The Western Pennsylvania of my youth was a magical place, with bucolic parklands and architectural gems like Frank Lloyd Wright’s Fallingwater. The decline of the steel industry over subsequent decades has left this beautiful countryside scarred with abandoned mills and rife with the toxins and refuse of a dying industry. This experience informs my perspective when I think about how to tackle the problem of funding the estimated $2.5 trillion gap in annual global infrastructure needs: How can future development avoid the mistakes of the past?
Notwithstanding President Trump’s commitment to reopen shuttered steel mills, the legacy of the steel towns of Western Pennsylvania carry lessons to be applied to the construction of new factories and infrastructure today. There must be a framework in place that measures and monitors each project’s environmental, social, economic, and regulatory impact. Only when policymakers and investors make decisions based on a sustainability quotient that effectively evaluates these four factors will sustainable investing become the true north by which every investment compass must navigate.
Today there are pockets of capital devoted to sustainable development investing, but not in sufficient size. Publicly traded or bank-owned asset managers have so-called retail money and other portfolios devoted to classic Environmental, Social, and Governance (ESG) mandates or impact investing, but that capital does not approach the scale of investment needed. Other sources of funding seek to leave the world a better place, but without much of a return expectation. This is philanthropy, not investment, capital.
But an awakening is near for insurance companies and pension funds that control some $60 trillion in assets with 30- or 50-year investment horizons. These stewards of capital are increasingly being held accountable for the types of investments they make. Increased portfolio transparency, a growing social consciousness among younger people, and empowered citizen-reporters using their smart phones and social media are exposing—and calling out institutions that do not use their investment might to serve a higher purpose. We have reached an inflection point where doing right for the world and doing well for investors are converging.
Institutional investors with long investment horizons are becoming more interested in sustainable development opportunities, but they must be engineered to contain the four key attributes at their inception, before capital is committed. These four attributes constitute the framework for our sustainability quotient for determining the suitability of any proposed development project as an institutional investment.