What should you do if a forest-based carbon offset project you have invested in burns down? This is not simply a dystopian hypothetical question. It has already happened in the U.S. and it is expected to become a more common occurrence as climate-induced wildfire risks increase in the coming decades. But could a potential answer to this problem be to simply "make an insurance claim"?
That is the question triggered by a new report from carbon market consultancy BeZero Carbon and two leading insurance brokers, Howden Broking and Blackford, which suggests the insurance industry could play a key role in securitizing the nature-based carbon market and unlocking the capital needed to scale it.
The report draws on previous estimates that suggest the voluntary carbon market could be worth $50 billion a year by 2030, before growing to deliver a nature-based solutions market worth $800 billion a year by 2050. As such, it estimates the sector could create demand for new specialist insurance policies and services worth $1.3 billion, rising to $2 billion to $4 billion under "blue sky scenarios" where the sector delivers at the upper end of expectations.
The reports' authors hope insurance providers could help tackle some of the well documented challenges faced by a nature-based solutions offset market where consistent and effective regulation remains largely absent.
They contend the provision of dedicated insurance cover and the accompanying verification and risk management efforts that would be demanded by insurers could help to professionalize the voluntary carbon market, increase buyer confidence and drive demand for the high-quality NbS needed to support global climate goals. "For those developing NbS, insurance has the power to remove barriers to growth and improve risk management by expanding from adjacent markets, partnering with investors, and leveraging technology," the report states.
"Insurance has a significant role to play in society's journey to a low-carbon future both by de-risking companies' and industries' transition to low-carbon energy sources and in helping to increase confidence behind the removal of carbon from the atmosphere," said Charlie Langdale, head of climate risk and resilience at Howden. "Soon enough, regulation will come into this market and certain risk management controls will be mandated, but the insurance industry shouldn't be waiting for this to happen — we have an important role to play now. There is a huge pool of untapped modeling skills, data and capacity that could be used to accelerate the growth of nature-based solutions, a market that has the potential to provide up to 30 percent of the climate mitigation required to limit global warming to 1.5C."
Insurance fosters confidence which, in turn, attracts investment.
The report details how a nascent insurance market for nature-based solutions could build on the industry's already fast-expanding interest in related fields, such as weather-related insurance for the agricultural and renewables sector or forms of timber or crop insurance.
The report explains how, by building on existing relationships in agriculture, finance and industry, the insurance sector is perfectly placed to support clients as they look to expand into, or finance, the emerging markets for carbon and NbS. Similarly, as more financial institutions and corporates invest in nature-based solutions they are likely to want specific insurance for their carbon credits to ensure they deliver promised long term emissions reductions.
Tom Aldridge, founder and managing director at Blackford, said the insurance industry could play a critical catalyzing role in the development of the carbon offset market. "Insurance fosters confidence which, in turn, attracts investment," he said. "In order to grasp the opportunities associated with nature-based solutions and carbon markets, as an industry, the insurance sector must transition to a more proactive position; helping build the knowledge and comfort required for future capital investment in this fast-developing area."
His comments were echoed by Ronan Carr, chief research officer at BeZero Carbon, who argued that leading insurance companies would be wise to start developing dedicated cover for nature-based solutions. "Whilst insurance products aimed at nature based solution markets have been slow to take off, efforts to achieve greater standardization and regulation are gaining momentum, whilst private sector innovations are multiplying in the carbon and natural capital markets, raising the bar for transparency and accountability," he said. "To capture this opportunity, insurers need to set out a bold and clear strategy of how to integrate insurance solutions into this new market."
In the absence of robust global regulation and enforcement, the insurance industry could provide a mechanism for accelerating the adoption of best practices by nature-based solution providers.
Inevitably, talk of a new multi-billion-dollar market as an offshoot of the carbon offset market will do little to assuage some environmental campaigners' concerns about the financialization of nature. With former Bank of England Gov. Mark Carney arguing once again this week that carbon offsets should only be used to tackle relatively low levels of residual emissions, the sector remains a long way from delivering the comprehensive and robust regulation that might instill confidence that nature based projects are routinely delivering on their promise and are not being used to "greenwash" continued pollution.
But in the absence of robust global regulation and enforcement, the insurance industry could provide a mechanism for accelerating the adoption of best practices by nature based solution providers, helping companies differentiate between credible projects with effective risk management and verification processes in place and questionable projects from low-cost cowboy operators, and ensuring that developers can reinvest in new projects if the worst happens and promised emissions reductions go up in smoke.