Sustainability and Insurance: May Roundup
June 13, 2024
Welcome to our monthly sustainability roundup, keeping you up to date on the insurance industry’s most significant sustainability-related news. May’s topic: The growing carbon market – exciting again?
Read our summary and analysis below.
Analysis
The growing carbon market – exciting again?
The carbon market has been around for a while. It has faced significant challenges in the past, including questions about the validity of credits, lack of regulation, and exposure to risks such as reversal events, where sequestered carbon is re-released due to events like forest fires. This lack of confidence has been a major barrier to market growth.
However, insurers have started to step up their game by increasingly offering coverage for carbon credits in response to the pressing risks within the voluntary carbon market (VCM). Innovative insurance products are now able to de-risk a range of carbon credit investments, addressing financial, reputational as well as regulatory exposures.
In the last few months alone, insurers like CFC, Gallagher Specialty and Aon have launched solutions that transfer risks from buffer pools, where a portion of credits are reserved to cover potential losses, to insurance policies. Such products benefit investors by enhancing market liquidity and also supporting project developers by reducing financial pressure and enhancing the viability of their initiatives. This evolution reflects a broader shift from viewing the VCM as merely a sustainability tool to recognising it as a strategic risk management asset.
Incorporating insurance into the VCM not only mitigates risks for investors and project developers but also signals a crucial step towards a more mature market. By instilling confidence and providing financial security, insurance mechanisms can attract a broader range of participants, unlocking substantial capital for sustainability projects. The growing number of relevant insurance solutions demonstrates the growing recognition of insurance as a key enabler in sustainable initiatives.
However, realising the full potential of the VCM requires a collaborative approach. Governments must enact robust regulatory frameworks to ensure transparency and accountability, while industry bodies play a pivotal role in establishing best practices and standards. Through collaborative efforts, stakeholders can instil confidence in the carbon market, encouraging increased investment and ultimately advancing progress towards global climate objectives. In this context, insurance plays a vital role in de-risking investments and ensuring the integrity of carbon offset projects.
If the VCM takes off, as it looks like it will do, can you afford to be behind the curve?
Summary
Expanding carbon market
CFC launches carbon cancellation insurance solution (Insurance Business)
CFC has launched Carbon Cancellation Insurance, its second solution for buyers of voluntary carbon credits. This insurance protects against financial and management risks if credits are cancelled or invalidated due to political risks, regulatory changes, or weather events. Alongside the Carbon Delivery Insurance introduced in March, CFC is the first insurer to offer both delivery and cancellation insurance products to buyers of voluntary carbon credits.
Gallagher Specialty introduced carbon insurance service (Business Insurance)
Gallagher Specialty has launched a carbon insurance solutions service to help clients mitigate risks associated with de-carbonisation initiatives. Although purchasing carbon credits is currently voluntary, James Bosley, Head of Climate Strategy, Carbon Insurance & Parametric Solutions for Gallagher Specialty noted that mandatory requirements for certain sectors are anticipated. According to the firm, the voluntary carbon market was estimated to be worth $2 billion in 2022 and is expected to scale up to $40 billion by 2030.
Aon launches comprehensive carbon capture and storage insurance solution (Reinsurance News)
Aon has developed a new insurance product for international transport and storage companies involved in storing carbon dioxide. This product covers key risks associated with Carbon Capture and Storage (CCS) and aims to advance the role of insurance in de-risking global CCS projects. It seeks to attract capital providers and investors, address protection gaps, and shift perceptions of insurability.
Kita and ClearBlue partner to enhance carbon credit insurance models (Yahoo! Finance)
Carbon credit insurance specialist Kita has partnered with carbon markets expert ClearBlue to enhance the precision of carbon insurance models. This collaboration aims to improve the voluntary carbon market (VCM) by offering stakeholders better data, transparency, and risk mitigation solutions for carbon credit transactions. ClearBlue’s technology platform, ClearBlue Vantage, assesses delivery risks for nature-based projects and integrates these findings into Kita’s underwriting model for its Carbon Purchase Protection Cover (CPPC). This partnership boosts confidence in market transactions by addressing project delivery risks, mitigating exposure to project failures, and ensuring accuracy in estimated credit volumes.
Update to ClimateWise reporting
ClimateWise updates reporting framework to aid insurers in evolving disclosure environment (Reinsurance News)
ClimateWise has updated its reporting framework Principles to help insurers prepare for evolving disclosure requirements. These updated Principles, launching in June 2024, will aid members in meeting various regulatory standards, including TCFD, TNFD, CSRD, ISSB, TPT, and SEC. The new Principles aim to go beyond compliance, enabling insurers to embrace broader opportunities.
The updated Principles enable insurers to stay ahead of the curve in an increasingly complex regulatory environment concerning climate and nature-related disclosures. By aligning with multiple global standards and going beyond mere compliance, these Principles not only help insurers meet current and emerging regulatory requirements but also position them to capitalise on new opportunities within the sustainability space. This approach can enhance the resilience and competitiveness of insurers, support their transition to a sustainable economy, and build trust with stakeholders who are increasingly prioritising ESG considerations.
Ariel Green tech consortium
Ariel Green expands Lloyd’s Technology Performance Insurance Consortium (Reinsurance News)
Ariel Green, a division of Ariel Re, has expanded the Lloyd’s Technology Performance Insurance (TPI) Consortium to protect clean energy technologies and projects. Launched in 2023, the Consortium has increased the number of participating markets and available capacity. Ariel Green now offers TPI policies with up to $150 million in aggregate per risk, facilitating significant risk transfer for major cleantech projects. This expansion enables the clean energy sector to access more capital and accelerate the deployment of innovative technologies crucial for achieving net-zero.
About the author
Eleanor Ewen is a Senior Consultant at Oxbow Partners. Her work has included undertaking a culture review for a Bermudian reinsurer and building a ‘break-out strategy’ opportunity for a UK retail insurer. Alongside this, she helped draft a ground-breaking report on ESG which launched in Bermuda.
