Insulated siding breaks the "thermal bridge" between the home's studs and exterior cladding. Thermal bridging occurs when materials with poor insulating properties contact each other, allowing heat to flow through them. Because most home insulation is installed between the studs, heat escapes through the studs and exterior cladding.
Insulated siding reduces thermal bridging and now is accepted as home insulation in various energy efficiency programs. In fact, insulated siding has been added to the checklist of building products or methodologies that can help meet the requirements to qualify new homes under ENERGY STAR Qualified Homes Version 3.