ESG investing

by Junbin Yuan

ESG investing is an investment strategy that considers and integrates environmental, social and corporate governance factors into the investment decision process.

In September 2015, UN announced 17 interconnected global goals as SDGs. Since then, the international capital market association made various kinds of principles, guidelines in order to promote the global finance and enterprise by the financial department of many initiatives and investment, which marked the macro investment prospects and market trends, namely sustainable asset reallocation of capital to a "structural change".

Over the past few years, we have seen an acceleration in pace at which banks, institutional investors, and multiple government agencies begin to impose ESG requirements on debt and equity financing.

Source: abc.net.au

Macquarie Bank,  as the world's largest infrastructure asset management group, has an inherent advantage and using financial tools in facilitating SDG8. For ESG investments, there are types of sustainable financial products as- green and social loans and sustainability related loans. Two of them are not materially different from standard loan products, while SDG one has incentives built within the financing structure, like interest margins that fluctuate depending on whether the borrower meets or exceeds certain pre-determined sustainable performance targets.

While the SUSTAINABILITY Linked Lending Principles provides a non-exhaustive list of KPI as a reference, we should accept the fact that company and industries are different and utilize ESG ratings provided by third-party agencies. Till now there are several leading providers in the market including Morgan Stanley Capital International (MSCI), Sustainalytics and Refinitiv, which also helps reducing concern of the risk of greenwashing.

On the other hand, the setting of sustainable performance goals should be both ambitious and achievable. As sustainable financial markets mature, we expect a more regulated system to evolve over the next few years, which insure the sustainability of business.