As green bonds become increasingly prevalent in global financial markets, Malaysia is taking the lead in green sukuk issuance thanks to its sophisticated Islamic finance industry and ongoing collaboration with the World Bank.
Global green bond market
Green bonds are issued to finance a range of initiatives directed towards carbon emission reduction and climate change impact mitigation. Although the market is young, it is expanding fast. The European Investment Bank issued the first green bond in June 2007 and since then the practice has become increasingly common. Issuers now include corporations, financial institutions and even nations. This transformation has seen total global issuance of green bonds rise from just a few billion U.S. dollars in 2012 to a record level of US$81 billion in 2016, which itself is almost double the figure of US$42 billion for 2015 (see fig. 1). The sector is expected to grow even further in 2017.
As the market expands, it is also becoming more diversified, with issuances being made from an increasing number of countries and a variety of issuers. Innovation is also a theme and 2016 gave rise to a number of global issuance firsts, including green covered bonds, which have a dual recourse structure; a green bond backed by mortgages on energy-efficient homes, issued by Rabobank Group’s Obvion; and a green Schuldschein, or promissory note, issued by Nordex.
The increasing prevalence and diversification of green bonds to fund infrastructure projects such as renewable energy power plants and sustainable, energy efficient buildings have been closely observed by Malaysian policymakers for some time. Keeping a particularly watchful eye on this segment has been the country’s well-established Islamic finance sector. Malaysia is a global leader in the Islamic finance space and the industry is especially well suited to infrastructure investment initiatives. This is due to Islamic principles that forbid conventional lending or bonds that are based on interest and, rather, stipulate the need for financing to be asset based, with all risk being shared by the provider and the user of the asset.
The concept of green and sustainable development is becoming increasingly prominent in national policymaking and there is a resultant need to bridge the prevailing infrastructure gap in this area. In response, an innovative solution based on Islamic financing principles was put into effect in mid-2017 with the issuance of the world’s very first green sukuk .
The sukuk in question was issued by the energy company Tadau Energy for MYR250 million on 27 July. All capital raised will go towards the company’s 50-megawatt solar power plant project in Kudat, Sabah. Once complete, this plant is set to play an important role in boosting the proportion of electricity generated from green sources within the overall Malaysian energy mix, as per national targets. Affin Hwang Investment Bank, which is a member of the Malaysia International Islamic Financial Centre community, is acting as Principal Adviser, Lead Arranger, Lead Manager and Facility Agent for the issuance.
The instrument was issued under the Securities Commission Malaysia’s Sustainable and Responsible Investment (SRI) Sukuk framework and has been certified by the Center for International Climate and Environmental Research based in Oslo, Norway. The so-called ‘Green SRI Sukuk Tadau’ has tenure of 2 to 16 years and has been assigned a long-term rating of AA3 by RAM Rating Services, the largest credit rating agency in the ASEAN region.
Developing an SRI framework
The roots of the Green SRI Sukuk Tadau are lengthy and multifaceted. One of the key players driving the issuance was the Securities Commission Malaysia (SC). In fact, a fundamental step forward occurred in 2014 when the SC implemented its SRI Sukuk framework as part of its wider developmental agenda to facilitate a national ecosystem conducive to SRI investment.
Under this framework, and in line with Islamic principles, projects eligible for investment must be backed by physical assets or activities in the following sectors: natural resources; renewable energy and energy efficiency; community and economic development; and waqf properties and/or assets.
Accordingly, the local sukuk market is set to grow in the coming years. The nascent ecosystem in Malaysia helped to facilitate the country’s inaugural SRI sukuk issuance by Khazanah Nasional in 2015 for MYR100 million via its Trust Schools Programme, which was followed by a second tranche of MYR100 million in August 2017. The growth of this segment received further impetus with the introduction of the SC’s five-year Islamic Fund and Wealth Management Blueprint in January 2017, which, among other aspects, aims to consolidate Malaysia as a global leader in sukuk issuance.
Collaboration and sustainability
The Green SRI Sukuk Tadau marks the latest Malaysian milestone in what is already a mature and socially responsible investment ecosystem. The market’s potential is most clearly demonstrated by the SRI Sukuk framework under which the green sukuk was developed, which required extensive collaboration between the SC, Bank Negara Malaysia and the World Bank Group. Their collective efforts are not only set to facilitate the growth of innovative financial instruments, but also the green sector as a whole, particularly in terms of financing the country’s infrastructure investment.
The Chairman of the SC, Ranjit Ajit Singh, has praised the green sukuk as helping to strengthen the country’s value proposition as a centre for sustainable finance. Since the national ecosystem provides a number of incentives for investors seeking to contribute to a sustainable and more inclusive economy (see fig. 2), Malaysia is well on track to become a leading market for both conventional and Islamic-based socially responsible investment. This is highly significant since green and SRI sukuk are increasingly identified, including by Singh himself, as representing one of the most viable solutions for fostering responsible forms of financing, while also addressing global sustainability needs.
 A sukuk is an Islamic finance instrument with similar characteristics to a conventional bond. However, rather than conferring ownership of a debt, a sukuk grants the investor a share of an asset, in conjunction with the commensurate cash flows and risk.