Carbon credits and debt for nature swaps at risk from geopolitical volatility, warns Marsh

By Rebecca Delaney

March 10 - (The Insurer) - Heightened geopolitical volatility poses challenges for the growing markets for both carbon credits and debt-for-nature swaps, while politically charged lobbying around climate regulations may cause operational disruptions, according to Marsh's latest political risk report published on Monday.

With 90% of the world's economies committed to net-zero goals in some form, Marsh said the agreement made at COP29 on international standards is expected to solidify carbon credit markets as an "essential tool" for mitigating climate change and financing the transition.

At the same time, debt for nature swaps have gained traction as a means for heavily indebted countries to reduce their debt burden while investing the savings in resilience and nature protection.

However, challenges persist in both markets regarding political risk and the potential risk of non-delivery. Failure to complete a project because of conflict-induced disruption or misappropriation of funds could see buyers incur significant losses.

Other political risks associated with carbon credit projects include confiscation or forced abandonment.

These risks are particularly in focus because the heightened geopolitical risk environment is driving operational and strategic risks to trade, finance and investment.

As Marsh noted in the report, this shift is promoting organisations to evolve their risk management and investment strategies for the second half of the decade by reassessing their geopolitical assumptions.

Longstanding assumptions include the stability and security of trade flows (particularly between the U.S., China and other major trade partners) and the reliability of supply chains from specific regions.

Marsh warned that firms with long investment horizons, complex supply chains and key supplier dependencies will continue to be "tested" by shifting global trade dynamics, including protectionism as an economic strategy.

For debt-for-nature swaps, mitigating the influence of geopolitics on operational risks includes assessing the impact of weaker systemic constraints and a less predictable global environment on shock-sensitive public and private finances.

On the regulatory side, organisations purchasing carbon credits may still face future regulatory changes that could invalidate previously purchased credits.

At the same time, increased climate compliance obligations, especially those originating from new European Union regulations, may pose operational risks to firms.

Incoming EU regulations will increasingly require importers to track emissions and sourcing, or else face penalties for misreporting. Most notably, the Carbon Border Adjustment Mechanism will target carbon-intensive imports, while the Deforestation Regulation will prohibit the import of goods linked to deforestation.

As political priorities shift, Marsh highlighted that new uncertainties may surround the implementation timeline and permanence of climate regulations, particularly for organisations trading soft commodities (such as coffee, beef, and palm oil), as well as in the energy, industrial manufacturing and construction sectors.

For example, the Deforestation Regulation’s full implementation was postponed until the end of 2025 with little warning after a lobbying effort, despite many businesses having already invested in reporting technologies or adjusted supply chains to ensure compliance. The last minute changes may have caused disruption to some operations or a financial loss.

The Carbon Border Adjustment Mechanism is set to take effect in 2026 but faces similar lobbying pressure to prune or delay the regulation, particularly from developing countries with carbon-heavy energy mixes that would be most significantly impacted.