Insurance will become a “must have” rather than “nice to have” for carbon markets in the next couple of years, says Artio cofounder and CEO Bilal Hussain.
As more companies look to carbon markets to help them reach net zero targets, more attention is going to the risks of such projects. Fires, floods, geopolitical crises, and many other factors can impact carbon removal projects at any given time, affecting the quantity and quality of carbon credits.
Hussain and his cofounders started Artio to provide more risk mitigation for those wanting to back early-stage carbon removal projects.
Artio officially launched in May of this year and has backing from well-known providers including Tokio Marine, Markel Corporation, and Apollo Syndicate Management.
Below, Hussain delves further into the carbon insurance concept and why we’ll see more of it in the future.
AgFunderNews (AFN): Explain the carbon insurance concept to us.
Bilal Hussain (BH): What usually happens is you have a project developer and a project buyer. Normally in these transactions, there’s also a third party to this, which is the landowner—meaning that a lot of the time, the project developer does not own rights to the land. They’re just leasing it or doing some activity on it.
It’s quite common for real estate investments and other agricultural investments that if a bank issues a loan, you’re meant to provide a form of security or collateral. But the developer doesn’t own the land, so how can they give it as collateral?
Then, if you’re somewhere like India, the laws are so complex because of indigenous rights, communal land, etc., there’s no way anyone could promise the land.
So an investor/buyer in an afforestation project, what do they get in return if things go wrong? That’s really what insurance does: it [helps] investors and buyers if things go wrong.
Let’s say for an afforestation project a buyer pre-purchases credits. In three years, they’re expecting 1,000 carbon credits because they paid for that upfront.
Within those three years, a bunch of things can go wrong. There could be a fire, there could be fraud or political risk. A government could step in and take the land. Maybe instead of 1,000 credits, the buyer gets 900 credits. That’s where insurance comes in and says “here’s 100 credits” or “here’s the money for them.”
In the next couple years, [carbon insurance] will become a prerequisite, because time and time again, what we’re seeing is companies that think they can just internalize this risk reach out to us.
AFN: Why has demand for this sort of thing only picked up now?
BH: Even though carbon markets are about 20-odd years old, they really picked up in the last five years. In the grand scheme of things, it’s still quite a nascent, early-stage market.
For financial products to come in, the market needs to mature a little bit, because when we look at launching a product, we have to look at the historical success of other projects, which is what we did for afforestation.
We looked at the last 20 years of afforestation projects and said, “Where have things gone wrong? How could we have picked them up? How could we price this policy?”
Before all the greenwashing scandals, that information wasn’t really available.
When you can see financial products coming in, you’re seeing compliance coming in, it’s just a sign of evolution, and the majority of carbon insurance can help scale that much faster. You can distribute the risk much more evenly, and then you don’t just have your Microsofts buying 80% of the market. You can have other people come in and buy insurance, and then they’re part of the market as well.
AFN: How does Artio build its insurance plans?
BH: There are two kinds of insurance products we have.
One is for when the corporate who purchases the credits but doesn’t pay upfront, and they only pay on delivery. There’s a funding gap, right? Someone’s going to pay [for] the trees to be planted. The bank comes in, gives a loan. We can insure that loan so we can say, hey, if you don’t make your money back, we’ll pay you.
The more normal financing for carbon markets is that corporates pay upfront. The way to quantify that would be the amount of credits they need because of their scope one or two emissions they need for net zero.
So if they think they’re going to emit 1,000 tons of carbon, they’re going to be in the market looking for 1,000 tons. (One credit is one ton.) So they’ll try and find a forestation project that fits those needs.
Before we sell them a policy we help them decide if they want to be compensated in credits or cash. If they pick credits, we have to decide on the characteristics of what they’re buying.
If they were buying a US afforestation credit for a native species, maybe the buyer and us agree [to broaden the criteria] to North America. So North America afforestation are the characteristics of your carbon credit.
The number of credits that they want insurance on will be determined by their investment agreement with the developer.
The way that’s calculated is that you model out the growth curve of the trees. Internally we would say, “If you’re buying 1,000 trees, we think in five years they’ll all be worth one ton of carbon, and that means 1,000 credits will be available by this project.”
The last thing is the different [types of coverage] that are available.
So we’ve agreed on number of credits. We’ve agreed with the characteristics of the credits are so we can replace them if we need to. Now we agree on the risks.
We try to do fully comprehensive coverage: [a policy] covers political risk, it covers natural catastrophe, so any flood, storm, drought can happen. We also cover under performance. For example, if the trees are expected to grow to 100,000 [in number] and they actually only grow to 800 because of whatever reason we need to cover that.
AFN: Will greater standardization in carbon measurement, reporting and verification help here?
BH: Standardization helps a lot. We’re actually part of two different groups for data standardization [working on] how we ingest data.
One of the biggest things will be reporting. When we created our historical analysis of the past 20 years, it was painful. Honestly, the information’s just not there. You have to read between the lines and do so much analysis yourself.
[Standardization in reporting] would really help us price things more effectively. When we know everyone’s using the same data sources for fire risk, that helps a lot, for example.
One of the funky things we learned when we started this is that in every country there’s a different definition of a wildfire. Most countries would use the international definition, but some have different definitions of what constitutes a fire event, and insurers have to align to that. If they’re within that country, they would then use that as a trigger.
Verra just released a consultation on this, and one of the feedbacks we gave was, “Can we all just align on coverage definitions?”
AFN: What else is Artio doing to help grow the carbon insurance market?
BH: One thing we’ve learned is that there needs to be a lot of education done in the market generally.
One way we’ve tried to do that—and it’s not just goodwill from us, it’s also a market strategy—we give risk mitigation and risk modeling free to [carbon removal project] developers.
The reason for that is, we won’t get paid if the project’s not high quality. So it’s in our interest that developers go to market with the best tools possible.
So if we get a developer coming to us, we give them a document that tells them all about their risk, if it’s insurable by us. It’s our way of saying, basically, this is stamped for insurance by insurance. If you invest in this, we will come in, and that’s our way of helping the market scale.
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