Lex; in Breve
The online supplement to our eponymous journal features concise and insightful articles penned by law students from the University of Malaya, as well as guest writers.
The notion of Green Sukuk owes itself to when socially responsible investments are made with regards to the environment.
Image credits: https://www.shine.cn/archive/business/UN-partners-with-Alibaba-for-green-finance/shdaily.shtml
Before we indulge in the elucidation of Green Sukuk, the query that shall be first unfolded is the definition of Sukuk. Sukuk is an Islamic bond engineered to generate returns to investors without infringing the Islamic law prohibiting riba or interest. It is an investment in the assets using Shariah principles and concepts endorsed by the Shariah Advisory Council.
In the case of conventional bonds, the issuer has a contractual obligation to pay interest and principal to bondholders on certain specified dates.
In contrast, when investors buy Sukuk, they become Sukuk holders and receive a certificate from the issuer to evidence ownership. Hence, they are entitled to receive periodic profit payments on the principal amount invested. Upon maturity, the Sukuk holder will be reimbursed the principal amount of investment. This article aims to study the evolution and rise of Green Sukuk where the investment is specified to finance climate action projects.
II. Green Sukuk
The notion of Green Sukuk owes itself to when socially responsible investments are made with regards to the environment - for instance, in the investment for renewable projects such as solar panels and windmills. The whole idea of Green Sukuk may be derived from the Al-Quran whereby Islamic finance was urged not only to focus on obtaining monetary return but also to reflect on the ethical aspects regarding the environment. Thus, the need exists to integrate ethical perspectives into Shariah-complaint investment to address the concerns of the Shariah to protect the nature. Although the concept of Green Sukuk is still new and foreign in the industry, it is growing rapidly as a new horizon for the Islamic perspective of Sukuk where Shariah principles and values are complied with. For instance, in 2008 the World Bank was one of the trailblazers to issue a green bond in the conventional market to support the funding of global climate action.
III. Green Sukuk as a form of development.
The advancement of Green Sukuk does not only focus on financing climate action projects as it is also an ethical form of investment which prohibits riba or interest. Hence, issuing Islamic bonds with the combination of protecting and preserving the environment would result in an ethical and principled multifarious investment. The Islamic Development Bank will issue Green Sukuk bonds where all the papers comply with Shariah law and are aimed to increase climate-related projects. Essentially, conventional bonds are issued for renewable projects, particularly heavy renewable industrial projects such as solar panels and windmills which can be very costly. To overcome this problem, Green Sukuk is issued to fund these projects.
The idea of Green Sukuk was introduced by Malaysia's Prime Minister in his 2014 budget speech to finance socially responsible projects. As the population of the world is estimated to increase by nine billion people by 2050, the increasing acknowledgement of environmentally friendly investment and the increasing demand for natural resources has boosted the development of Green Sukuk.
Quoting Datuk Ranjit Singh, the Chairman of the Malaysian Securities Commission;
“Green Sukuk is in line with the rising trend of green bonds and social impact bonds that have been introduced globally to facilitate and promote sustainable and responsible investing.”
A. Methodology of Green Sukuk
The modus operandi of Green Sukuk is almost homogenous to a bond - the structure is only divergent in the sense that the assets must be available to support the Sukuk and for the project to be financed. However, Green Sukuk is concerned with the investment made to finance a construction project or refinance the construction debt. Moreover, Green Sukuk could also be used to finance the payment of a government green subsidy which scrutinises cash flow from projects or assets that is viable. The assets that may be used for Green Sukuk are solar parks, biogas plants, wind energy or to finance a government green payment.
Green Sukuk is especially important given Malaysia’s commitment to green technology as evinced in Datuk Seri Dr Maximus Johnity Ongkili, the Minister of Energy, Green Technology and Water in an interview with New Straits Time;
"We are capable of raising the nation's energy output via solar through various initiatives - the Feed-in Tariff (FiT), large-scale solar (LSS) programme and Net Energy Metering. These initiatives can fulfil the country's commitment to reduce its greenhouse gas emission as stipulated under the Paris Agreement made in 2016."
