THE VCM: TAKING STOCK OF A TURBULENT YEAR
Reducing 12 months into one email is a challenge in the simplest of years. For the voluntary carbon market (VCM), 2023 was not the simplest of years.
From mandatory corporate disclosures to record-breaking temperatures, the case for carbon offsetting has never been stronger. Conversely, criticism of the VCM has rarely been higher. Both themes were on display at COP 28, where policymakers and initiative leaders centered carbon markets — warts and all — in climate talks. If you want something to work, you need to know which flaws to fix.
It can be easy to miss the forest for the Bloomberg headlines, of which there have been plenty. But the two most market-significant developments to come out of 2023 make us cautiously optimistic for the year ahead — “cautious,” because their catalytic potential rests on two conditions.
In Capital Markets… regulation clicked into gear. The US SEC punted its climate disclosure rules into 2024, but legislators elsewhere pressed ahead. The EU adopted the European Sustainability Reporting Standards, and the CFTC proposed guidance for Carbon Credit derivatives, while California signed into law its landmark disclosure requirements. The latter will apply to 10,000 public and private US companies from 2026, with 2025 the first reporting year (make that 2024 for carbon-credit disclosures). Working backwards, companies will need to start assessing their climate-related risks, GHG emissions, and decarbonization progress as soon as next year. Many will need a dual reduction and offsetting strategy to come within range of their targets.
On our mind for 2024: Will mandatory disclosures catalyze carbon-credit demand? Yes, but only if the financial risk associated with carbon-credit purchases appears less than that of missed emissions targets. Based on the events of this year, it’s not an insignificant ‘if’.
In Carbon Markets… the guardrails also grew. Following long consultation periods, the VCMI and ICVCM published worldwide standards for corporate buyers (Claims Code of Practice and guidance) and project developers (Core Carbon Principles and Assessment Framework), respectively. Both frameworks were released in a year of rising controversy and slowing demand for the VCM, its would-be customers citing publicity crises and quality concerns as chief deterrents.
On our mind in 2024: Can standards restore buyer confidence? Yes, but not in isolation, nor in the space of 12 months. These guidelines are risk-management measures, designed to preempt risk. Unlike risk-mitigation solutions, they don’t protect against it. Liquidity, particularly in the near term, depends on both.
OKA HIGHLIGHTS: CAPITAL, COLLABORATION, INNOVATION
Closer to home, the perfect storm of 2023 powerfully validated the thesis on which Oka, The Carbon Insurance Company™ (Oka) was built. The VCM has $1 trillion-dollar potential and one big obstacle — risk.
Supported by our investment backers, Aquiline Capital Partners and firstminute capital, Oka has worked relentlessly to bring buyers and sellers the protections they need to bridge the so-called “incentive gap.” In so doing, we’ve directed our resources and focus on two areas.
The team and I have grown fond of the idiom “it takes a village.” Make that a forest. In a nascent market, collaboration is as important as a signal to our customers as it is a lever for integrity. To that end, we made partnerships a key focus in 2023.
Oka became the first carbon-credit insurance company to join the industry-leading International Emissions Trading Association (IETA). By allying with transaction network Carbonplace, we put our insurance solutions in front of its global audience of buyers and sellers. Partnerships with data providers BeZero and Sylvera helped us strengthen the risk models on which those solutions depend.
Cooperation is critical, but we’re not averse to competition. Our goal — to catalyze market scale with best-in-class risk solutions — made us laser-focused on product development in 2023. Mobilizing support across the insurance industry, from reinsurers to Lloyd’s, we’ve been fortunate to work with the best minds in pricing, underwriting and legal counsel to bring the world’s first embedded carbon insurance policy to market.
JANUARY 2024: LLOYD’S OKA SYNDICATE 1922
Rounding out the year, Lloyd’s officially approved the Oka Syndicate 1922. Designed to protect buyers from credit risks financial, reputational, regulatory, and environmental, Oka syndicate 1922 will begin underwriting from 1 January 2024.
There are a number of reasons we’re excited for 2024. Not only is it the springboard for Oka syndicate 1922, January also marks the public release of our flagship product, Carbon Protect™, alongside our first customer — which is an announcement we look forward to making very soon!
Similarly, we sense the wider market is about to metamorphosize. As companies across the world prepare for mandatory climate disclosures, the VCM is only just beginning to meet its potential. As evidence mounts that credit buyers decarbonize faster and more aggressively than their non-buying peers, sentiment is shifting about the merits of offsetting. The question is, can the VCM meet demand for quality credits at scale?
Risk was and continues to be an existential threat to the VCM. In 2024, the Oka team and I will be focused on pivoting it from danger to opportunity.
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