It’s an interesting time for insurance in the voluntary carbon market (VCM). Yesterday, I wrote about concerns with VCM buffer pools, which act as a type of insurance for VCM buyers and project developers; last week, I blogged on considerations for CSOs when pushing for carbon offset insurance. That second article may have been a bit prescient because here’s some news that surprised me. According to Bloomberg,
“Insurance broker Marsh will start offering contracts to protect companies against fraud in the market for carbon credits, after the instruments became the subject of recurring allegations of greenwashing. The insurance contracts will allow companies in the US, Europe and the UK to gain financial protection in the event that credits purchased in order to offset their carbon footprint prove worthless…
Marsh said that scenarios under which its insurance kicks in include if a company has purchased counterfeit certificates, or purchased certificates representing projects that don’t actually exist, as well as outright theft… Companies using it will also gain access to technology that can identify duplicate and counterfeit certificates and monitor projects.”
This is a big deal, although the devil is absolutely in the details. Marsh’s own press release on the new coverage didn’t offer additional information. It seems that the insurance may be limited to nature-based offsets only – but that could change over time if demand takes off. Critical exclusions and coverage limits will apply, and the insured will almost certainly be required to undertake tasks to qualify for and maintain coverage.
This may prove to be a shot in the arm for the voluntary carbon market which has been rocked by numerous problems in the past 2-3 years that shook the market’s faith in the entire concept.
I wonder though – could this pose a moral hazard? As I explained in a blog last month,
“Moral hazard is when a company takes reckless, inappropriate or even illegal business risks because they expect someone else – an insurer or contract counter-party – will pay the price instead of the company. This is why companies can’t buy insurance for environmental compliance fines and penalties as one example.”
Certainly, Marsh and the underwriters considered that and have controls in the policy to deal with it, but still – something feels off about it. Hopefully I am wrong.
ESG leaders, staff and advisors: If you think insurance could be beneficial in your company’s climate risk management program, make sure you understand in detail what the policy covers, excludes and requires of you to qualify. Further, read (or re-read) my recent blog on problems that sustainability departments face when talking about insurance in their companies.
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