Alexandra Cooley, chief investment officer and co-founder of Nuveen Green Capital, discusses the potential benefits for insurers of the public-private financing tool, Commercial Property Assessed Clean Energy (C-PACE), and how C-PACE could provide cost-efficient financing for sustainability measures

Why should insurers consider C-PACE? How does it work?

C-PACE provides insurers with access to very high quality, fixed rate cash flows with maturities that can extend to 20 years – three traits valued highly by life insurers in particular.

In addition to the fundamental investment factors that make C-PACE compelling to insurers, C-PACE-backed investments can be classified within impact buckets because the proceeds from this lending leads to a direct and quantifiable carbon reduction or climate mitigation for the commercial properties. This 'impact' portion of the investment has become much more important and prevalent with UK insurance companies today, and this is a trend we see continuing in the future.

Our investor base has always been focused on the insurance segment due to the traits of C-PACE matching well with many insurers' liabilities. Nuveen works closely with our insurance clients to develop structures that contemplate various regulatory nuances (e.g. Solvency II Matching Adjustment eligible structure to ensure that C-PACE can also be used in annuity backing portfolios and are certified by independent responsible investing firms, S&P and Sustainalytics). We endeavor to be solutions-orientated for our global insurance partners.

Our firm set out to create a cost-efficient financing product that benefitted commercial building owners in making sustainability improvements to their buildings. The demand from borrowers was overwhelming and we began to securitise Commercial Property Assessed Clean Energy (C-PACE) loans in 2017. By creating our securitisation programme, it became clear that we'd developed an extremely compelling insurance investment offering.

What are the investment benefits of C-PACE for insurers?

As an investment product, C-PACE typically offers higher yields than comparable products because the underlying security that the tax assessment structure provides has proven to deliver strong capital-efficient income, duration and diversification, alongside the opportunity to invest for impact without sacrificing risk-adjusted return.

The benefit assessment structure of the financing allows for added flexibility as it is repaid through the property tax bill over a term that matches the useful life of improvements or new construction infrastructure, which is typically around 20 to 30 years. The assessment transfers on the sale of the property and can be passed through to tenants where applicable, which is another added benefit.

One of the challenges to scaling clean energy is a gap in long-term, affordable, fixed rate financing. By definition, many of these financing products are new to the market and need scale in order for institutional capital to flow.

What is driving the need for energy and water improvements at commercial properties?

While sustainable buildings were previously seen as "nice to have," decarbonisation is now becoming an imperative that is being driven by several factors:

In the first place, energy prices are increasing in the UK, Europe and the US and are projected to continue to do so for the next several years. As a result, energy efficiency will become increasingly attractive in all three jurisdictions.

In the US, meanwhile, many cities and municipalities are enacting clean energy mandates, such as Local Law 97 in New York City, recently added Title 24 requirements for California's Buildings Standard Code, as well as BERDO in Boston to name a few. The fines associated with non-compliance are substantial. There are similar requirements in the UK and Continental Europe.

In the US, the White House continues its clean energy push following the passage of the Inflation Reduction Act in 2022, which offered $1trn in tax incentives and credits. Incentives in the bill for the commercial and residential real estate industries are expected to help the building sector make major contributions to that reduction. In the UK, the government has recently recommitted UK to Net Zero by 2050. There is strong national action across all Continental European countries.

Overall, with increased focus on the climate crisis, consumers and tenants are seeking responsible, sustainable investments, including in commercial buildings. It is no longer "nice to have" a green building – it is becoming seen as an imperative.

Where has C-PACE been enacted and are there plans for its expansion?

C-PACE policy has been enacted in 28 US states, as well as Washington DC. Nuveen Green Capital has a policy team that is dedicated to helping expand C-PACE's footprint in the US and helping to implement policy frameworks to bring it to new markets and municipalities.

While our operations are exclusively US for now, Nuveen Green Capital continually assesses the feasibility of international expansion. There are nascent programmes in some parts of the world that have expressed interest in replicating the U.S. C-PACE model, including the UK, Europe, Canada, and Australia, where a similar financing structure could be implemented. We are working with organisations within the UK to potentially develop a similar lending framework.

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