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Mitigating voluntary carbon market risks: Insurance strategies for corporate climate goals

As new risks associated with environmental initiatives materialize, the insurance market is adapting to better address these exposures.

23/10/2025 · 4 minute read

As new risks associated with environmental initiatives emerge, the insurance market is evolving to more effectively address these exposures. One significant development is the introduction of carbon credit insurance solutions, aimed at mitigating the specific risks faced by companies participating in the voluntary carbon market (VCM). The VCM is a decentralised marketplace where each carbon credit represents one tonne of carbon dioxide (or equivalent greenhouse gases) that has been either removed or avoided. Carbon credit insurance may assist in transferring some of the risks linked to buying, investing in, or selling carbon credits within this unregulated environment, with the objective of providing greater security and confidence for market participants.

The growing market for carbon credit insurance

Companies can face numerous risks when purchasing carbon credits to offset their emissions. These include the invalidation of credits due to fraud, changes in accounting methodologies, or other reasons that lead to the withdrawal of credits previously issued and validated by accrediting bodies. Additional risks include late delivery of credits by project developers and the potential for reversals, where sequestered carbon is re-released into the atmosphere, often due to natural disasters or other unforeseen events.

Reversal is a particularly significant risk, especially in regions prone to natural catastrophes. Forest-based offset projects are especially vulnerable; wildfires, for example, can destroy trees that have sequestered carbon, resulting in the release of stored emissions back into the atmosphere. If a company relies on these offsets to meet regulatory or voluntary commitments, such reversals could have serious consequences, including reputational damage, financial penalties, or loss of credibility.

While the VCM remains largely unregulated, the potential impact of reversals highlights the necessity for risk mitigation. Insurance products are being developed to offer coverage against these events, providing companies with potential financial protection in the event of a reversal. This may enable organisations to repurchase credits or receive compensation for their investments, aiming to help maintain confidence in their offsetting strategies.

Practical application: A claims example

Consider a company purchasing nature-based voluntary carbon credits from a forest carbon offset project. The project developer may also generate its own credits. Both the company and developer are protected by separate voluntary carbon credit insurance policies. Suppose a wildfire damages the forest, leading to a reversal where the sequestered carbon is released back into the atmosphere. In this scenario, the company’s credits are significantly reduced. Ideally, the insurance policy would indemnify the company for any invalidated credits and cover losses from non-delivery. However, coverage depends on policy wording and the verification process. Since voluntary credits are often unregulated and verified by multiple bodies, discrepancies may arise — such as differing assessments of the extent of damage or invalidated credits. The insurer’s response will depend on the specific policy terms, but broad interpretation clauses can help maximise recovery.

Similarly, the project developer may seek coverage for physical damage to the project and associated revenue losses. For example, if a wildfire temporarily prevents access to the site, resulting in missed delivery deadlines, questions may arise about whether revenue losses are fully recoverable under the policy.

The importance of specialised insurance products

The development of carbon credit insurance represents a significant evolution in risk management, driven by the increasing complexity of environmental initiatives. As companies increasingly rely on voluntary credits to meet their climate commitments, they may face risks such as credit invalidation due to fraud, natural disasters, or other unforeseen events.

While these risks are currently limited in scope, insurance products are designed to provide reassurance that companies can meet their offsetting obligations even in adverse scenarios. As claims experience accumulates, it is expected that the market will stabilise, fostering greater confidence and encouraging investment in sustainable practices.

As the voluntary carbon market continues to expand, the availability of specialised insurance solutions such as carbon credit insurance will be crucial. These products can assist in mitigating specific risks, supporting corporate commitments, and contributing to wider environmental goals. Ultimately, effective risk management through customised insurance coverage may be essential in ensuring the long-term sustainability and credibility of carbon offset initiatives.

Find out more about solutions in the voluntary carbon market. 

For more information please contact your local Marsh representative.

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