Social Impact Investing

Last Updated on 03/06/2024

Issue. Social impact investments are financial investments made with the explicit intention of addressing social issues and concerns. Insurers are increasingly making social impact investments, and many insurers that have not made social impact investments have expressed an interest in doing so. In a 2023 report of findings from a survey of institutional investors, Nuveen reveals that 82% of global insurance companies are “considering or planning to consider” impact in their investment decisions.[1] When asked in a separate Nuveen survey if they felt that “factoring in responsible investing risks and opportunities should always be part of the investment process, 76% of insurers either strongly (35%) or somewhat (41%) agreed.”[2] Insurer balance sheet positions in social impact investments are expected to increase significantly over the next few years.

Background. The goal of social impact investing is to align the traditional motivation for investing—an adequate and competitive risk-adjusted financial return that meets regulatory requirements—with a secondary motivation of contributing to positive social outcomes. Social impact investing is different from philanthropy, where the investment focus is entirely on social impact. Many companies, including insurers, make philanthropic investments, but social impact investments are balance sheet investments made with general funds. Investments in this context fall along a spectrum between traditional investing, where the motivation is purely financial, and philanthropy, where the focus is purely impact.[3] (Refer to Figure 1.)

Figure 1. Social Impact Investing Spectrum​

Although most insurer-investors take a finance-first approach, where social impact is secondary to earning a market-rate, risk-adjusted return, some may be willing to accept a lower risk-adjusted return in favor of greater social impact. That said, there is no inherent trade-off between financial performance and social impact. And regardless of primary investment motivation, most insurers want to see a tangible social impact.

Why Social Impact Investing? Insurers undertake social impact investing for several reasons.[4] First, insurance companies are in the business of managing risk. Social issues can introduce long-term risks into their financial portfolios. Hence, efforts to address social issues could be seen as a long-term risk management practice.

Second, many insurers see a link between their core business underwriting risk and the goal of creating a sustainable and resilient society. For example, an insurer that underwrites residential property may see a connection between their underwriting business and investments in sustainable, affordable housing.

Third, social impact investments can generate corporate goodwill. Being seen as socially responsible can enhance an insurer’s brand and reputation.[5] Indeed, some insurance companies view their role as not only providing insurance but also being responsible corporate citizens.[6] Moreover, increasingly, both individual and institutional clients, as well as internal stakeholders, are demanding socially responsible investment products.

Finally, some insurers make social impact investments in hopes of improving financial performance and/or better managing risk. In the Capital Group Environmental, Social, and Governance (ESG) Global Study 2022, 14% of survey respondents (10% in North America) reported that the primary driver in adopting ESG was to improve performance.[7] Another 10% (globally and in North America) reported risk management to be the primary driver.

Many social impact investments earn market or above-market returns. The research does not bear out the perception that social impact investments should underperform other types of investments. Existing empirical evidence on the financial performance of social impact investments vis-à-vis non-impact investments is mixed, but there is an increasing body of evidence that firms with better “social performance” have moderately better financial performance.[8] These gains may take time to materialize, however. A recent study of Standard & Poor’s 500 index (S&P 500) companies reports that companies with “good social impact practices” often outperform their counterparts in the long run.[9] Most insurance companies, particularly life insurers, have long-term investment horizons. Although a lack of longitudinal data and sufficient volume of social impact investments challenges researchers seeking to explore the financial performance of social impact investments, research in this area is accelerating.[10]

Under the federal Community Reinvestment Act (CRA), commercial banks are required to make “social impact investments” in the areas where they do business, specifically in areas where they take deposits.[11] No regulations require insurance companies to make social impact investments. However, state insurance regulators may have some involvement in the social impact investing space.

The California Organized Investment Network (COIN), which is part of the California Department of Insurance (DOI), collects reports from insurers and insurance holding companies on community development and environmental (green) investments made in California. These reports are required if annual premiums written in California exceed $100 million for any reporting year (Assembly Bill 1099, 2019). Some smaller insurers voluntarily report their impact investments. In addition to collecting this information, COIN makes an effort to facilitate social impact investing by matching funders with projects. However, insurance companies doing business in California are not required or directly encouraged to make social impact investments—only to report them.

Types of Social Impact Investments. Social impact investments are evolving into a separate asset class.[12] Social impact investments made by insurers come in a variety of forms. The most common social impact investment type in the insurance industry is Low-Income Housing Tax Credit (LIHTC) equity funds. By investing in these funds, insurers receive a proportionate distribution of dollar-for-dollar (federal) tax credits, delivered over 10 years, and depreciation allowances from the properties financed by the LIHTCs. In 2022, insurers held nearly $9 billion in LIHTC equity funds, according to NAIC calculations.

