De-Risking Nature-Based Investments to Spur Carbon Markets and the Net-Zero Transition

As the world deals with the worsening impacts of climate change, curbing greenhouse gas emissions is critical to reducing the frequency and severity of climate-induced catastrophes and natural disasters like forest fires and floods. Our lands and oceans absorb over half of the carbon dioxide (CO2) humans produce, making their protection a necessity to our survival.

Nature-positive initiatives can help protect the environment and support organizations in meeting their net-zero emissions goals. The voluntary carbon markets — where carbon credits representing certified removals or reductions of greenhouse gases in the atmosphere are bought and sold — provide a unique opportunity to scale investment in the mitigation of the climate and biodiversity crises. Acting as a revenue source for nature conservation and restoration projects, these markets can not only rebuild global carbon sinks, but also provide a host of additional benefits as well to surrounding biodiversity and local communities.

Voluntary carbon credit sales are projected to reach $50 billion by 2030. These markets represent a growing source of funding for nature. Given their importance in solving climate and biodiversity challenges, how can we enhance the integrity of these markets and improve them, so they are maximizing impact and attracting greater investment?

One of the improvements needed is reducing risks associated with carbon credit purchases. For example, pest infestations and natural disasters that may cause damage and destruction of forests or political risks can prevent some investors from doing business in certain jurisdictions.

How Insurance Can Protect and Encourage Nature-Based Solutions

On September 20, 2022, Aon hosted an event in New York City with participants involved in the voluntary carbon market and nature-based projects, including the Institute of International Finance (IIF), Revalue Nature, Sylvera and Carbonplace. Speakers discussed several key topic areas, including:

• The role that voluntary carbon markets currently play in the net-zero transition
• The value of nature-based solutions for climate change mitigation and their sustainability benefits
• Opportunities and challenges of matching investors with a limited supply of high-integrity carbon projects
• The need for improved standardization, transparency and integrity for carbon credit transactions
• The role of the insurance industry in facilitating new forms of capital and helping scale the carbon markets

To introduce the discussion, Aon President Eric Andersen underscored the importance of mitigating climate-related risks: “Climate change is a certainty, not a probability, with severe weather becoming a part of everyday life.”

He reflected on $330 billion in economic losses from weather and climate events in 2021, with only 38 percent covered by insurance.

Eric described how Aon has been innovating on behalf of clients to help address climate-related risks. This includes working with other institutions to use historical data to develop forward-looking catastrophe models and using intellectual property-backed lending for companies developing clean technology solutions. (Read more about Aon’s climate solutions here).

Similarly, speakers at the event agreed that insurance innovation is needed to protect voluntary carbon market participants — from project developers and sellers to buyers, to lenders and intermediaries — against a range of risks they face in this emerging and growing industry.

Development of risk transfer solutions will require collaboration with stakeholders such as (re)insurance markets, which provide balance sheets to match risk with capital and signal the quality of transactions. These are crucial for building integrity and confidence for carbon credit transactions. To meet this challenge, Aon and Revalue Nature recently announced they would work together to attract potential investors to high-integrity nature-based projects and work to offer insurance solutions to protect projects and their stakeholders.

The Importance of Standardization, Ratings and Institutional Infrastructure for Robust Carbon Markets

Sonja Gibbs, managing director and head of sustainable finance and global policy initiatives at the IIF, spoke about global efforts — notably those of the Integrity Council for the Voluntary Carbon Market (IC-VCM) — to lay the foundation for what constitutes a “high-quality carbon credit” at the event. Sonja described the work that is underway to develop Core Carbon Principles as means of informing the quality of supply of carbon credits, as well as other initiatives to help standardize the marketplace.

These initiatives are critical to avoid greenwashing and to lay the foundation for trust, transparency and accurate data to help scale carbon markets.

Stuart Rowland, ceo of Revalue Nature, noted that his firm holds its projects to high standards and tracks not only carbon sequestration, but also biodiversity and local community impacts. Stuart said projects are expected to be verified to meet and exceed the highest voluntary carbon standards with a goal of achieving “AAA+” ratings from emerging carbon project ratings agencies.

Allister Furey, co-founder and ceo of Sylvera, reflected on the work his team is leading to provide data that lets a seller, trader or buyer of carbon credits understand their quality, similar to a “Moody’s rating for debt.” Sylvera also tracks the validation of biodiversity or socioeconomic benefit claims for the projects they rate, an increasing focus area of impact-oriented investors.

Allister underscored that better data on quality and risk mitigation can also help support offtake agreements and improve project financing overall.

Dominique Barker, who represented Carbonplace, brought attention to the work that banks are leading to bring trust, transparency, and accessibility to carbon markets. “Our goal is to contribute to the development of a highly functional, interoperable market so that millions of buyers and sellers can trade carbon credits globally with confidence,” said Dominique.

Carbonplace was founded by nine banks – CIBC, Itaú Unibanco, National Bank of Australia, NatWest, UBS, Standard Chartered, Sumitomo Mitsui Banking Corporation, BNP Paribas and BBVA. Using blockchain-enabled distributed ledger technology, Carbonplace’s secure distribution network allows for instant, secure and traceable settlement of carbon credit transactions.

Solving for the biodiversity and climate crisis must rely on a “whole of society” approach, with both government and non-government sector actors playing a role to create the enabling environment and direct investments in a prudent manner towards high-impact projects. Insurance solutions can help accelerate this effort, and Aon seeks to be a leader in developing and bringing these solutions to market.

To learn more about this topic or speak with one of our nature and climate experts, please contact Aon’s Public Sector Partnership Climate Resiliency Leader, Natalia Moudrak, at natalia.moudrak@aon.ca.