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Insurance Companies and Impact Investing

Institute for Sustainable Energy's picture
Research, Boston University Institute for Sustainable Energy

The Boston University Institute for Sustainable Energy (ISE) translates sustainable energy research into urgent action. The ISE is a university-wide center dedicated to developing energy systems...

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  • Jan 19, 2021
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The need for greater investments that incorporate social and environmental impacts is clear. Governmental and philanthropic resources, while critical, will be insufficient to respond to our economic, social, and environmental challenges. The private sector is expected to align its actions with societal goals, and stakeholders increasingly have the tools to hold it accountable, thanks to progress on data and standards for impact measurement and reporting. The pending “era of impact transparency” will be both a risk and an opportunity. Businesses that proactively manage their impacts will experience greater opportunities and lower risks as the world comes to terms with the many crises facing it.

As part of my ongoing efforts to understand how impact investments align with the goals and risk appetites of institutional investors, I have researched impact investing activities of insurance companies. Insurance companies are uniquely suited to engage in investing that addresses social and environmental goals.

  • Insurers naturally take a long-term view. This view can contribute to patience and flexibility when deploying capital. Such catalytic qualities are instrumental to unlocking more market-based solutions to social and environmental problems.
     
  • Insurers have deep investment expertise, which sets them apart from most other long-term investors. Insurance companies also have skills in evaluating non-financial outcomes given their adoption of environmental, social, and governance (ESG) investing and can leverage those skills in impact investing.
     
  • Insurers are leading corporate citizens through their giving and volunteer programs, with insights into effective solutions to societal challenges. Impact investing can amplify the impact of these programs by bringing additional resources to the issues they address. Many insurers also have a history of community investing, which has goals and risks similar to impact investing.

Few insurance companies have embraced impact investing despite their complementary skills and activities. Of the nearly 300 respondents to the Global Impact Investing Network’s 2020 Impact Investor Survey, only three were insurance companies.

Prudential is a notable exception among insurers both in terms of scale and sophistication of its impact investing activities. Prudential has leveraged its investment and philanthropic expertise to build one of the largest impact investment portfolios in the world. Prudential makes impact investments through both its general account and its foundation and also manages a portfolio of higher-risk impact investments to catalyze new and innovative solutions. Prudential’s approach to impact investing recognizes that impact investments offer a continuum of returns. Its impact portfolio includes market-rate, catalytic, and philanthropic investments. Most of Prudential’s portfolio is invested in market-rate impact investments, which along with traditional investments are used to support the company’s insurance liabilities. Its catalytic portfolio includes higher-risk investments that are not used to support liabilities but offer potential “learning returns” and may move to the market-rate portfolio if successful. The philanthropic portfolio provides concessionary capital to non-profits including community development financial institutions.

The pandemic is accelerating the need for institutional capital to be part of rebuilding our economy in a more equitable and sustainable manner. Insurance companies are already being called upon to engage with impact investing in a more significant manner. A recent report recommending policy priorities for COVID-19 recovery stated on page 30:

“At a national level, requiring that insurers report annually to the NAIC about their impact investment or ESG activities could incentivize these companies to invest more of their capital in underserved communities and/or for environmental benefit. Such reporting could further unlock new capital within the impact investment market.”

Insurance companies are also starting to attract the attention of stakeholder groups that have in the past campaigned for banks to do business more responsibly.

Impact investing is an opportunity for more insurance companies to make significant contributions to economic, social, and environmental challenges while also meeting business goals and strengthening their social license to operate. By deepening, scaling, and connecting existing efforts, insurance companies have the potential to become the leading impact investors of the future.

Pauliina Swartz, a Senior Fellow at the Boston University Institute for Sustainable Energy, advises and raises capital for mission-driven organizations and funds and seeks to bring new pools of institutional capital to impact investing.

The opinions expressed herein are those of the author and do not necessarily represent the views of the Boston University Institute for Sustainable Energy.

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