US-based carbon credits insurance company Oka announced the close of its seed round, attracting over $7 million in funding. The round was led by Aquiline Technology Growth ventures.
- Oka has raised $7 million to develop its platform for insuring carbon credits.
- The company underwrites and insures the purchase of carbon credit offsets, providing another layer of comfort for purchasers.
- There have been a number of carbon credit insurance products launched over the last few months, and rapid market growth is expected.
The funding round was led by Aquiline Technology Growth, which focuses on investment in financial services, and also included Firstminute, a founder-led fund focused on climate tech.
The funds will be used to accelerate Oka’s goal to see carbon credits insured. The goal is for Oka to help companies differentiate between high- and low-quality projects through a science-driven risk management, verification, and underwriting process.
Net zero will require carbon offsets for many
Increasing numbers of companies are making net zero pledges and developing decarbonisation plans to reduce their greenhouse-gas emissions. Yet many businesses find they cannot entirely eliminate their emissions or reduce them at the necessary rate.
While alignment with the Paris goals under the Science-based Targets initiative warns that only 5-10% of emissions should be offset, that is still a significant market. Many current plans see a higher rate of offsets in the early years as effective decarbonisation is implemented.
At the same time, the use of voluntary carbon credits can direct private financing to climate-action projects that would not otherwise get off the ground, the case for many nature-based solutions (NbS projects). They are also critical in lowering the cost of new technologies, such as carbon removal through direct air capture.
Regulation is an increasing concern in the US market
In the US, where Oka currently operates, the Securities and Exchange Commissions (SEC) released plans for mandatory environmental disclosures for public companies in March 2022. The requirements currently include disclosure of:
- The projected risks and material impacts on the business, strategy, and outlook caused by climate change;
- Scope 1 and scope 2 GHG emissions;
- Scope 3 if the material or the registrant sets an emissions reduction target that includes Scope 3 emissions;
- Governance of climate risks and risk-management processes; and of course
- Decarbonisation plans with interim targets.
Voluntary carbon credit demand set to grow
As decarbonisation plans become an operating requirement, there is likely to be significant growth in the carbon markets. While some states, such as California, have regulated markets, it seems likely that the majority of carbon offsets purchased will initially come from the voluntary carbon market (VCM).
The voluntary market is already experiencing significant growth, with 350 million carbon credits issued in 2021, which represents a 220% increase in volume from 2020. Trading turnover of the VCM has increased steadily over recent years to just under $2 billion in 2021. A total of 60% of Fortune 500 companies have now set climate targets and these commitments point to substantial increases in demand for voluntary carbon credits. In fact, turnover in the VCM is projected to reach $1 trillion by 2037, highlighting the scale of the opportunity.
Given the importance of carbon offsets in reaching net zero, it seems clear that the world will need a voluntary carbon market that is scalable, transparent, verifiable, and environmentally robust.
Insurance can provide comfort to investors in carbon credits
Oka is currently focused on providing insurance that will replace credits if destroyed or invalid, providing security and confidence to the VCM market.
The investment will be used to scale Oka’s innovative carbon credit insurance offerings, addressing the risks that large US corporations face when buying carbon credits to offset their emissions and meet net-zero targets.
“We are honored to have the support of Aquiline in accelerating the growth of our company and achieving our vision for making insurance an integral part of the voluntary carbon credit market,” said Chris Slater, Founder and CEO of Oka, The Carbon Insurance Company. “With their help, we are confident that we will accelerate the growth of our company and achieve our mission of insuring the transition to net-zero.”
Carbon credit insurance guarantees the ownership and transfers the risks to buyers associated with carbon credit purchases. Oka believes insurance will play a key role in securitizing and providing legitimacy to the voluntary carbon market, increasing buyer confidence and driving demand for high-quality carbon removal solutions.
Carbon credit insurance is a growth market
Earlier in February 2022, Kita, a London-based carbon credit insurance specialist, raised £4 million in funding to leverage InsurTech solutions to support carbon removal projects.
While Kita’s focus appears to be on the funnelling of capital towards the development of carbon removal technologies, there is a clear need for increased trust in the voluntary carbon markets as their use expands beyond specialists.
The lack of transparency and quality metrics within the VCM create a high-risk environment for carbon emission reduction and removal investments, which is a deterrent to financing at scale. The recent scandal regarding the effectiveness of some of Verra’s REDD+ credits is an example of this.
Insurance for carbon credits has been around since at least 2011 but the voluntary carbon markets have weathered a number of storms over the last decade and a half. Today there is a more consistent framework with the increasing demand for collaboration on the achievement of net zero.
September 2022 saw Howden, the international insurance broker, announce that worked with carbon finance business, Respira International, and Nephila Capital, a leading investment manager specialising in reinsurance risk, to develop a carbon credit invalidation insurance solution to increase confidence in the voluntary carbon market.
The product, which is wrapped around books of independently-verified, high-quality carbon credits, provides cover for third-party negligence and fraud. While we are likely to see an increasing range of products and approaches, rapid market growth should be expected.