New Macquarie Group Ltd (ASX: MQG) chief executive, Shemara Wikramanayake, gave an interview to the AFR today in which she talked up Macquarie's push into the green investment space and its role providing input into a United Nations report titled Adapt Now: A Global Call for Leadership on Climate Resilience.
Macquarie's single biggest profit earner is still 'asset management', but when it talks about 'green' investing it actually means traditional lending as much as 'investing'.
This is because via principal or syndicated lending, advisory work, asset financing, or arranging debt funding for huge green projects such as solar, wind, or hydroelectric power it can make excellent risk-adjusted returns on investment.
For a few years now 'green' investing has been central to its long-term growth plan, but despite the hyperbole over developing an environmental conscience, Macquarie is not doing this as it's suddenly turned all eco-warrior.
It's still all about profit growth.
Here are five reasons why Macquarie is really going green.
- In April 2017 it completed a deal to buy the UK's Green Investment Bank (GIB) for around A$4.1 billion from the UK government. This is notable because the GIB is the first multi-lateral development bank to fall into private hands and Macquarie was desperate to get it despite some political opposition in the UK. Multi-lateral development banks such as the World Bank, African Development Bank, or European Bank for Reconstruction and Development have long existed to funnel huge amounts of public and private capital into infrastructure projects that aid development in return for a profit. Macquarie now owns the only exclusively green-focused multi-lateral development bank and has multiple ways to make big profits from it.
- Capital flows (public / private) – it's obvious that eye-watering amounts of government and pension fund money (e.g. industry super fund) is looking to invest in 'green projects' to achieve a modest but 'sustainable' return. In part it's a scale game and the more deal flow Macquarie can arrange the more fees it can earn. Skimming fees from structuring green capital or debt markets deals actually provides excellent low-risk adjusted returns. While getting involved in 'syndicated' lending as a lead or otherwise also provides relatively good risk-adjusted returns compared to some of its other Corporate and Asset Finance activities for example.
- Expertise / networks – thanks to the success of its 'infrastructure' investing arm it already has the 'know how' and networks to arrange or structure green financing. Investment banking talent is limited and the further it can stretch it the more profit it can make. While the 'networks' involved in public /private syndicated lending are also hard to build unless you have a lot of prior experience and credibility in the space.
- Competitive advantage – Macquarie has struggled against the powerful U.S. investment banks in the lucrative U.S. capital markets, which is why it chose to specialise in infrastructure or commodities investment many years ago. If it specialises in the green investment space it can also be a big fish in a big pond, rather than a small fish in a big investment banking pond dominated by hungry overseas rivals.
- Green is the future – It's been estimated that they'll be $68 trillion of infrastructure investment over the next 20 years or so and much of that is going to be in the green space. If you're a long-term investor it makes sense to hitch your wagon to Macquarie and its plans to grow profits from this trend.
Move over World Bank?
Given its adaptability and willingness to innovate into the green space I still expect Macquarie will be a better long-term investment than the likes of Commonwealth Bank of Australia (ASX: CBA) or Westpac (ASX: WBC).
Moreover, it looks like Macquarie is filling the role of the old government-owned multi-lateral development banks in order to profit from the structural shift into green investment.
Publicly, it wouldn't make sense for Macquarie to outline this as a strategy (as it would be politically controversial for one), but given the tailwinds and its new CEO's ongoing positioning it looks like this is the latest growth strategy.
