The future of carbon credits – insurance protection to increase financial security and drive support to carbon projects

In January 2023, Chaucer launched an exciting new sustainability partnership with the first carbon insurance specialist, Kita, which provides financial protection for carbon credit transactions. Their policies help mitigate risk against carbon projects failing for reasons including natural catastrophes, fraud and negligence, insolvency and abandonment, political risks, and changing carbon standards.

This innovative new organisation aims to improve the quality of carbon credit investment projects by reducing risk, improving standards, and thereby supporting buyer confidence in them.

We spoke to Kita co-founder, Natalia Dorfman, about how Kita helps clients and how things are going, nearly two years on.

The core goal of Kita is providing insurance as an enabler to reduce risk, and drive finance to scale projects that capture carbon dioxide out of the atmosphere. The end goal is to fight climate change by enabling more high-quality carbon projects to grow faster.

We insure carbon credit financiers against the risk of a carbon project failing in various ways, which gives their purchases financial security and additional due diligence. It supports their sustainability goals and helps fight climate change by scaling projects more quickly, as they are more receive funding with greater buyer confidence.

Sure. We worked with a large corporate with a very high integrity net zero target, but also a high intensity carbon profile. They were looking to invest in high quality new projects, particularly afforestation, in the areas they operate in. They wanted to provide positive action locally such as biodiversity gains and community benefits. They also wanted to reduce the risk in the successful outcomes of these projects.

They came to us with five projects of interest. One was too risky for us to work with, but four were viable so we were able to insure those projects, and they were able to deploy capital into them. The result is that the projects could get off the ground and the company could meet its net zero targets in a way that enabled it to have safety and capital efficiency.

I would say there are broadly four sets of challenges.

Firstly, carbon insurance is a new insurance asset class, so we must work closely with clients to help them understand their own needs and what the product covers, as it’s probably not an insurance they have purchased before.

Secondly, carbon markets are relatively rapidly moving in terms of underlying methodologies and regulatory expectations. Again, we work closely with clients to help them understand the wider environment in which they are operating.

Thirdly, carbon projects themselves are quite technical. Kita have a strong specialism in understanding and reviewing the underlying projects, as well as understanding the risks from natural catastrophes, and alignment with expectations of usable carbon credits.

Finally, a challenge clients face and which we are proud to now have a new insurance policy for, is political risks, which are increasing. We also look at how this links into wider regulatory frameworks, for example, for airline companies that have to comply with global aviation offsetting programme, CORSIA.

Honestly, it's very rewarding to be an early mover in a brand-new insurance market because you know you’re one of the first to solve a problem. It's also gratifying to work with the great people at Kita and Chaucer and all our other stakeholders and clients. When we're able to reduce the risk in a transaction in order to help projects get their essential funds, we know our mission is working.

We want to have a quantifiable impact in enabling more finance to flow to scale high quality carbon projects, particularly in projects that remove carbon dioxide from the atmosphere. It’s also really important to increase biodiversity and community benefits in the areas in which they're located.

Because insurance companies are amongst the few entities within the Voluntary Carbon Market that must abide by regulations across multiple aspects of the business, we believe we are enhancing trust and integrity within the wider carbon market and hope to see better governance and regulation more widely across the market in the future.

There was strong alignment in values. It was clear Chaucer really believed in what we were trying to achieve and was willing to back to something that is inherently quite new and different, because they understood the impact that we could have together.

They worked closely with us to translate our knowledge of the carbon markets and our knowledge of risk modelling, into the language of the insurance industry.

The key lesson we've learned in our journey with Chaucer has been around the importance of having a strong vision and a strong focus on what we're trying to achieve, but enabling flexibility in the specific routes that we take to achieve it. Things don’t always turn out how you expected but with innovative thinking and commitment, as Chaucer’s strapline goes, “We find a way”.

The growth areas for Kita are aligned to the growth of the carbon markets. Within the carbon markets and particularly the voluntary market, we increasingly see convergence points where what has been voluntary, is increasingly going to become regulated. That will enable us to access a much broader range of clients looking for a broader range of projects, which will speed funding to climate-positive action.