A version of this article appeared in The Power of Ideas, the flagship publication of the 2016 Milken Institute Global Conference.
I grew up in Western Pennsylvania during a halcyon period. It was the 1960s, the postwar industrial economy was booming, and Pittsburgh supplied about 70 percent of the world’s steel. There was a feeling of great prosperity and limitless opportunity, but that would soon change. By the end of the 1970s the steel mills I knew as a boy had been shuttered. The collapse of the massive regional industrial complex left blighted towns, impoverished lives, and a polluted environment. I wondered why my hometown failed so miserably, why the roadmap for economic development in the region ended with such disaster.
"At its core, sustainable development means investing in safe, reliable infrastructure and financing projects that will power our world, feed our people, and foster growth in ways that preserve and protect our environment."
Looking back at this and many other hard lessons from history, we see how critical sustainable development is to healthy economic growth and social progress, which is why it is also the “true north” by which every investment compass must navigate. 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 where almost none exists, 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. That is sustainable development.
But capital will only flow to sustainable development in the future if it can also meet the institutional investor’s mandate to generate strong and stable returns.
The good news is achieving strong and stable returns no longer requires trade-offs. We no longer need to sacrifice economic growth for environmental protection, or give up compelling returns in order to make responsible investments. In fact, in the future, I believe it will be impossible to deliver strong and stable returns without a principled approach to sustainability.
Nowhere is this principled approach to investing needed more than in the Arctic region. The Arctic is truly the final frontier market for global investors, and it is the bellwether for the sustainable development movement. Home to 12 million people and $450 billion in annual economic output, the Arctic already produces a significant share of the world’s food, minerals, and energy. As climate change affects the Arctic, the region will only grow in environmental and economic importance to the world. Arctic sea ice currently covers 65 percent less of the region than it did in 1979. By 2040, the Northern Sea Route could be open year round, resulting in faster, more energy-efficient global trade. In addition, the Arctic holds an estimated one-quarter of the world's undiscovered oil and gas reserves, but its ability to generate and share energy from wind, hydro, tidal, geothermal, solar, and biomass will make it a leader in the future of clean energy.
"At the heart of sustainable development is our mandate to generate strong, stable investment returns."
As the climate transforms the Arctic, so will the Arctic transform the world, creating extraordinary long-term investment opportunities with real responsibilities. To adapt and thrive, communities will need critical and careful investment, paired with a strong commitment to protect and preserve the environment for future generations. The World Economic Forum Global Agenda Council on the Arctic took an important step towards this goal by establishing six foundational and formative principles for responsible investment in the Arctic, called the Arctic Investment Protocol. We estimate that infrastructure investments in the region are expected to reach US$1 trillion over the next 15 years, and these principles set clear standards for sustainable and responsible business practices, governance, and environmental stewardship.
The Arctic, with its possibilities and challenges, is just one example of the global need for sustainable development. Last year, 193 nations adopted the United Nations Global Goals for Sustainable Development (SDGs), which aim to end extreme poverty, protect the planet, and ensure prosperity for all. The SDGs require up to an estimated $4.5 trillion per year in capital investment in developing countries between 2015 and 2030. Current investment in these areas is around $1.4 trillion, leaving an annual investment gap of around $3.1 trillion. If just 1 percent of the $300 trillion global capital stock were allocated to sustainable development each year for the next 15 years, we could free the world from extreme poverty, spare millions from the perils of preventable disease and lack of education, and promote freedom and economic opportunity. We can achieve this and so much more if we recognize we no longer live in a world of trade-offs. Smart, strategic investments in sustainable development today can deliver strong, stable returns, and make the world a better place.
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.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2016, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
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