Today, I’ve been speaking at the World Future Energy Summit in Abu Dhabi about the potential for green sukuk. A few years ago, if I had said “energy investment” and “the Middle East” in the same sentence, your thoughts would probably spin to oil and gas rather than solar and wind. But there are now some huge renewable energy developments and plans around. (Of course the rationale may be to save more oil for export, but that’s OK – we’re best to fight that fight at the demand side.)
Combining those plans to scale up green investments in the region with the rapidly growing Islamic finance (sukuk) market – in 15 years it’s grown from nothing to $70bn issuance a year - and the surging green bonds market you end up with what something called “green sukuk”.
Sukuk are “tradable Islamic finance instruments”, consistent with the principles of Shari’ah. Sukuk represent an ownership in underlying assets or earnings from those assets. While sukuk are often described as Islamic bonds, there are also types of sukuk that have equity-type risk-sharing structures. Their closest equivalent is probably the “YieldCo”, with its fixed interest like return.
Just as green bonds are a subset of normal bonds with the difference being proceeds are used for green, green sukuk are a subset of sukuk that finance green assets. The asset-focused nature of all sukuk makes it a good fit with the green bonds concept, which is also asset-focused.
The investor pool for green sukuk is in both the Islamic world and in OECD markets. For Islamic investors they provide a means to more easily address Shari’ah concern for environmental protection in investment choices. On the other hand some of the biggest investors in sukuk in recent years have been in Europe and the US; a green sukuk.
For more details on how green sukuk will work and its benefits, have a look at the chapter we contributed to the newly launched Middle East Renewable Energy Guide from the law firm Eversheds and PwC.
We’re not the only ones talking about the green sukuk concept: we’re part of a green sukuk working group, along with the Clean Energy Business Council of the Midde East and North Africa and the Gulf Bond and Sukuk Association. And the World Bank and the Dubai Supreme Council of Energy are looking at green sukuk to fund Dubai's Green Investment Program.
But it’s not just a Middle East story – there’s a lot of talk in Malaysia in particular.
For example, in September, RAM ratings, a Malaysian ratings agency, announced that they see “great potential” in green sukuk at the Global Islamic Finance Forum (yep, that’s right – that’s a mainstream financial conference where it’s on the agenda). This was shortly after the Securities Commission of Malaysia in August had issued a framework for sustainable and responsible sukuk – although not specific to green, it was a step towards developing a thematic sukuk market, which is a step closer to making that a green thematic market.
Both Malaysia, and Indonesia have a significant number of sukuk issuers, a massive need for infrastructure investments and strong green growth plans. Perfect for green sukuk.
We’re now just waiting to see which country will see the first green sukuk issuance. The race is on!
BTW, did you know that the word “cheque” can trace its origins to the plural for sukuk – “sakk”, via the Persian version of the word, pronounced “check”. The word has been used in Islamic cultures since medieval times.
Our blogs are written by a team: Sean Kidney, Tess Olsen-Rong, Beate Sonerud, with a bit of help from Justine Leigh-Bell.