Other avenues through which insurers have made social impact investments include community development financial institutions (CDFIs), loan funds, social infrastructure private equity funds, certain types of municipal bonds (such as private activity bonds and mortgage revenue bonds), and direct investments, among others.[13]

Investment targets span a wide range of sectors and issues and depend on the specific social and financial goals of the investor. Social impact investors generally look for areas where impact can be a natural extension of their existing investment strategies. Among the three asset classes attracting the most attention from insurance companies is affordable housing, which has been a “staple investment of the insurance industry through tax credits.”[14] One-third of North American insurers have made or are considering making investments in affordable housing. In addition, 24%are making or planning to make investments in innovations that address financial inclusion, and 15% are making or planning to make investments in affordable healthcare.[15]

[1] Nuveen, “Reframing the Future,” website. In the Nuveen report, impact investment includes climate, economic infrastructure, and social infrastructure. The report itself is accessible at no charge upon entering an email address and other information in a form. For a CIPR analysis of insurance industry investments in economic infrastructure, refer to “Can Insurance Company Investments Help Fill the Infrastructure Gap?” September 2021.

[2] Nuveen, “Responsible Investing’s Role in Risk Mitigation.”

[3] Modified from IDP Foundation graphic

[4] Refer to Josh Dobiac, “Sustainable/ESG Investing in Insurance: Frequently Asked Questions,” Milliman, December 8, 2023, and references therein.

[5] Asif Mahmood and Jamshed Bashir, 2020, “How Does Corporate Responsibility Transform Brand Reputation into Brand Equity? Economic and Noneconomic Perspectives of CSR,” International Journal of Engineering Business Management, 12 [doi:10.1177/1847979020927].

[6] Refer to, for example, AXA, “Corporate Responsibility: The Many Ways Insurers Can Drive Positive, Sustainable Change.”

[7] Survey respondents were asked to choose only one reason for adopting an ESG strategy. ESG stands for “Environmental, Social, and Governance” and refers to a set of criteria or factors that are used to evaluate and measure the sustainability and ethical impact of an investment.

[8] Refer to John Peloza, 2009, “The Challenge of Measuring Financial Performance from Investments in Corporate Social Performance,” Journal of Management, 35(6), 1518-1541 [doi:10.1177/0149206309335188] and references therein; Marc Orlitzky et al., 2003, “Corporate Social and Financial Performance: A -Meta-Analysis,” Organization Studies, 24(3), 403-441 [doi: 10.1177/0170840603024003910]; Asli Aybars et al., 2019, “ESG and Financial Performance: Impact of Environmental, Social, and Governance Issues on Corporate Performance,” in Handbook of Research on Managerial Thinking in Global Business Economics [doi:10.4018/978-1-5225-7180-3.ch029]; Kun Tracy Wang and Yue Wu, 2023, “Corporate Social Responsibility Reporting and Investment: Evidence from Mergers and Acquisitions,” Journal of Business Finance & Accounting, December (forthcoming) [doi: 10.1111/jbfa.12768].

[9] Bejtush Ademi et al., 2022, “Does It Pay to Deliver Superior ESG Performance? Evidence from US S&P 500 Companies,” Journal of Global Responsibility, 13(4), 421-449 [doi: 10.1108/JGR-01-2022-0006].

[10] Anirudh Agrawal and Kai Hockerts, 2021, “Impact Investing: Review and Research Agenda,” Journal of Small Business and Entrepreneurship, 33(2), 153-181 [doi: 10.1080/08276331.2018.1551457].

[11] The CRA is much more complex than suggested here. Making social impact investments, or more specifically, community development investments, can satisfy the requirement assuming certain parameters are met, but there are other ways to meet the CRA requirement as well,

[12] Agrawal and Hockets, op cit.

[13] CDFIs are like non-profit banks that serve vulnerable and marginalized populations. About 90% of CDFIs are loan funds.

[14] Nuveen, “Think Equilibrium: 2023 Global Institutional Investor Study – Global Insurance Edition,” April

[15] Ibid.

In October 2021, the NAIC’s Center for Insurance Policy & Research (CIPR) produced the report Can Insurance Company Investments Help Fill the Infrastructure Gap? That report investigated various aspects of insurer investments in economic infrastructure. In 2023, the CIPR extended this body of work to social infrastructure, particularly social impact investments focused on community development. The CIPR is currently undertaking a large-scale investigation of social impact investments to understand comparative financial performance, regulatory implications, and, more generally, the opportunities and pitfalls that these types of investments present. The NAIC, including the CIPR and the Securities Valuation Office (SVO) (refer to the Valuation of Securities (E) Task Force), regularly engages stakeholders on this issue, including (but not exclusively) the American Council of Life Insurers (ACLI), state insurance regulators, insurers, community development organizations, and community development practitioners.