Malaysia and Indonesia show how green sukuk fights climate change
In 2015, 195 countries signed the historic Paris Agreement on tackling climate change, an ambitious attempt to build on the United Nations Framework Convention on Climate Change. This involved binding all signatory countries to a common approach for creating a global response to climate change challenges.
However, since then, with the tightening of government budgets and more immediate policy priorities, green financing has not been at the forefront of the agenda. That was most notably evidenced by the withdrawal of the US from the Paris Agreement.
At a time when populations across the world are experiencing increased environmental disasters, food insecurity and rising temperatures, it is vital that we look to innovative tools and alternative methods such as faith-based financing solutions. New thinking is needed.Islamic finance
The Islamic finance industry was founded and developed on adherence to Sharia. It has grown tremendously in the past two decades and the World Bank estimates that by 2020 the industry will reach $3 trillion in assets. Furthermore, environmental stewardship is deeply enshrined in Sharia principles and Islamic teachings.
Given the importance that Islam places on the care of the environment, combined with the growth of the Islamic finance market and growing green financing needs, it is only logical that the Islamic finance industry should be encouraged to get involved in climate change issues.
The creation of Islamic green finance, a confluence of Islamic and green finance, is one way of addressing the issue. It is a form of socially responsible investing, which seeks to consider not just the financial return but also the social good. The concept of socially responsible investing is aligned to the ideology of Maqasid Al Sharia, which outlines the objectives prescribed in Sharia to protect and preserve the interest of society.
Islamic green finance has been growing in popularity in the past couple of years with one of the latest developments the creation of green sukuk. These are Sharia-compliant capital market instruments similar to green bonds, whereby the proceeds raised are specifically allocated for use in funding environmentally friendly projects such as waste management and renewable energy.
Accordingly, in 2014, due to the rising trend for and increased popularity of green bonds and social investing, the Securities Commission of Malaysia launched a sustainable and responsible investment sukuk framework.
By tapping investment markets not open to conventional green bonds, green sukuk offerings have the opportunity and potential to help meet the world’s increasing appetite for green financing solutions. Unlocking this potential could help to finance the fight against climate change. For example, earlier this year, Indonesia issued the first sovereign green sukuk, raising a total of $3 billion through a dual-tranche deal.
Case study: Malaysia
In Malaysia, green sukuk are proving to be effective tools for funding environmentally friendly projects and addressing the country’s growing green financing needs. The Malaysian government sees the importance in Islamic green finance and the benefit of stepping in to create a regulatory environment to encourage this.
To date, only a few green sukuk transactions have been issued utilising the Malaysian Securities Commission’s SRI sukuk framework, raising a combined 1.25tn ringgit (Dh1.1bn) for the funding of renewable energy projects.
In July 2017, Tadau Energy, a Malaysian subsidiary of Chinese-owned Edra Power Holdings, became the first issuer of green SRI sukuk, raising a total of 250 million ringgit to finance a 50MW solar power plant in the Malaysian state of Sabah. The offering was more than twice oversubscribed.
Subsequently in October 2017, Malaysian corporate Quantum Solar Pak issued a green SRI sukuk, raising a total of 1bn ringgit to finance the construction of solar photovoltaic power plants in three Malaysian states.
Galvanising Islamic green finance
The governments of Indonesia and Malaysia have taken the lead in leveraging the use of Islamic finance tools to fund renewable energy projects.
In particular, it is hoped that these early successes could encourage GCC countries to consider issuing green sukuk, given that green finance has also been steadily gaining traction in the Arabian Gulf region. Last year, First Abu Dhabi Bank, the largest bank in the UAE, issued the region’s first green bond, raising a total of $587m. Unlocking the potential of green sukuk could help the region meet its growing renewable energy requirements, including aiding Saudi Arabia in addressing its ambitious 2030 agenda.
For the market to really take off, other jurisdictions need to take a leaf out of Malaysia’s book and develop regulatory environments that embrace Islamic green finance as a funding opportunity.
It is only logical that the Islamic finance industry should be encouraged to get involved in climate change issues