Regulatory & industry trends in the carbon credit market
Learn more about the regulatory and stakeholder trends driving the carbon markets into 2030 and beyond
Nandini Wilcke
20th Jan 2024
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Industry pressures are increasingly driving companies to act on climate change and to guarantee outcomes
One reason insurance has yet to play a significant role in the carbon market is that, up to now, the penalties for failing to hit net zero have been non-existent: virtually no company or organization has committed to reaching this goal before 2030, and most corporate commitments are voluntary.
But as 2030 approaches, scrutiny is intensifying, with activists and investors looking carefully at whether companies have been taking the actions necessary to achieve their stated goals. Several high-profile journalistic investigations in the last year, for example, have questioned the validity of carbon avoidance credits to offset emissions, with carbon credit verifiers scrambling to respond.
We expect demand for insurance to grow rapidly over the next decade and beyond as more certified credits fail to be verified and the companies that bought them begin to see shortfalls in their net-zero accounting – but also as the penalties for those shortfalls become material.
Regulatory pressure
Starting in January 2024, European companies and multinationals – 50,000 groups by 2026, small and large, publicly listed and private – will be required to file detailed reports on their environmental, social, and governance (ESG) plans and processes that include an audited accounting of their contributions to the Paris 2050 goals. Beginning in 2026, California is requiring similar reporting from any company with annual revenues over $1 billion that does business in the state. And the US Securities and Exchange Commission has proposed reporting rules that, if adopted, will require big publicly listed companies in the US to disclose their emissions accounting and targets. All of these reports will be pored over by journalists, activists, and shareholders, with shortcomings likely triggering negative public relations and investor relations responses.
Stakeholder pressure
Alongside reporting standards, other pressures are mounting for greater environmental accountability by the private sector. This year the SEC, responding to a whistleblower complaint, fined an investment company owned by Deutsche Bank $19 million for failing to follow its stated ESG processes. Greenwashing charges have also taken the form of lawsuits against not just companies, but pension funds and municipalities, and these are increasingly being funded by hedge funds and other investors. Nor are these niche battles that have little impact outside ESG circles: a 2022 study looking at consumer panel data found that consumer-facing companies hit by ESG scandals see sales drop by an average of 5 to 10 percent for at least six months afterward; the bigger the scandal, the greater the hit to sales.
The case for in-kind insurance
In-kind carbon insurance cannot protect against every environmental scandal, but it could go a long way toward quelling concerns over reporting. Insurance is a well-understood and time-tested mechanism for protecting market players and the wider community from unexpected outcomes; companies with this high-quality backstop in place can reassure stakeholders that their net zero commitments are making a genuine contribution to efforts to slow global warming.
