Three key sustainability themes for U.S. insurance companies
In many ways, the insurance industry is at the leading edge of sustainability matters.
Today, sustainability issues weigh heavily on insurers’ minds. As evidenced in Nuveen’s recent global survey of major institutional investors, a strong majority of insurers are focused on the energy transition with roughly four out of five now considering or planning to consider the energy transition in their investment decisions.
Across the insurer community, three sustainability themes occur repeatedly:
- The importance of fundamental climate beliefs;
- Data challenges and the search for suitable impact investments; and
- The resulting innovative solutions for insurance companies and their partners.
Let’s take a closer look at these three themes.
No. 1: The importance of fundamental climate beliefs
Starting with a set of fundamental climate beliefs lays the groundwork for investment decisions.
A belief that climate risk is an investment risk, for example, provides a lens through which insurers and investors can better analyze the portfolio implications of climate change.
As another example, a belief that asset prices will shift as we transition to a low-carbon economy provides a set of assumptions that can help uncover future risks and opportunities.
It is paramount for insurers to revisit these fundamental beliefs regularly as views continue to evolve.
Solution: Acknowledge the significant impact that government policies can have on the pace of global decarbonization and add flexibility around how to prudently execute a net zero carbon goal. These steps are key to maintaining alignment between investment strategies and the changing landscape for insurers.
No. 2: Challenging gaps in data
Reducing carbon in portfolios is often easier when approaching it asset by asset class, which is why many insurers begin with assets in which they are confident in the available carbon data.
Thanks to relatively widespread disclosure, public corporate bonds and real estate can be the easiest starting points, followed by other directly owned infrastructure and real assets where asset-level operational data may be available. Private assets, especially those held indirectly through funds as well as municipal bonds and structured securities have proven to be more difficult for most insurers currently.
Solution: Where data is especially scarce, technology solutions can help fill gaps.
For example, software approaches are being used to map the revenue streams of portfolio company holdings to assess alignment as well as misalignment with Sustainable Development Goals and impact metrics across key ESG indicators. Some insurers address challenging data gaps by implementing data quality scoring systems like those put forward by the Partnership for Carbon Accounting Financials (PCAF). This process allows insurers to rank data from highly certain to highly uncertain and help determine how different types of data should be used.
No. 3: Finding suitable impact investments
Public filings show that some of the largest U.S. insurers have less than 0.5% of assets in a disclosed impact investing program. While many insurers want to expand their sustainable/impact investments, the challenge is finding suitable opportunities that are capital efficient, meet risk requirements and also have the scale insurers need to make investments worthwhile. This is an area where particularly interesting innovation is occurring.
The potential to use U.S. insurance company assets to deliver both financial return and a positive impact for people and/or the planet is evolving.
Solution: Structured finance combined with certain impact investments can address these challenges. A club of like-minded insurance companies was recently involved in raising more than $1 billion for Commercial Property Assessed Clean Energy (C-PACE) investment, a financing approach for upgrading existing buildings for energy efficiency. This transaction solved for scale and capital efficiency so that the insurers could use balance sheet assets for the investment. We also are seeing emerging partnerships between insurance companies and philanthropic capital creating structured investments.
Insurers at the forefront of innovation
We continue to be excited by the progress we are seeing across the insurance industry. From codifying climate beliefs to impact measurement and product innovation, I’m proud that the insurance industry is at the leading edge of sustainability matters.
Joe Pursley is head of Insurance, Americas at Nuveen LLC, which provides investment solutions through its investment specialists. These opinions are the author’s own.
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