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Howden offers first insurance against fraud in voluntary carbon markets

By Simon Jessop, Carolyn Cohn and Susanna Twidale

LONDON (Reuters) - Broker Howden Group said it has helped create the world's first insurance against fraud and negligence in voluntary carbon-market credits, part of efforts to scale up the nascent industry.

Carbon credits - which stem from practices such as the planting of trees and preserving biodiversity to offset carbon emissions - are seen as a crucial part of the world's plan to limit global warming.

Carbon credit trading turnover was around $2 billion in 2021, but consultants McKinsey suggest it could be worth more than $50 billion a year by 2030, as companies and countries look to offset some of their emissions on the way to net-zero.

However, with the market unregulated and amid concerns about the quality of some of the credits being sold, many companies have been reluctant to spend millions of dollars on credits for fear of being misled.

To help speed up the growth of the industry, Howden - which manages premiums of more than $10 billion - said it had teamed up with carbon finance firm Respira International and reinsurance investor Nephila Capital to provide cover for third-party negligence and fraud, reducing the potential reputational risk of buying carbon credits.

"If I'm a big shampoo buyer and I've told every shampoo buyer in Europe that I'm going to be net zero and it turns out half the credits I've bought aren't worth the paper they are written on because I've been lied to, that really is reputationally very damaging for me," Charlie Langdale, head of climate risk and resilience at Howden, told Reuters.

In the 2000s, the voluntary carbon market was rocked by a number of scams with some rogue sellers offering credits relating to land that did not belong to them and incidents of people being miss-sold credits at vastly inflated prices in so-called boiler-room scams.

Britain's High Court in 2016 issued winding up orders for 19 companies involved in one such scheme that saw over 5 million credits sold to the public for in excess of 36 million pounds ($41 million).

Traditionally, insurers have baulked at offering cover for credits tied to such projects, given the lack of quality data on historic losses and with many projects based in countries with weak legal systems and limited recourse if problems occur.

To help kick-start the market, Howden and its partners said they had bundled together a portfolio of verified credits that had also been checked by Respira and insured them as a combined lot, thereby diversifying the risk for the insurer.

In the event of fraud or negligence after the credits have been sold, Respira would be able to make a claim on the insurance and compensate the buyer.

The insurance for Respira's portfolio was led by Nephila's Lloyd's of London-based Syndicate 2357, along with other Lloyd's insurers and Zurich Insurance Group, Langdale said.

As the market develops, and insurers become more comfortable with pricing the risk, the aim in the coming months would be for larger companies with diverse portfolios of credits to be able to also secure their own insurance.

Ana Haurie, co-founder and CEO of Respira, said the insurance backing for its credits would give comfort to carbon credit buyers.

"It underpins the fact these are good quality projects if you can get them insured."

($1 = 0.8693 pounds)

(Editing by David Evans)