2020 marks the 3-year anniversary of the first green sukuk, a unique capital market instrument merging green and Islamic finance.
A green sukuk is financially similar to a ¡°conventional¡± sukuk or Islamic bond, except that the proceeds of a green sukuk can only be used to fund environmentally-friendly projects.
Malaysia debuted the first green sukuk and to date has the largest number of green sukuk issuances. Indonesia, meanwhile, has raised the most through green sukuk issuances.
Size of green sukuk issuances
- USD6.1 billion has been raised through 12 unique green sukuk issuers from Indonesia, Malaysia, the United Arab Emirates and one multilateral development bank (up to July 2020)
- USD-denominated issuances make up 65% of green sukuk issuances, followed by Euro-denominated (18%), Ringgit-denominated (16%) and Rupiah-denominated (1%)
Support mechanisms for green sukuk
- External reviewers provide independent verification that a green sukuk issuance is ¡°green¡±
- Impact reports that inform investors of the environmental impact of financed projects
- Financial incentives that mitigate the cost of green sukuk issuance
Challenges to overcome
- Project-based green sukuk issuances are too closely linked with only renewable energy and green real estate projects ?
- Green sukuk can finance a wider range of projects from solid waste management to sustainable land use to biodiversity conservation
- The lack of classification of green assets and projects by financial institutions prevent the pooling of green assets for green sukuk issuances.
- National green taxonomies will assist in easing and standardizing green asset identification
- Other challenges include restrictive issuance criterion, steep learning curves for new issuers, marginally higher costs due to review and reporting costs
Despite these challenges, there are many opportunities of sukuk issuances in green sukuk and beyond. Emerging themes for issuances include:
- Social sukuk towards positive social outcomes
- Sustainable sukuk towards positive environmental and social outcomes
- Sustainable Development Goals sukuk aligned with some or all SDGs
- Sustainable and Responsible Investment (SRI) sukuk broadly encompassing the outcomes above
- Blue sukuk to fund marine and ocean-based projects.