Yesterday, Trellis (formerly GreenBiz) wrote about insurance solutions for the carbon market. Given the turmoil in carbon markets – reputational problems, fraud and growing frequency/severity of wildfires – using insurance to manage risks may make sense.
“Buyers can insure their carbon credits with specialist policies. As more options come to market, sustainability teams will soon need to decide: Is carbon credit insurance the best choice for their business?…
Insurance in a mainstream sense arrived in the carbon markets in 2013, but specialist insurers have launched in earnest only in the last three years. Some policies cover fraud and negligence (if the carbon project is not delivering what it claims), purchase protection (if the buyer agrees to purchase more carbon credits than are issued from a project) and buffer depletion…
Ultimately, the decision to purchase carbon insurance comes down to a company’s risk tolerance, and CSOs should weigh the cost of a policy against that of purchasing replacement credits.”
In most companies, however, the CSO likely has limited decision making power – if any at all – when it comes to buying insurance. Internal risk management departments are charged with doing that, along with setting the company’s risk benchmarks that are the foundation for deciding when insurance is an acceptable solution. Many factors go into making that decision, but perhaps the first is whether the risk exceeds the company’s retention or self-insured value (analogous to the deductible on auto insurance – you pay the first $X amount of a loss before the insurance kicks in). Large companies can have retention values for property losses in the tens of millions – if carbon offset investments don’t exceed established “deductibles,” insurance isn’t likely to be considered. My comments are generally focused on buyers of offsets; if offsets are your company’s business, then that would change your risk tolerance/management landscape.
Based on the time I spent working at the world’s largest insurance broker/risk management firm, I’ve written extensively on the tension between ESG/sustainability leadership and corporate risk management departments. However, it is probably best summed up by findings from the World Business Council for Sustainable Development (WBCSD) report Sustainability and enterprise risk management: The first step towards integration, which included:
- Although companies have sustainability professionals working to address ESG-related risks and issues, they struggle to get these into risk management discussions.
- Little collaboration exists between a company’s risk and sustainability practitioners.
- ESG risks managed and disclosed by internal sustainability staff are considered less significant than conventional risks, leading to a bias against ESG-related risks.
ESG/sustainability leaders, staff and advisors: Manage your expectations when bringing forth insurance as a solution for carbon offset risk management. The value of the risk may not exceed your company’s risk benchmarks. You may also struggle to get executives and risk management staff interested in the risk to begin with.
Our members can learn more about offsets and climate risk here.
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