Accounting for Carbon

Following on from the news that Clyde and Co, in collaboration with our partners Nature Broking, have recently completed an acquisition of Carbon Credits that they are confidently accounting for as assets rather than liabilities on their balance sheets (CSO Futures, Environmental Finance, The Lawyer), we take a look at the critical role that insurance played (through our partners at Kita) in satisfying the international accounting standards, allowing for that ultimate security that their offset requirements will be met.

Introduction

Carbon credits are increasingly central to corporate sustainability strategies, yet many firms struggle with how to account for them. Traditionally, credits can be treated as contingent items or even liabilities if their permanence or compliance value is uncertain. Insurance, however, offers a mechanism to transform carbon credits into recognized assets on the balance sheet by mitigating risks around their validity, permanence, and market value.

The Challenge

• Project under-delivery: Incorrect management, due diligence, or other project failure can lead to under or non-delivery of credits, meaning PIUs are not issued on anticipated year of retirement and replacements are required.

• Uncertainty of permanence: Issued credits from forestry or soil projects may be reversed if carbon is later released

• Regulatory risk: Shifting standards can undermine the value or validity of credits.

Without risk mitigation or transfer, auditors may hesitate to allow credits to be booked as assets, fearing impairment, non-delivery, or liability exposure.

Insurance as a Solution

Specialized insurance products can address these risks by guaranteeing the integrity and future delivery of carbon credits. This transforms them from contingent items or liabilities into secured assets:

• Full delivery insurance: Protects against the failure of a project to deliver pre-issuance (PIUs) so that buyers know that their offset requirements will be met, even in the instance of underperformance.

• Permanence insurance: Covers reversal risks post issuance. If reversal occurs, the insurer compensates the holder, ensuring the credit retains financial value.

• Political risk insurance: Protects against invalidation due to policy changes or registry disputes.

Implications for Reporting

By embedding insurance, firms can:

• Recognize carbon credits both as PIUs and Retired as intangible assets with measurable fair value.

• Reduce impairment risk, improving investor confidence.

• Align sustainability commitments with financial reporting, bridging ESG and accounting standards.

Example Basis of Recognition

In accordance with IAS 38 – Intangible Assets, carbon credits acquired and held for use in offsetting emissions or trading are recognized as intangible assets when:

• The entity controls the credits (through purchase or contractual rights).

• Future economic benefits are expected (either through compliance savings, offset requirements, or resale of excess).

• The cost can be reliably measured (through clear market structures).

Where insurance contracts mitigate risks of reversal, invalidation, or non-delivery, the credits can meet the recognition criteria for intangible assets under IAS 38 (also for trading brokers see IFRS 9 - Financial Instruments).

Conclusion

Insurance provides the missing link between sustainability markets and financial accounting. By transferring risks of reversal, invalidation, or non-delivery, companies are starting to confidently report carbon credits as assets against their future environmental liabilities, creating security in their acquisition and confidence in their environmental targets.