The Green Sukuk is a strategic market in the Non-Interest Finance Space designed to provide funding for sustainable projects in the globe. Saturna Capital in its analysis believes Green Sukuk expands the dual investment mandate of green bonds by including a third element: faith-based alignment.
According to the Malaysia International Finance Centre there has been a growing interest in the past few years towards socially responsible investment (SRI) or green Sukuk.
The growing trend toward SRI or green Sukuk is mainly due to the natural progression of markets, the growing awareness of investors toward ethically and socially responsible investment and the stricter capital requirements for the bank to finance infrastructural projects.
In 2019, the Indonesian Government issued a green Sukuk worth $750 million with a five-and-a-half-year maturity period and a 10-year tenor of $1.25 billion regular, both of which were oversubscribed.
It marked an opportunity for Indonesia to tap into the market opportunities in the green space and also address its sustainable development goals objectives. The nation of Indonesia now holds the record of the first sovereign to issue a sovereign green in the globe.
Also, in the year 2019 the Islamic Development Bank also issued a green of about 1bn Euros which will be deployed by IsDB towards a range of climate-change and green projects in its 57-Member Countries.
This will cover projects like renewable energy, clean transportation, energy efficiency, pollution prevention and control, environmentally sustainable management of natural living resources and land use and sustainable water and wastewater management.
Despite the developments in the Green Sukuk there are still challenges it faces that has to be addressed, to enable it boost Islamic Finance and the global economy.
The issues include the following:
-Inability to Identify Key Green Sukuk projects
-Lack of a pricing incentive
-Potential issuers cost of a Green Sukuk
-Lack of ESG standards- Many potential issuers lack internal environment, social and governance standards or sustainability programmes.
-Lack of acceptance for Green Sukuk by international investors due to lack of standardization and legal enforceability.
-The secondary market for Green Sukuk is very small due to small number of investors holding funds and other institutional investors which traditionally require robust secondary market for meeting the investors’ liquidity expectations.
-The absence of the standard and verification system for performance measurement of Green bonds.
Green Sukuk may expose to higher risk profile. This is because many environmental friendly projects involve a sophisticated degree of new technology due to construction and operation of green technologies.
-The difficulty to assure investors that proceeds will be used for projects with economic value, while meeting accepted and credible green standards.
Green Sukuk has immense opportunity of helping the Gulf Countries and OIC member states in achieving a transition to a sustainable future.
Source Proshare