The Guggenheim Path to Sustainable Investing
Investing in safe, reliable infrastructure, and financing innovation in the sectors that will power our world, feed our people, and foster growth in ways that preserve and protect our environment.
As a fixed-income manager, we are motivated to deliver compelling investment solutions for our clients, many of which seek long-lived assets to match their capital needs. Infrastructure and project finance investments can fulfill these requirements, but we believe it is incumbent on providers of capital to enter into these investments while aligned with principles of sustainability.
Sustainable development is about delivering strong and stable investment returns in efficient, effective, consistent ways for the future of the world. At its core, this means investing in safe, reliable infrastructure and financing innovation in the sectors that will power our world, feed our people, and foster growth in ways that preserve and protect our environment. Looking back at hard lessons from history, we see how critical sustainable development is to healthy economic growth and social progress, the true north by which we believe every investment compass should navigate.
Guggenheim’s experience in advocating for sustainable development takes many forms, but it is driven by the size of the challenge and the imperative for responsible stewardship. The United Nations Global Goals for Sustainable Development (SDGs), which aim to end extreme poverty, protect the planet, and ensure prosperity for all, call for an estimated $4.5 trillion per year in capital investment in developing countries between now and 2030. In the Arctic region alone, which has so much potential for economic development, Guggenheim estimates a $1 trillion infrastructure investment need over the next 15 years.
As a model for the path that investors should follow when undertaking these projects, Guggenheim and other stakeholders joined with the World Economic Forum’s Global Agenda on the Arctic in a multi-year project to develop the Arctic Investment Protocol. When it was announced in 2016, Guggenheim was the first financial services firm to formally endorse the Arctic Investment Protocol, a milestone towards sustainable and responsible business practices, governance, and environmental stewardship.
Case Study: The Arctic Investment Protocol
The Arctic Investment Protocol of the World Economic Forum Global Agenda Council on the Arctic aspires to promote sustainable and equitable economic growth in the region that furthers community well-being and builds resilient societies in a fair, inclusive, and environmentally sound manner. The 22-member Council, which includes Guggenheim’s Global Chief Investment Officer Scott Minerd is a global committee devoted to ensuring responsible development in the Arctic. The following six principles lay the foundation for the Arctic Investment Protocol:
- Build resilient societies through economic development
- Respect and include local communities and indigenous peoples
- Pursue measures to protect the environment of the Arctic
- Practice responsible and transparent business methods
- Consult and integrate science and traditional and ecological knowledge
- Strengthen pan-Arctic collaboration and sharing of best practices
As asset managers actively involved in project finance and infrastructure investing, we understand that successfully meeting the need for sustainable investment will require funding from both public and private entities. Today there are pockets of capital devoted to sustainable development investing, but not in quantities sufficient to make a real difference. To attract the necessary scale of capital, sustainable development investing must become an institutional asset class.
Institutional investors with long investment horizons are becoming more interested in sustainable development opportunities. However, projects must be engineered at their inception to contain four key attributes—positive environmental, social, economic, and regulatory impact—before capital is committed. These four attributes constitute the framework we call the Sustainability Quotient, which determines the suitability of any proposed development project as an institutional investment.
Verifiable, actionable standards are essential in order to advance the Sustainability Quotient. As the infrastructure asset class has grown and developed over the last fifteen years, institutional investors, asset managers, developers, designers, and public sector sponsors have noted that infrastructure development has a profound impact on our climate, natural environment, and societies. Moreover, the asset class is a natural union between long-term investing and sustainability. Infrastructure assets have useful lives that often exceed 50 or 100 years, making sustainability and the accounting of environmental or social externalities particularly critical. Despite these facts, the field of infrastructure sustainability accounting and assessment tools is relatively underdeveloped. To address this problem, Guggenheim worked with the WWF and the Stanford Global Projects Center to produce a groundbreaking new study, “State of the Practice: Sustainability Standards for Infrastructure Investors,” which identifies and analyzes the various metrics established so far by multiple organizations to assess the sustainability of infrastructure investments.
While significant progress has been made, there is more work to be done to reach the goal of actionable, verifiable, and widely used standards. Through continuing this dialogue, we can move towards establishing standards and certifications for the planning, design, operation, financing, and community engagement that will benefit the world for generations to come.
Case Study: Setting Sustainability Standards for Investors
Working with the WWF, Guggenheim commissioned the Stanford Global Projects Center to analyze the myriad standards, reporting tools, ratings certifications, and accounting systems that have become a familiar part of sustainable investing. “State of the Practice: The Sustainability Standards for Infrastructure Investors” examined metrics and tools from 11 different global organizations, including the International Finance Corporation’s sustainability framework, Greenhouse Gas Protocol’s accounting standards, and Principles for Responsible Investing. The reporting systems operate either as project screening tools or accounting tools. The screening tools focus on the review or verification of information at the project level, culminating in a project rating or total score against a series of sustainability standards. The accounting tools are broad standards for reporting performance against specific indicators or sustainable development goals.
Investing involves risk, including the possible loss of principal. Infrastructure investments may be subject to a variety of risks, not all of which can be foreseen or quantified, including operating, economic, environmental, commercial, currency, regulatory, political and financial risks. Investing in a specific sector such as infrastructure is more volatile than investing in a broadly diversified portfolio, as there is a greater risk due to the concentration of holdings in issuers of similar offerings. Sustainability requirements, including environmental, social, and governance (ESG) obligations may limit available investments, which could hinder performance when compared to strategies with no such requirements.
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Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.