MALAYSIA’S two financial market regulators, Bank Negara Malaysia (BNM) and Securities Commission Malaysia (SC), are pushing green sukuk as part of the fast-growing global green economy, finance and sustainable development agenda.
The two entities are engaging at the highest international level with the World Bank Group under the Sustainable Development Goals (SDG) agenda, IOSCO (International Organisation of Securities Commissions) under its Climate Bonds Initiative, the International Capital Markets Association under its Green Bond Principles, which now includes green sukuk, and with the Centre for International Climate & Environmental Research (Cicero), the respected Oslo-based independent second opinion green certification agency.
The rationale is to leverage Malaysia’s inclusion-friendly Islamic finance public policy, enabling legal and regulatory infrastructure, its leadership in the global sukuk market and its innovation in being the first jurisdiction to host the issuance of the world’s first green sukuk.
Last week, the Malaysia International Islamic Financial Centre (MIFC), a network of the country’s financial sector regulators, ministries and agencies, Islamic finance industry players and allied professions published a report on “Sukuk Going Green: Malaysia Continues to Drive Innovation”, which emphasised the collaboration and progress of BNM, SC and World Bank Group “to develop an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to accommodate global infrastructure needs and green financing”.
This collaboration yielded its first return early last month when Tadau Energy, the Kota Kinabalu-based joint venture between Kagayaki Energy, a Malaysian renewable energy and sustainable technology investment firm, and Edra Solar, owned by China’s clean energy group, China General Nuclear Power Corporation, issued “the world’s first green sukuk”, the RM250 million Green Sukuk Tadau.
The proceeds of the sukuk, based on the Islamic structures of Istisna (construction finance) and Ijarah (leasing), will be used to finance the construction of a 50 MWAc solar project in Kudat, Sabah, under purchase agreements signed with Sabah Electricity. So successful was the issuance that Cicero assigned its highest “Dark Green” compliance certification.
According to MIFC, green finance is gaining ground. Last year, global green bond issuance reached US$90.5 billion (RM378 billion) from 2015 issuance of US$47.2 billion. “It is estimated that investments in oil, coal and gas must decrease by one-third by 2030, while investments in renewables and energy efficiency must increase by a similar
portion if we are to keep global average temperature rise below 2°C. This presents a significant opportunity for green finance to be part of mainstream investment and financing,” says MIFC.
With its financial and social inclusion impact, climate and social-aligned finance, backed by the appropriate regulation and public policy commitment, could act as a vital “social multiplier” significantly expanding the impact of positive finance, especially Islamic finance, which has a neat fit with green finance, whose broad scope involves financing investments that generate benefits to the environment with the aim to achieve inclusive, resilient and sustainable development with maximum social impact.
Last year, the climate-aligned bond market grew by 16 per cent to US$694 billion, US$118 billion worth of which are labelled green. Global Sustainable and Responsible Investment (SRI) assets totalled US$22.9 trillion last year. According to Global Sustainable Investment Review 2016, Malaysia, with 30 per cent share in Asia (ex-Japan) is the largest SRI market in the region, as it recognises syariah-compliant funds as part of the SRI universe. The total global primary sukuk market amounted to US$89 billion last year and Malaysia accounts for 47 per cent of the primary market and 52.6 per cent of the US$150 billion sukuk outstanding.
Malaysia’s lead in innovating green finance and sukuk is underpinned by its pioneering work in regulating the sector through the SC’s SRI framework and green bond/sukuk market, the first of its kind in the world established in 2014 in cooperation with the World Bank to address global funding gaps in syariah-compliant green financing. The other OIC country pushing the green agenda is UAE through its Green Finance and Investment Support Scheme, which promotes financial growth through investing in green projects, products and services.
Malaysia has also introduced several proactive incentives to attract green issuers, including tax deduction until year of assessment of 2020 on issuance costs of SRI Sukuk approved, authorised by or lodged with SC. Green and SRI Sukuk is a nascent market, albeit Khazanah Nasional, the government investment fund, is a major issuer of SRI Sukuk, linked to education projects.
Malaysia has been promoting green investment and finance since 1970 relating to the palm oil industry. Malaysia’s green industries were valued at RM67 billion in 2012. With the addition of green projects under the Economic Transformation Programme, the industries are expected to create RM53 billion in gross national income by 2020. The growth potential for green sukuk, concludes MIFC, is timely with rising global interest in green financing where innovative fundraising instruments like green and SRI Sukuk is a viable solution to address global needs for green and other forms of sustainable and responsible financing.
The challenge for the Islamic finance industry as far as green sukuk is concerned is not to get bogged down in the rhetoric of aspiration couched in techno jargon, as the industry sometimes tends to do. Laurence Carter, senior director of the World Bank Group, recently stressed that SDGs would not be achievable without further growth in Islamic finance. To me, it is also the ethical dimension of Islamic finance with its focus on the real economy and duty of care for consequences in market conduct.
The writer is an independent London-based economist and writer