This article originally appeared in The Circle 01.18. Find back issues here.
Long-term investors (LTIs) bring a unique set of resources that make them ideal partners for sustainable development. JAMES E. PASS addresses the benefits of LTIs in the Arctic.
THE ARCTIC stands at the crossroads of important trends in climate change and development. Given recent calls for private capital participation in development, especially infrastructure, Guggenheim Partners wants to emphasize how and why we believe LTIs can be the ideal partner for sustainable development in the Arctic with appropriate environmental and social safeguards.
The ability of LTIs to hold assets throughout business cycles and their preference for alternative investments, such as infrastructure and real estate, make them attractive partners to local leaders, planners, conservation groups and other stakeholders to create sustainably developed environments, while preserving plentiful natural habitat. They can provide capital that understands the convergence of long-term value and sustainability. LTIs have provided capital for essential projects for decades, including power, water, transportation and real estate development.
Since 2013 Guggenheim Partners has maintained an Arctic Infrastructure Inventory, detailing the physical asset needs of the region. Over the next 15 years USD $ trillion of investment in the Arctic is needed. LTIs can help to meet this investment gap. The Arctic and near-Arctic is a vibrant region, counting 12 million inhabitants and a USD $500 million annual economic output. Despite this footprint, many basic needs and economic opportunities go unmet. Some of these require the following investment needs:
- Renewable Energy $60.6 billion
- Rail $23.3 billion
- Maritime $16.8 billion
- Social Buildings (schools, hospitals, etc.) $2.4 billion
LTIs can provide some of the capital to fund revenue producing assets but governments need to be a partner in investment, with input from local communities, planners and conservationists. When LTIs provide targeted capital for specific purposes, public capital can flow where it is needed most. To ensure the long-term license to operate for these private and public investments, national and regional development plans with strong social license are needed.
In 2016, Guggenheim Partners participated in the creation of the Arctic Investment Protocol at the World Economic Forum. This document provides a framework and a commitment for investors in the region. The Protocol helps investors understand how to contribute to sustainable development, but it is only the beginning. Robust standards, tools and indicators are necessary to properly measure and understand both environmental impact and societal impact.
Guggenheim Partners, along with others, advocates for the development of more precise standards, tools and indicators to measure sustainability. Current practice is an improvement over efforts from years past but the mobilization of tremendous resources needs an institutionalized framework. To value sustainability investors need to measure it first.
The Arctic is changing at a rapid pace in both climate and human dynamics. In the years to come there will be opportunities for responsible economic growth. There will also be an imperative to protect this region. By proactively steering development on a sustainable and managed path, this region can be preserved while meeting the economic needs of its residents.
JAMES E. PASS is senior managing director at Guggenheim Funds.