Nature Insurance Demystified Series

Part 4 - What is Insurance for Natural Capital?

A clear guide of how financial, contractual, and market risks, not physical loss, shape natural capital insurance and determine whether projects are truly investable.

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William Butler

Understanding the financial and market realities of natural capital insurance

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In part 4 in our Nature Insurance Demystified series, we look at insurance for the natural capital markets, covering transactional, financial, and market risk but not physical asset cover directly, rather the losses associated with physical loss and beyond. It is designed to complement knowledge on insurance for physical asset cover (see part 5 of the series), and show that by combining the two we can create comprehensive solutions for nature projects.

Natural Capital Insurance Decoded

As natural capital markets mature, it is becoming increasingly clear that the most material financial risks are not physical. Insurance for biodiversity units, carbon credits, and wider natural capital units is often approached as if it were a question of site damage or environmental impairment, in reality, the primary risks sit threaded throughout the contractual and market webs that projects and entities operate in.

For biodiversity units, carbon credits, and other forms of natural capital, value is created, transferred, and lost through transactions, financing arrangements, and market structures, not through storms, fires, or pollution events and the direct cost of replacing the physical asset alone, which up until recently has been the biggest cause of loss. Collectively we refer to insurance for the Units or Credits themselves as ‘Replacement’ insurances.

This distinction is critical for anyone involved in natural capital, whether as a project developer, investor, aggregator, or intermediary.

Natural capital risk sits beyond the physical site

Natural capital projects create value beyond the pure asset cost. Units are defined, measured, verified, contracted, sold, and relied upon by third parties. As a result, loss most often arises where those abstractions fail commercially or contractually, rather than where the land itself is physically damaged. Whilst this can feel complex, the value of a house once built is not simply the sum of the cost of its materials, rather it has esoteric additional value based on market forces.

Common non‑physical loss scenarios include:

Failure to deliver contracted biodiversity or carbon outcomes
Invalidation or cancellation of issued units
Counterparty or financier default
Regulatory or political intervention
Contractual liabilities triggered by non‑performance

In each case, the site may remain ecologically intact but the financial value of the natural capital asset collapses, leading to the entities involved struggling to maintain sites and the crucial nature they’re looking after.

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Delivery risk in natural capital projects

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Delivery risk is when a project fails to produce the natural capital outcomes that have been promised, pre‑sold, or financed.

In biodiversity net gain insurance and carbon credit insurance as the most well developed markets, delivery risk is perceived as being most at risk from physical losses such as fires or floods destroying biological integrity on sites, however it may also result from:

Ecological underperformance relative to forecast models
Methodology selection or interpretation failures
Verification delays or failures
Long‑term management shortcomings
Third‑party contractor or operator failure

Delivery risk insurance focusses on the value of the units themselves, and transactions and investments made in advance of the creation of the natural capital. Whilst it does not attempt to repair ecosystems, it protects against financial shortfalls created when delivery fails to materialise as expected, or within agreed contractual timeframes.

For investors and buyers, this form of natural capital risk transfer is becoming more and more of a prerequisite for participation. This can quickly become complex as some capital can be created many years in advance, so correctly managing the insurance application and cost is crucial.

Unit cancellation and invalidation risk

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Even where ecological outcomes exist on the ground, natural capital units can be cancelled or deemed invalid after they have been delivered.

As above this can often occur due to physical events, but also can look at:

Changes in registry or standard interpretation
Verification disputes
Methodology updates
Regulatory reassessment
Retrospective compliance challenges
Re-application of baselining

Unit cancellation risk strikes directly at asset value and often triggers repayment obligations, investor losses, or downstream regulatory breaches. In compliance markets, it can also expose buyers to secondary penalties.

Specialist cancellation cover can be designed to indemnify financial loss arising from invalidated units, not to insure the underlying habitat or carbon stock itself.

Political and regulatory risk in nature markets

Natural capital markets are still developing, and regulatory frameworks continue to evolve.

Political and regulatory risks include:

Changes to national and global policy
Alteration of eligibility rules
Withdrawal of approvals or designations
Shifts in enforcement interpretation
Jurisdiction‑specific regulatory divergence

Where projects rely on long‑term policy continuity, particularly in international operations and sales, such changes can render otherwise sound assets commercially unviable. Political risk insurance and regulatory change cover are therefore increasingly relevant within nature regeneration insurance, particularly for projects seeking institutional capital.

Credit and counterparty risk

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Natural capital transactions frequently involve long‑term payment structures, forward purchase agreements, and reliance on project‑specific entities.

