The case for insurance as the third pillar of climate finance

Bilal Hussain is co-founder and chief executive of carbon project insurance company Artio

Past underperformance of carbon projects has led to a loss of trust in the market by investors. Insurance can give them renewed confidence

Carbon markets are entering a new phase of cautious optimism. Regulatory alignment is improving and corporate action continues to hold firm, despite a volatile political backdrop. Meanwhile, demand is increasing from sectors such as aviation and technology, signalling a maturing market.

Yet the sector remains hampered by concerns over structural fragility. These feed into the largest perceived risk: that of under-delivery — when projects do not achieve the carbon removals anticipated.

This concern has long been treated as an unquantifiable risk, compounded by concerns around credit quality, a history of overestimated project impacts and uneven standards.

However, as buyers are pushed to seek out high-quality credits at an earlier stage of the carbon project lifecycle, insurance is beginning to play a transformative role. It is fixing the trust gap between investors and the market, strengthening the case for its status as the third pillar of climate finance, alongside investment and regulation.

Scaling supply requires effective risk transfer

To meet global net zero targets, carbon markets need a strong supply of high-quality credits in the coming decades. That means a surge in the development of effective projects needs to happen now to fuel that supply. Yet for a 1.5C pathway, annual climate finance investments need to grow by more than six times, reaching almost $9tn by 2030 and a further $10tn through to 2050.

The constraint is not merely a lack of capital, it is the difficulty that early-stage carbon projects face in accessing the institutional capital — specifically debt — essential for scaling up climate solutions.

While delivery risk remains a key barrier, focusing solely on it overlooks a broader challenge: traditional financing also requires risk transfer mechanisms. Corporates cannot be expected to fund credits upfront indefinitely.

Insurance solutions can unlock institutional capital by de-risking early investment, enabling innovative and impactful climate solutions to reach scale.

Stronger foundations for a changing market

As standards tighten and regulatory frameworks evolve, the bar for credit issuance is rightly rising. The Carbon Offsetting and Reduction Scheme for International Aviation sets a global baseline for emissions growth, requiring airlines to offset any emissions above 2019 levels, while compliance markets continue to grow.

But raising the bar also increases the risk. Developers face longer lead times, scrutiny, and complex reporting obligations in order to deliver credits. 

Insurance can offer a counterbalance. It enables growth without compromising credibility.

For corporate buyers, it is a way to demonstrate that robust safeguards underpin their purchases. For developers, it becomes a passport to capital at the stage when they need it most.

And for banks, it provides the risk mitigation necessary to unlock their balance sheets, reducing the capital reserves required against project financing and freeing up capital for deployment into the climate solutions of the future.

Early-stage insurance

Risk transfer mechanisms are foundational to every major asset class. Insurance creates trust, which enables investors to price risk, developers to access capital earlier and the market to reward quality.

Yet most carbon market insurance has exclusions that are the key drivers of loss, such as project registration failure, or that provide cover from when the risk has already been internalised by the buyer or the developer. What is missing is early-stage coverage — that is, precisely when capital is hardest to raise.

Early-stage insurance covers the risk of under-delivery and is triggered by performance shortfalls. By covering the financial consequences of project failure, this type of insurance gives buyers the confidence to support new approaches, from reforestation projects to enhanced rock weathering. It leads to more projects being funded and completed.

If a project is deemed insurable, it sends a strong signal that risks have been assessed through independent technical due diligence and are manageable. It tells investors they are covered and safe to engage and can improve project selection.

Early-stage insurance also levels the playing field by allowing smaller developers to compete, and can even support debt financing. Large banks use corporate interest to extend loans to project developers. However, if the developer cannot repay the loan, insurance steps in to protect the lender.

This is not about blanket coverage. It is about targeted, data-driven risk management, such as predictive risk modelling, to understand carbon removal potential. Insurers can analyse vast data sets to optimise risk selection. This process builds a bridge, channelling finance to credible developers and ensuring that the most effective and well-structured projects get the funding they need to succeed.

Unleashing potential

If carbon markets are to play a meaningful role in meeting climate goals, they must follow the maturation path of other asset classes, such as clean energy and emerging markets. Insurance is a core part of that.

Capital follows trust, and trust is built on effective risk management. It can de-risk capital deployment at the scale needed to support credible, science-based climate solutions.

Without the trust that insurance affords, we risk holding back the market. With it, we can help carbon markets reach their full potential and leap forward to reach net zero. It is time to give insurance the recognition it deserves as the third pillar of climate finance.