The Green Sukuk and Working Party (GSWP) has been established by the Clean Energy Business Council (MENA), the Climate Bonds Initiative and the Gulf Bond and Sukuk Association (GBSA), to promote and develop Shari'ah-compliant financial products to invest in climate change solutions.
GSWP is a collaboration of experts in project development, environmental standards, capital markets, actuarial compliance and Islamic finance.
The GSWP will:
- Design Green Sukuk architecture, so that product issuers can offer and investors can access products with confidence about their compliance with Shari’ah law and ethical standards.
- Promote the concept of Green Sukuk and other green Islamic finance products to governments, investors, product originators and other interested parties.
- Engage with Governments and development banks about supporting appropriate project development and the growth of a Green Sukuk market.
- Inform the market by promoting best practice, convening industry forums and developing template models.
Sukuk are Shari’ah compliant securities backed by a specific pool of assets.
‘Sakk' (sukuk is the plural) signifies an instrument evidencing financial obligations.
A sakk represents a proportionate beneficial ownership in an underlying pool of assets, or 'usufruct’.
The sakk was used as a form of promissory note 1000 years ago at the height of the Islamic mercantile era; the word ‘cheque’ can trace its origins to it.
Typically, sukuk returns are linked to returns and cash flows generated by the assets purchased or created through the proceeds of the sukuk.
Most sukuk to date have been asset-backed (e.g. infrastructure projects), where credit of the originator has been the decisive factor for ratings and investor analysis, in accordance with Shari'ah principles.
A number of issues have been government or quasi-government backed for rating purposes.
There is a growing demand in the Middle and Far East for Shari'ah-compliant or Islamic bonds, but a shortage of product.
An estimated 25-40% of institutional investors’ assets under management are dedicated to fixed-income debt, including asset-backed securities.
The sukuk market is well-suited to channel the growing global pool of Shari’ah-compliant capital to fund renewable energy and climate change projects.
There is a preference for sukuk where it is easy to understand the underlying assets, how the return is generated and how secure that return is.
Green Sukuk are Shari’ah compliant investments in renewable energy and other environmental assets. They address Shari’ah concern for protecting the environment.
Proceeds are used to finance construction, to refinance construction debt, or to finance the payment of a government-granted green subsidy. They may involve securitizing future income cash flows from ring-fenced projects or assets with specific criteria attached.
While there are many opportunities for Green Sukuk in the solar energy plans of Gulf countries also have significant potential for renewable energy for sustainable development, plus have significant requirements for investment to protect themselves from the impacts of climate change.
Eligible assets for Green Sukuk are defined by Climate Bond Standards certification.
They can be:
- Solar parks
- Biogas plants
- Wind energy
- Ambitious energy efficiency
- Renewable transmission and infrastructure
- Electric vehicles and infrastructure, light rail
- Or could finance a government green payment/subsidy