Swiss Re Corporate Solutions, the commercial insurance arm of Swiss Re, and goodcarbon, a Berlin-based climate startup, have developed an innovative insurance for 5-year forward carbon credit portfolios to bolster the reliability of these investments.
According to a recent post on goodcarbon’s website, it is aimed at addressing the inherent risks in the carbon credit market by offering ‘in-kind replacements’ or refunds to investors if the credits fail to deliver the promised carbon reductions.
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.
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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.
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