The Use of Green Sukuk Grows to Support Environmental Projects

"If the world is to avoid catastrophic climate change, trillions of dollars of sustainable investments will need to be made every year between now and 2050," writes Melanie Noronha, senior editor for The Economist Intelligence Unit's (The EIU) thought leadership division in EMEA. "Much will have to come from capital markets where investors have already demonstrated an appetite for 'green bonds' which tie the proceeds to environmental projects. There are hopes that sukuk—a sharia-compliant financial instrument similar to a bond—could also be channeled towards environmental investments."

Supported by the Dubai Islamic Economy Development Center, Ms. Noronha's article, "A new shade of green: Sukuk for sustainability," is the first in a series by The EIU on "Innovation in the Islamic Economy." According to the article, "The first shoots of a similar 'green' instrument in the Islamic finance sector emerged not too long ago. In 2017, renewable energy group Tadau Energy issued the first 'green' sukuk, raising US$59m to finance a solar power plant in Malaysia, the birthplace of conventional sukuk in the 1990s. Indonesia issued sovereign green sukuk worth US$1.25bn in 2018 and US$750m in 2019 to fund environment-related projects."

Moreover, "There is activity in the Arabian Gulf countries as well. In 2019 Majid Al Futtaim, a UAE-based retail company, raised US$600m with the region's first corporate green sukuk. This was followed by a €1bn (US$1.12bn) green sukuk by Saudi-based Islamic Development Bank to finance renewable energy, green transportation and pollution control in its member countries."

Ms. Noronha explains that "[c]ompared to conventional sukuk, the market for green sukuk is tiny. Conventional sukuk issuance totaled US$162bn in 2019, while the total outstanding debt for green sukuk amounts to only US$7.9bn..." She adds that "some view it as a natural solution for low-carbon investment. Islamic finance is based on assumptions of fairness and social responsibility, and—while it has not always been observed—environmental stewardship is intrinsic to sharia principles."

What is more, "Since sharia forbids the receipt of interest, sukuk are backed by assets and investors are paid an agreed share of the profits before being returned the principal at maturity. This structure gives them confidence that their capital is being used for a particular purpose."

As a way to combat the effects of climate change, I am witnessing a rise of business and investment opportunities in Africa, Asia, and the Middle East in the automotive (electric vehicles) and renewable energy (wind, solar, and biogas) sectors. Recognizing an increasing interest among investors to support environmental, social and governance initiatives (ESG), I concur that "[t]he combination of investors seeking sharia-compliant investments and those with ... ESG priorities provides a wide investor base for green sukuk."

What instruments are you seeing used to support sustainable investments?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.