Maurice:

Hello everybody, welcome to C&F Talks. Today I'm delighted to have with me Bilal Hussain, who's the Co-founder and CEO at Artio. Bilal's going to be joining us to speak at the Net Zero Finance Innovation Summit on the 30th of June, which is being held as part of City Week at the Royal Garden Hotel in London. Bilal, welcome.

Hi, thanks for having me.

Great to have you here.

First up, could you just tell us, Bilal, how you view the current state of the voluntary carbon markets and its potential for the future? Because obviously it's had a bit of a rocky ride and there's been a focus in recent years at least, to improve greater integrity to the market.

So how do you assess its current state, and do you think it's going to achieve the ambitions that people have previously stated for it where it will grow into a very large market indeed?

And so, yeah, I see carbon markets currently in a state of cautious optimism. I think the last couple of years there's been a lot of work done on existing mature projects, how to kind of clean the market, set guidelines that everyone agrees on and how to proceed from that. And now I think we're in a state where that's being implemented.

You're seeing much more activity from insurers like ourselves, financial institutions come into play, rating agencies are also moving to the pre-issuing space, which basically means the project that we're developing now, we think there'll be much more higher quality. And that's also what corporates are talking about. So, corporates are now much more aware and active in the early-stage phase and developing their own pipeline of projects rather than seeing what's available in the market today, can I just buy in the spot?

So, I think overall, there's an optimistic nature and we're moving towards a more high integrity market over the next, let's say, three to five years.

Yeah, fantastic. That's good to hear.

And when corporates, and I suppose financial institutions as well, look at this market, how do you sort of breakdown the risks that they have to assess? What are the types of risk?

Yeah, it's quite a deep question. It’s all kinds of risks you have to assess as a corporate and as a financial institution. I think the first risk that you really look at is delivery risk from the very early stages when you start looking at project documents, look at the developer profile.

A lot of the corporates and financial debt financiers, they're looking at projects that haven't started yet. So, what you want to look at is how are the project operators going to execute on this project? What's their plan? What's their background? What technology are they using? So, this is much easier for project types like afforestation, IFM, which is improved forest management, because you have some history of projects there. So, you know, what's worked before, what hasn't.

It's a little bit more trickier for new project types like enhanced rock weathering, direct air capture, where these are first of its kind. So, there you might be looking at more technology risk, the pricing risk. Do you have off takers already set up? Do you have a revenue stream that's ready to go? So, I think it depends on what project types you're looking at. They can stem from operation execution risk to just technology risk as well.

So, when you talk about providing insurance services, how do you tackle each of those risks? Or do you not tackle all of them? Do you focus on some in particular?

We have to look at all of them. So, for example, the first product that we launched was for afforestation delivery risk. The last 20 years of projects and assess why there was an under delivery or failure by the project. So that's really what defined our coverage. So, we had to look at all risks.

So, for example, if I was to say a few, it's financial distress by the developer, which can be influenced by lower carbon stocks or lower sequestration by the trees. It's natural catastrophes. You could have a fire, flood, storm, drought. You could have price risk. For example, in the market, you thought you would sell your crates for 20. Actually, you sold them for 12. Now all of a sudden, you're in a financial distress situation.

I think everyone knows political risk situation is pretty much alive in the carbon markets. So, we do look at all of them. We price them according to our historical portfolio that we imagined for the last 20 years, what that would have looked like. And that's what we use for going forward as well.

The one thing that is tricky in the current market and for people like us is the instability of the prices in the market. So that's something that we usually have to work quite hand in hand with the developer and the buyer to make sure that we all agree where the market's going and what's a conservative price curve.

Yeah, yeah.

So, I mean, you touched on some of the methodologies that you approach. I mean, is it, it must be a very complex process though. Perhaps you could share with us a bit more about the methodologies you use when you're looking at these different risks.

Yeah. So, we had to develop a lot of our kind of underwriting ability in-house because we didn't think a lot of these existed in the open market today. So, I can give you a few examples.

