The voluntary carbon credits market, valued at approximately $2 billion in 2024, is projected to grow to up to $35 billion by 2030, according to research from MSCI (opens a new window). These projects need financing, creating a significant opportunity for financial institutions. However, despite this potential, many lenders remain hesitant to provide substantial financing to carbon credit projects due to several factors, including concerns about project quality, potential for greenwashing, and the lack of robust regulation in the carbon market.
To address these concerns, carbon non-payment insurance (CNPI) is emerging as a critical tool to transform the risk-return equation — enabling proactive financial institutions to capture this market opportunity, while maintaining robust risk management.
Financing challenges associated with carbon projects
Carbon projects — particularly nature-based solutions — present distinctive challenges for lenders, including:
Extended development timelines
On average, the first verified carbon credits are issued three to ten years after initial investment
Delivery uncertainty
Carbon sequestration rates can vary due to ecological, political counterparty, and implementation factors
Verification complexity
Rigorous validation procedures can be compounded by potential delays and methodology revisions
Market volatility
Price fluctuations are typical in evolving markets
Credit rating
Companies developing carbon credit projects are likely to be newly formed businesses that lack trading credit history
Regulatory fluidity
Governments and regulators are still developing standards and frameworks for carbon credit projects, creating uncertainty for lenders
These factors create a risk profile that has traditionally designated carbon project finance a high-risk — with 100-150% risk weightings. Consequently, carbon projects become more capital-intensive and challenging to approve within conventional lending frameworks.
CFC, “We were the first insurer globally to offer Basel-compliant credit insurance to lenders seeking exposure to the carbon credit developer market and bound the insurance market's first carbon orientated credit insurance deal. Since then, we have been seeing rapidly increasing enquiries relating to insured debt financing in all parts of the world where natural capital based carbon solutions are being established. We are working closely with Lockton to make some deals happen in this important part of the carbon market.”
How CNPI can mitigate financing issues
CNPI can provide coverage that protects lenders against the risk of loan repayment default stemming from carbon project underperformance. CNPI enables financial institutes to replicate transaction structures that are similar to the financing of other markets.
CNPI can derisk lending in several ways:
1. Capital treatment enhancement
With qualified insurance coverage:
Risk weightings typically reduce from 100-150%, to 20-50%
Capital allocation requirements decrease by 60-80%
Return on regulatory capital improves significantly
2. Risk profile transformation
CNPI insurance policies convert uncertain carbon delivery risk into:
Quantifiable insurance counterparty risk (typically A-rated)
Standardized policy terms with clear triggers
Predictable claim processing frameworks
3. Financial structure optimization
The integrated lending and insurance structure creates:
Improved lending metrics
Enhanced approval probability
Competitive product offerings
Reforestation project lending comparison
The example below compares the lending conditions with and without CNPI for a $12 million loan to finance a 25,000-hectare reforestation project with expected annual generation of 120,000 carbon credits:
Without CNPI | With CNPI |
Risk weighting: 120% Risk-weighted assets: $14.4 million Capital requirement (10%): $1.44 million Interest rate: 8.5% Annual interest income: $1.02 million Loan loss provision: $240,000 (2%) Net income before tax: $780,000 ROE: 54.2% (before tax) Approval likelihood: limited | Risk weighting: 35% Risk-weighted assets: $4.2 million Capital requirement (10%): $420,000 Interest rate: 7.5% Annual interest income: $900,000 Loan loss provision: $36,000 (0.3%) Net income before tax: $624,000 ROE: 148.6% (before tax) Approval likelihood: high Insurance premium: $240,000 (2.0% annual) |
The comparison shows that with CNPI the bank/financial institution could reap a 71% reduction in capital required, a capital release of over $1 million, a 2.7x improvement in ROE, and a significantly enhanced probability of approval compared to without CNPI.
Kita, “We see 80% of early-stage investment deals having insurance as a condition precedent to closing in the voluntary carbon markets.” Natalia Dorfman, Kita
Strategic benefits beyond the balance sheet
Beyond direct financial metrics, financial institutions securing CNPI for carbon project lending can gain various other advantages, including:
1. Market positioning
First-mover advantage in a rapidly growing market
Specialized expertise development
Competitive differentiation in sustainability finance
2. Client relationship enhancement
Offering solutions where competitors decline
Supporting clients' sustainability transitions
Building relationships with emerging climate leaders
3. ESG strategy alignment
Tangible climate finance contribution
Measurable financed emissions reduction
Authentic sustainability positioning
Financing carbon removal projects directly reduces the carbon footprint of the bank’s lending book
4. Regulatory preparation
Alignment with evolving climate finance frameworks
Experience with emerging asset classes
Readiness for potential capital incentives for climate finance
Implementation considerations
The following steps should help financial institutions prepare for the purchase of CNPI for carbon project lending:
1. Insurance selection criteria
Financial strength rating (minimum A- typically required)
Specific carbon market expertise and proven track record
Claims payment history and reputation
Capacity for multi-year commitments
2. Policy structure optimization
Alignment with project development timeline
Clear definition of covered events
Appropriate attachment points and coverage limits
Verification and claims documentation requirements
Cost-benefit analysis of premium rates (typically around 2% annually for quality, insurable projects) against capital relief benefits
3. Regulatory engagement
Early communication with regulators on capital treatment
Documentation of risk transfer effectiveness
Integration with climate risk management frameworks
Oka, The Carbon Insurance Company™ (Oka), “We have worked with stakeholders across the carbon market ecosystem, including traditional lenders, to de-risk carbon finance. Credit insurance lowers barriers to access both sides of the equation: it gives regulated lenders an avenue into the market, and project developers — for whom access to commercial capital is a major growth hurdle — a smoother path to scale. Oka’s policies, which we tailor to the unique challenges of both developer and lender, have facilitated project financing at critical stages of development — and we believe the opportunity is only going to grow. From 2021 to Q3 2024, around $43 billion was raised or committed for carbon-credit activities (more than half of that since 2023 alone), with a growing share earmarked for project finance.”
Market outlook and timing
Several converging factors are creating a strategic window for organizations to investigate and implement CNPI:
Carbon market maturation: increasing standardization and liquidity
Insurance market evolution: growing capacity from specialized insurers offering competitive rates (typically 1.5% to 5%)
Regulatory advancement: developing frameworks for climate finance
Corporate demand: rising commitments driving high-integrity credit demand
As these trends accelerate, financial institutions that begin implementing CNPI strategies can competitively position themselves in a fast-growing market.
To learn more about how CNPI can work for you, please contact:
David Briscoe – Head of Digital Integration & Special Projects
P&C Specialties
E: david.briscoe@lockton.com
This analysis is based on current market observations. Specific insurance terms, pricing, and regulatory treatment may vary by jurisdiction and project type.
