you to reassure your statkeholders that you intended to mitigate risks that were identified. This can significantly improve the recovery process and the ongoing relationship with clients and customers by demonstrating how you are looking forward.

Part of the recovery could be further recognising the value of pre-emptive action. So consider investing in insurance for your whole portfolio to avoid future losses. Swap out the uncertainty of a future loss for the certainty of a known insurance premium. This gives you greater control over your finances as you look ahead.

NB: A really honest, objective internal inquiry is a worthwhile process: are there things we could have done better in the initial stages? Are there signals we could have picked up on? Are there additional terms you might have put in the contract with hindsight? At the point of crisis, did you engage the counterparty, regulators and stakeholders in an early enough and proactive enough way? Does the experience impact the way you will report your involvement in the markets going forward? How might you change the way you frame things?

Can you apply these learnings as you recover and progress?

NS: There’s an adage: “never waste a good crisis”. Now you have the opportunity to highlight what you have learnt from the crisis, how it will inform your approach going forward and the changes you will make as an organisation. As you rebuild, you can educate - explain what you are doing now and why.

Be pro-active. Get out on the front foot - go back to stakeholders and highlight how you are adapting to the aftermath of the crisis. What good things came out of this bad situation? Avoid jargon: be honest and transparent.

Change the narrative: think about thought leadership/research that can move the story forward and navigate away from focusing on the crisis. Potentially go back to journalists who covered the crisis and brief them on the context and background now that you have more space and time to provide information.

Don’t assume that a crisis only happens once and will never happen again: prepare, prepare, prepare. Make sure that all the learnings are being captured and being turned into better, stronger procedures.

If you want to watch the full discussion and listen to the fascinating Q&A that followed the panel, please take a look here.

To find out more about how insurance can reduce the risks of engaging in the carbon markets, read more about what Kita does.