We searched the market for analysis on how much, how big a fire would have to happen for the project to lose its trees. That asset isn't really available. What a lot of people do is they say that a fire happened, the tree died. That usually doesn't, that's not how it works. It's a much, much more complex ecosystem than that. So, what we had to develop is we normally, the way we look at fire is the fire starts at a certain point, it spreads this way. And this is how much impact it can have on the trees that the project's chosen. Different species have different sensitivity to fires. So, this depends on their height, their diameter, if they're waxy, if they're oily, these kinds of characteristics.

So, we had to use this to figure out, hey, we think in three years there's gonna be a fire in this area because global warming is increasing. And because of that fire, this project might not be able to deliver those credits. If they don't deliver those credits, they're gonna have a shortfall in cash and they're gonna go bankrupt.

That's kind of a story we tell in-house when we develop our underwriting. And we also feed that back to the developer. So that's something that we're quite active in.

I think that's something that we can all play a bigger part doing is give that feedback back to the developer, tell them, they know more than us in most cases, but we can also help them in saying, hey, in this part of your project, maybe don't plant those trees because that's really fire-prone, plant them in this area instead. So that's the kind of work we do with the developer as well.

Wow, it's a very granular approach, isn't it?

And presumably, the actual underwriting of these policies is done by trusted third parties that you have, insurers. Do you find that they are ready and willing to take on this type of insurance and to write the risk? Or do you need to explain to them in great depth to get them on board?

We, from the start of this conversation with insurers, we were very transparent. So, our capacity currently is by Tokyo Marine HCC, Markel and Apollo, they're three of the, they're quite large companies, Tokyo Marine specifically and Markel were very interested in entering the market. But it's quite a scary concept entering carbon markets currently.

So, I think from the start, we were very aware that we wanted to be transparent. We need to share information with them. So, we went through a lot of workshops with them to show how we do all this modelling.

The fire case study that I just talked about, we shared all this information with them. And I think it was really important to show them how we're thinking of creating a sustainable portfolio. We aren't just gonna be underwriting any project that comes our way. We're gonna be trying to make them better if we can. And we're gonna be selecting the best projects. And to us, if a project isn't insurable, it isn't gonna get investment.

So, it's not a good quality project. So, it's also acts like a quality indicator. So that's something that they were really interested in saying, how can insurance act as a quality indicator in this market that's not really stable and also provide some sort of financial support for investments to go in.

So, I think the partners that we picked are definitely in it for the long run. It was all about collaboration, sharing information from them, also learning from them on how they do current underwriting, maybe in political risk. How can we learn from that and put that in carbon markets? So, it was a two-way approach, I would say.

Maurice:

And to what extent does the regulatory regime around carbon credits reassure people? Is there a strong regulatory regime around it or is it still more open to players who might not take the same approach as yourselves?

I think the regulation's currently improving, but I think it sometimes gets missed in the market news, maybe. So, there's a lot of countries in the global South that are advancing their compliance in voluntary markets or their integration, but you also have countries that are stepping back a little bit, like the US. But overall, I would say, it is moving towards a positive direction.

I think for insurers, financial institutions, you just need clarity at whatever it is, whatever direction the country's gonna go, you just need clarity. So, you can price that risk. So that's all it is, really.

So, if a country doesn't do that, what ends up happening is you get industry bodies doing that, like aviation shipping. If they don't do that, then you get third parties like SPTI doing that. And in the worst-case scenario, if no one does it, then you're just in a self-policing environment, which I think what the carbon markets were doing for the last 20 years, which didn't really work.

So, I do think this regulation just needs to be quite straightforward in terms of even if you're not very ambitious, that's okay. Currently, it just needs to be clear what the ambition is.

Mm-hmm. Very interesting, Bilal. So, I think we're probably up in terms of our allotted time.

For our viewers, if you'd like to hear more about the developments in the carbon markets, which will be discussed in depth at the Net Zero Finance Innovation Summit on the 30th of June in London at the Royal Garden Hotel, do have a look at the website, www.cityweekuk.com, where you'll find lots of further information about the day's programme and the various speakers. We very much hope you'll be able to join us in person, so do have a look at the website.

Bilal, very much looking forward to seeing you there on the day, 30th of June, not far away now.

Thank you, looking forward to it.