Swiss Re Corporate Solutions, the commercial insurance arm of Swiss Re, has partnered with goodcarbon, a Berlin-based climate startup, to introduce an innovative insurance product designed to enhance the reliability and attractiveness of carbon credit investments. This product is specifically tailored for 5-year forward carbon credit portfolios, providing a significant safety net for investors in the carbon market.
The carbon credit market, while instrumental in global efforts to mitigate climate change, is fraught with risks. These risks include uncertainties related to the actual delivery of promised carbon reductions and potential project failures. The insurance product developed by Swiss Re Corporate Solutions and goodcarbon aims to address these challenges by offering ‘in-kind replacements’ or refunds to investors if the carbon credits do not meet the expected carbon reduction targets.
Here are some key points about this innovative insurance solution:
- Risk Mitigation: The insurance product mitigates the financial risks associated with carbon credit investments. By ensuring that investors are either provided with replacement credits or refunded if the original credits fail to deliver the promised carbon reductions, it reduces the uncertainty and potential financial loss in the carbon credit market.
- Enhanced Credibility: By providing this insurance, Swiss Re Corporate Solutions and goodcarbon enhance the credibility and reliability of carbon credits. This can attract more investors to the market, boosting overall investment in climate mitigation projects.
- Market Stability: The introduction of such insurance products can contribute to greater stability in the carbon credit market. By offering a safety net, it can encourage more consistent and long-term investment, supporting the growth and effectiveness of carbon reduction initiatives.
- Innovation in Insurance: This partnership showcases how traditional insurance companies can innovate to support sustainability and climate goals. Swiss Re Corporate Solutions is leveraging its expertise in risk management to create products that align with the needs of a changing world.
- Support for Climate Goals: By enhancing the reliability of carbon credits, this insurance product indirectly supports global climate goals. More reliable and credible carbon credits mean that projects aimed at reducing greenhouse gas emissions can secure the funding they need, contributing to broader efforts to combat climate change.
According to a recent post on goodcarbon’s website, this initiative is a response to the inherent risks in the carbon credit market. It represents a proactive step towards making carbon credit investments more secure and appealing, ultimately fostering greater participation in climate-positive activities.
This “first-of-its-kind” solution is designed to enhance the security and credibility of carbon credits, making them a more attractive investment option.
It offers insurance for nature-based carbon credits, covering non-delivery risks due to political risks, natural catastrophe, and weather events. Initially available for afforestation and reforestation projects, this insurance applies to deliveries up to 5 years ahead.
Projects contribute a small percentage of credits to a buffer pool, providing in-kind replacements in case of non-delivery. If the buffer pool is insufficient, Swiss Re will refund the purchase price.
This mechanism ensures that investors are protected against the financial risks associated with carbon credit underperformance, thus fostering greater confidence in carbon markets and encouraging more significant participation in carbon reduction projects.
To meet the important targets in the sector, like those set by the Rio Conventions and the Global Biodiversity Framework, funding for nature-based solutions needs to increase to around $550 billion annually, goodcarbon said.
Companies must also meet climate targets amidst rising carbon credit prices and supply shortages, and investing in forward credits can secure volume and prices but carries non-delivery risks.
The introduction of this product is a strategic move to overcome one of the major hurdles in the carbon market: the uncertainty and risk of investing in carbon credits.
“It will add liquidity to the forward carbon market and has the potential to unlock much needed private capital to flow into nature-based projects,” Jerome Cochet, co-founder and Managing Director of goodcarbon, explained.
“By transferring the non-delivery risk of such contracts through its partnership with goodcarbon, Swiss Re helps clients increase the resilience of their climate transition plans,” Lasse Wallquist, Head of Sustainability at Swiss Re Corporate Solutions, added.
