From evolving climate beliefs and tackling data challenges to innovations in product design

Even if they’re not talking about it publicly, sustainability issues are weighing on insurers’ minds. We know this from our investor discussions, surveys and annual insurer sustainability think tank.

Three themes occur repeatedly—the importance of fundamental climate beliefs, data challenges and the search for suitable impact investments. And insurance companies and their partners are finding innovative ways to address them.

1. Fundamental climate beliefs are paramount

Some insurers tell us it’s imperative to start with a set of fundamental climate beliefs to lay the groundwork for investment decisions.

A belief that climate risk is an investment risk, for example, provides a lens through which insurers (or any investor) can better analyze the portfolio implications of climate change. A belief that asset prices will shift as we transition to low a carbon economy provides a set of assumptions that can help uncover future risks and opportunities.

Revisiting those fundamental beliefs regularly is important, as views continue to evolve. The?TIAA General Account, for example, recently reviewed its climate beliefs. Their refreshed belief acknowledges the significant impact that government policies can have on the pace of global decarbonization and adds flexibility around how they prudently execute their net zero carbon goal. This approach to climate beliefs helps to maintain alignment between investment strategies and the changing landscape.

2. Tackling the data challenge

A common approach to reduce carbon in portfolios is asset class by asset class. Many start 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 point, 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.

Where data is especially scarce, some asset managers are using technology solutions to help fill gaps. Churchill, Nuveen’s private credit investment specialist, has partnered with Upright Project to estimate borrowers’ impact on climate, among other themes. This software can map the revenue streams of portfolio company holdings to assess Sustainable Development Goals alignment and misalignment along with impact metrics across key ESG indicators. For municipal bonds, Nuveen integrates its proprietary ESG scoring of municipal bond issuers with analysis of thematic impact bonds’ use of proceeds that align with the UN Sustainable Development Goals.

But even with these advances, data confidence is going to vary across investments. Some insurers are addressing this challenge by implementing data quality scoring systems, like those put forward by Partnership by Carbon Accounting Financials (PCAF). This process allows insurers to rank data from highly certain to highly uncertain to help determine how different types of data should be used.

3. Innovations in scalable Schedule D impact investments

Many insurers have told us that they want to expand sustainable and/or impact investments outside the impact sleeve of their portfolios (which is typically very small) and into their larger Schedule D holdings. Public filings show that some of the largest U.S. life insurers have less than 0.5% of assets in a disclosed impact investing program.

The challenge is finding suitable opportunities that are capital efficient, meet risk requirements and also have the scale insurers need to make investment worthwhile. This is an area where we see some interesting innovation.

Structured finance, when combined with certain impact investments, can solve for these challenges. Nuveen, for example, in partnership with a club of like-minded insurance companies, recently raised over $1 billion for Commercial Property Assessed Clean Energy (C-PACE) investment. The key to unlocking insurance capital for C-PACE was solving for scale and capital efficiency so insurance companies could use Schedule D assets for the investment.

Impact investing with balance sheet assets is clearly in its infancy. However, 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. For example, we’re 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. At Nuveen, we manage over $320B in assets for insurers* and we’re owned by TIAA, one of the world’s most highly rated and financially stable insurance companies.** From codifying climate beliefs to impact measurement and product innovation, the insurance industry is at the leading edge of sustainability matters.

To learn more about how Nuveen partners with insurance companies, visit www.nuveen.com/insurance.

*As of December 31, 2023

**TIAA is one of only three insurance groups in the United States to currently hold the highest possible rating from three of the four leading insurance company rating agencies for its stability, claims-paying ability and overall financial strength.

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