Environmental products – bank of the year: Macquarie Group

Energy Risk Awards 2020: Macquarie is now pioneering new frontiers in sustainable commodities

Scobie Mackay

Macquarie Group is betting big on the low-carbon transition. Since 2010 it has helped finance 22 gigawatts (GW) of renewables capacity, and last year announced plans to develop a further 20GW over the next five years. In 2017, the Australia-headquartered bank spent £2.3 billion (US$2.89 billion) acquiring the UK’s Green Investment Bank.

Its involvement in environmental markets is long-standing and extremely broad. It is one of the few financial institutions to have been active in the European Union’s pioneering Emissions Trading System (ETS) since its inception in 2005. It is active in numerous ETSs globally, including those in Australia and New Zealand. Its expertise in combining financing and environmental products has led to some unique transactions over the past 18 months and it has been at the cutting edge of environmental investment and designing new environmental products.    

“We believe that a fundamental shift is under way in commodities markets, as there is in the energy mix and the global economy at large,” says Scobie Mackay, a managing director in Macquarie’s commodities and global markets group. “Addressing climate change in a practical way will require, among other things, the design of a new class of environmental products and the catalysation of markets in which they trade.”

As might be expected, the commitment to clean energy and environmental markets comes from the top. The bank’s chief executive, Shemara Wikramanayake, who took over in 2018, is a prominent figure in international climate circles, including as a member of Michael Bloomberg’s Climate Finance Leadership Initiative and former UN Secretary Ban Ki-moon’s Global Commission on Adaptation.

An example of Macquarie’s strength in bundling corporate financing and environmental products into a single package is its £900 million financing of MGT Power’s Tees Renewable Energy Plant, the world’s largest new-build biomass plant, situated in the UK’s northeast and expected to begin operating this year. In addition to supplying debt and bringing in an external investor, Macquarie also hedged the biomass supply for the 299 megawatt capacity plant.

“Most banks can’t provide both the financing and specialism in a niche area like biomass,” says Ben Readman, managing director at Macquarie in London.  Macquarie will also market its Renewable Energy Guarantees of Origin – ‘green certificates’ that prove the renewable provenance of the power the plant generates.

“Most banks can’t provide both the financing and specialism in a niche area like biomass

Ben Readman, Macquarie

When it comes to the environmental attributes of commodities, Macquarie is backing a new initiative powered by the latest technology that promises to link environmental attributes to a much wider range of commodities than has been done before.

The bank is one of the cornerstone investors in XCHG, an innovative new commodity exchange that will link data related to the production of commodities to the actual physical product, creating markets in what it describes as “intelligent commodities”. The exchange uses cryptography to link information such as the water used and the methane released by a shale plant operator to the natural gas it sells, or the fertilisers and water used by a particular farmer to its crops. By allowing buyers to see the specific environmental impacts of a commodity it is buying, the exchange promises to allow more sustainably produced commodities to command a premium price. 

“As the world transitions to a low-carbon future, all commodities will eventually have environmental attributes that serve as quality differentiators to a baseline (such as a carbon intensity index),” says Mackay. “XCHG combines a specialised environmental commodities exchange with the ability, through the Xpansiv data platform, to create tradable environmental attributes, and we see this as a scalable approach to building out forward-looking, climate-aligned commodities markets.”

The bank is using the exchange as a platform for its carbon offsetting business and, through its investment – which it declines to put a figure to – “we will encourage XCHG to build out new carbon-neutral commodities products and related offerings which, over time, we hope to be tradable on the platform”, Mackay says.  “Macquarie’s investment in XCHG is one example of our intention to be at the forefront of driving this transition into a low-carbon future.”   

Now, as always, Macquarie remains active in the EU ETS. The scheme enters its fourth phase next year, which runs to 2030. “What we’re seeing is lots of companies looking to transact on an over-the-counter basis to hedge their phase four obligations,” says Readman. “We are one of the few banks adding to our presence in that market and picking up new clients,” he says, noting Macquarie’s March acquisition of Societe Generale’s OTC energy commodities portfolio, which includes EU carbon positions.

Macquarie is also combining its environmental markets and structured products capabilities in offering structured notes that allow investors to take positions in EU carbon allowances, while simultaneously helping utilities reduce their funding costs.

With expectations of tightening policy and growing demand for carbon certificates, the carbon market is currently an attractive investment compared with many financial markets where low euro interest rates are making it hard to find assets offering yield, notes Readman.