Credit risk arises where:

Buyers default on payment
Developers or SPVs become insolvent
Intermediaries fail financially
Financing arrangements collapse mid‑delivery

In these scenarios, projects may continue performing ecologically while cashflows fail. Credit and trade‑style insurance structures can be used to protect against non‑payment and financial default, supporting revenue certainty in insurance for nature investments. It should be noted however that this is a particularly complex and difficult form of insurance, often combining with bond markets.

“Insurance in natural capital markets is not about replacing ecological integrity. It is about creating financial confidence to promote that integrity.”

— Will Butler, CEO & Founder

Contractual risk and liability allocation

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Contracts in natural capital markets are bespoke and layered, they can ascribe value across multiple parties and can even be aggressive in their allocation of liability where demand is still being sought.

They may include:

Performance warranties
Repurchase or replacement obligations
Long‑term indemnities
Cross‑default mechanisms
Liability extending beyond the project entity

Contractual risk is not about whether something fails, but about who absorbs the loss when it does. Insurance can be structured to respond when various forms of contractual liability crystallises, even in the absence of physical damage or professional negligence, provided the risk has been identified and structured correctly at placement.

Read more in Part 3 of the Nature Demystified Series on Nature Professional Indemnity Insurance.

Uninsurable elements of nature regeneration

Uninsurability is rarely caused by nature itself and in specialist markets it almost always comes about due to structural issues, so projects become uninsurable where:

Risks are poorly defined or undocumented
Liabilities are unlimited or unbounded in time
Contractual risk allocation is unrealistic
Governance is fragmented or unclear
Assumptions are untested and unmitigated
Insurance is considered too late in the lifecycle

Early engagement with specialist brokers is often the difference between a project that attracts insurance‑backed capital and one that cannot.

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Market confidence as the key driver

Natural capital value is also shaped by market confidence, which is also sadly the one risk element that insurance cannot directly transfer, so it is as important to highlight this as others.

Risks include:

Demand collapse for specific unit types
Loss of confidence in a methodology or standard
Oversupply in a given geography or asset class
De‑rating of certain project categories

Whilst market risk is generally uninsurable, insurance can sometimes be used to stabilise cashflow, protect minimum value thresholds, or enable financing where volatility would otherwise prevent capital deployment.

Case Study Example

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A project developer has created a habitat bank in England. One part of the habitat bank has 20 Biodiversity Net Gain (BNG) units and another has 100,000 carbon credits. The BNG Units have yet to be sold but are registered, whilst the carbon credits have been presold as PIUs under the Woodland Carbon Code (WCC) to an offtaker and although the forest had established, only the first issuance had occurred and only 1000 of the PIUs had been retired as WCUs.
A fuel tank located in a barn next to the BNG site cracks due to heat stress and leaks diesel over several days, the hard ground meaning it flows quickly across a significant portion of the site. A fire eventually takes and burns across the entire habitat bank, destroying the biomass of the site.
Due to the fire the PIUs that had been presold now face a significant delay, with delivery targets missed and the offtaker able to cancel their contracts entirely given their purchase agreement. The BNG units are now all lost, with the diesel having polluted the ground and causing permanent collapse in the integrity of the soil, rendering it unable to support conditions for regrowth.
Luckily the 2000 WCUs are replaced immediately from the WCC’s buffer pool, the PIUs however do not benefit from the buffer, as a result the carbon delivery insurance steps in to replace them for the offtaker on a like-for-like basis, meaning the developer is not under obligation to repay the sums lost. The BNG site is irreparably damaged so restoration is impossible, however the Environmental cover under the replacement policy pays for the costs of uplift for a similar site nearby to have the work undertaken, including new baselining and ecological surveys and the lost cost of any units that are unable to be replaced.
The restoration of the site would be covered in the next part of the series, part 5.

Insurance as infrastructure for natural capital markets

Insurance in natural capital markets is not about replacing ecological integrity. It is about creating financial confidence to promote this integrity, and, when structured correctly, nature insurance:

Enables and even helps attract capital to flow into projects
Supports forward transactions and offtake agreements
Aligns incentives across project participants
Protects balance sheets and reputations
Allows markets to absorb failure without systemic loss of trust

As biodiversity, carbon, and wider natural capital markets evolve, insurance that aligns with transactions and financing - and combines it with comprehensive physical asset cover - will be an integral part of the market finance mechanisms as it brings confidence to external stakeholders who hold perceptions of increased risk in nature based projects.

Projects and natural capital developers that recognise this early and combine it with comprehensive physical asset cover, will be better positioned to scale, finance, and endure.