GREEN SUKUK: PRESENT STATE AND FUTURE OUTLOOK Dr. Mohammad Mahbubi Ali Dr. Shahino Mah Abdullah International Institute of Advanced Islamic Studies (IAIS) Malaysia
SSE Country Snapshot Introduction Introduction Legal Aspect Green Bond: An Country Emerging Snapshot Market Financial Landscape Concept of Legal Green Aspect Sukuk Shariah Case Study: Green SRI Financial Sukuk Tadau Landscape Energy Infrastructure Regulatory Prospects and Reguirement Challenges Indonesia vis a vis Malaysia Product and Services Conclusion Analysis Conclusion Q&A
INTRODUCTION There has been a growing interest in the past few years towards socially responsible invesment (SRI). One of the areas that are normally associated with SRI is the environment and its preservation. Green bond and sukuk become a common instrument to serve the aspect of SRI in the global market. A number of green bond and sukuk has been issued in the global market to finance environmental-friendly projects. On 27th July 2017, the Securities Commission (SC) announced the issuance of Malaysia s first green sukuk under its Sustainable & Responsible Investment (SRI) sukuk framework.
GREEN BOND: GROWING TREND In 2007, the European Investment Bank (EIB) launched a EUR 600mln climate awareness bond focusing on renewable energy and energy efficiency. Subsequently in 2008, World Bank issued a total of USD440mln green bond to support climate-focused program for the Scandinavian pension. In 2013, the African Development Bank issued a USD500mln green bond to finance climate change solution in Africa. As of June 2015, the World Bank has issued over 100 green bond papers valued at USD8.5bln. Over $30bn worth of green bonds were issued in the second quarter of 2017.
GREEN BOND: GROWING TREND
GREEN SUKUK: AN EMERGING MARKET Green Sukuk are Shari'ah compliant investments in renewable energy and other environmental assets. Proceeds are used to preserve the environment and natural resources, conserve the use of energy, promote renewable technologies and reduce greenhouse gas emissions. In 2012, the Climate Bonds Initiative (CBI) in cooperation with the Clean Energy Business Council of the Middle East and North Africa (MENA) and Dubai-based Gulf Bond & Association established the Green Sukuk Working Group to promote the idea of green sukuk which meets a lowcarbon criterion. In 2014, SC revised its sukuk guideline by incorporating the new requirements for the issuance of SRI sukuk. The new sukuk guideline explains that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emission.
SUKUK VS BOND Sukuk Sukuk represent ownership stakes in well defined asset; Sukuk holder maybe affected by asset related expenses; Sukuk prices depend on the market value of the underlying asset; Selling a sukuk is a basically the sale of a share of an asset; The underlying contract for sukuk issuance is a permissible contract i.e lease (there are 14 categories defined by AAOIFI; Bonds Bond represent pure debt obligation; Bond holder are not affected by the asset related expenses; Bonds depend on solely on the creditworthiness of the issuer; Selling a bond is basically the sale of a debt; In a bond, the core relationship is a loan of money, which implies a contract whose subject is purely earning money on money (riba); Asset in a sukuk issuance must be islamically permissible Bonds can be issued to finance almost any purpose which is legal in its jurisdiction
MALAYSIA S SUSTAINABLE & RESPONSIBLE INVESTMENT (SRI) SUKUK FRAMEWORK On 28 August 2014, Malaysia launched sustainable and responsible investment (SRI) sukuk framework. To facilitate financing of sustainable and responsible investment initiatives. To meet demand of retail and sophisticated investors for access to a wider range of investment products and facilitate greater participation in the sukuk market. To facilitate the creation of an eco-system conducive for SRI investors and issuers.
ELIGIBLE SRI PROJECTS Natural Resources Renewable Energy/Energy Efficiency Community and Economic Development Waqf Property/Assets Sustainable land use New or existing renewable energy Public hospital/medical services Development of waqf properties/assets Sustainable forestry or agriculture Efficient power generation and transmission systems Public educational services Biodiversity conversation Energy efficiency which results in reduction of greenhouse gas emissions or energy consumption per unit output. Community services Remediation and redevelopment of polluted or contaminated sites Urban revitalization Water infrastructure, treatment and recycling Sustainble building projects Sustainable waste management Affordable housing
INCENTIVES Tax deduction until year of assessment (YA) 2020 on issuance costs of SRI sukuk approved or authorised by or lodged with the SC; Tax incentives for green technology activities in energy, transportation, building, waste management and supporting services activities [www.mida.gov.my and www.greendirectory.my]; and Financing incentives under the Green Technology Financing Scheme (GTFS) with total funds allocation of RM5 billion until 2022 [www.gtfs.my].
CASE STUDY: GREEN SRI SUKUK TADAU On 27th July 2017, the Securities Commission (SC) announced the issuance of Malaysia s first green sukuk under its Sustainable & Responsible Investment (SRI) sukuk framework. The sukuk is a RM250 million sustainable responsible investment (SRI) sukuk named Green SRI Sukuk Tadau. The proceeds are used to finance solar photovoltaic powar plants within the district of Kudat. The Green SRI Sukuk Tadau has a tenure of two to 16 years and has been assigned a long-term rating of AA3 by RAM Rating Services Bhd.
CASE STUDY: GREEN SRI SUKUK TADAU ISSUER Tadau Edergy Sdn Berhad PRINCIPAL ADVISOR SHARIAH ADVISER FACILITY PROJECT IDENTIFIED ASSETS Affin Hwang Investment Bank Berhad Dr. Aznan Hasan Islamic medium term notes ( IMTNs ) programme under the Shariah principles of Istisna and Ijarah of up to RM250.0 million in nominal value ( SRI Sukuk Programme ). The financing, design, engineering, procurement, construction, installation, testing, commissioning, ownership, operation and maintenance of the Solar PV Plants, to be located at Kudat, Sabah, The Solar PV Plans FACILITY TENURE ISLAMIC PRINCIPLES USE OF PROCEDDS PERIODIC DISTRIBUTION PAYMENT FREQUENCY RATING 2 to 16 years Istisna, ijarah and ijarah mawsufah fi al-dzimmah To finance solar photovoltaic powar plants within the district of Kudat. Semi annual basis AA3 by RAM Rating Services Bhd GOVERNING LAW Laws of Malaysia
GREEN SRI SUKUK TADAU STRUCTURE Source: PTC SRI Sukuk Tadau
GREEN SRI SUKUK TADAU STRUCTURE Source: PTC SRI Sukuk Tadau
GREEN SUKUK: PROSPECTS
GREEN SUKUK: CHALLENGES
CONCLUSION Green sukuk is a good model to finance sustainable infrastructure as well as help bridge the gap between conventional and Islamic financial worlds. Both sustainable investors and sukuk investors aim to use their money in manners that comply with certain values. Green sukuk funding and environmentally sustainable infrastructure projects, such as the construction of renewable or clean energy projects, could appeal to both Sukuk investors and conventional environmentfocused investors, as Sukuk by design are structured based on a specific pool of assets.