Although Malaysia is the hub of Sukuk in Southeast Asia, it had achieved world recognition in 2013 when former British Prime Minister David Cameron aimed to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic Finance.
B. Evolution of Green Sukuk
The lacunae in renewable energy financing in the Gulf Corporation Council (GCC) allows for Green Sukuk to flourish, but an expert is needed to show how it can be done. Within green bond markets, experts usually come from multilateral institutions and the Islamic Development Bank appears to be extremely well positioned to support a Green Sukuk market developing within the GCC.
IDB Chairman, Dr. Ahmad Mohamed Ali at the International Conference on Finance for Development assured that the IDB Group would “double its development assistance activities from around US$80 billion recorded during the Millennium Development Goals - period to more than $150 billion in the next 15 years (2016-2030)”.
Between the year 2010 and 2012, an amount of $1 billion has been invested by the Islamic Development Bank into clean energy projects.Together with the UN Environment Program (UNEP), they have been cooperating to sustain their development on renewable energy and towards the Sustainable Development Goals.
In addition to the Islamic Development Bank, the United Arab Emirates had attempted to issue a Green Sukuk. The Dubai Environment & Water Authority (DEWA) published proposals in March 2015 to issue a Green Sukuk and restated their intentions in November 2015. However, the market turmoil created a tough pricing market and generated other factors that limited the interest of the investors in renewable energy projects.
It is important to note that attracting funding requires governments to rise to the challenge and enhance the regulatory and investment environment. Efforts with regard to the growth of Green Sukuk from the IDB and government-owned entities like DEWA would reflect the developments in the green bond markets where multilaterals and municipalities have taken the lead, followed by companies.
In Malaysia, options for Green Sukuk are rather limited for now. For instance, the Green Technology and financing Scheme only provides capital for a maximum of RM50 million for the financing of a green project. According to Mr. Foo Suu Yin, the RAM Rating Services Bhd.'s CEO, the introduction of SRI Sukuk framework by the Securities Commission would further develop the range of Green Sukuk in Malaysia. In regards to this, larger investment projects could be initiated.
Furthermore, Khazanah Sdn Bhd has issued a rather innovative Sukuk for schools where investors invest in schools in rural areas, and if performance improves, investors will get returns to ameliorate school teaching and facility. This is the first social-impact sukuk to be issued in Malaysia. According to Mr. Mohd Effendi Abdullah, head of Islamic Markets at AmInvestment Bank Bhd, Khazanah’s issuance of Sukuk would be a positive development and introduce a new class asset in the industry of Islamic Finance in Malaysia.
In July 2017, Tadau Energy Sdn Bhd has successfully issued the world's first Green Sukuk, the Sustainable Responsible Investment (SRI) Sukuk worth RM250 million to finance an LSS project in Kudat, Sabah. Tadau Energy is a project company undertaking a large-scale solar project of 50MWac in Kudat, Sabah. Tadau Energy is devoted to minimising the reliance on the use of fossil fuels in generating power supply. Through this Project, Tadau Energy aspires to achieve its goal in providing a friendly, clean and sustainable power supply.
The Chairman of Securities Commission, Tan Sri Ranjit Ajit Singh said that;
“The launch of Malaysia’s first Green Sukuk marks another significant milestone in product innovation that strengthens Malaysia’s position as a leading Islamic finance marketplace as well as its value proposition as a centre for sustainable finance.”
The Malaysia International Islamic Financial Centre (MIFC) concludes that the growth potential for Green Sukuk is opportune with the soaring of global interest in green financing. A newfangled fundraising instrument like Green Sukuk is a feasible solution to address global needs for green and other forms of sustainable and responsible financing.
IV. Advantages of Green Sukuk
Green Sukuk is becoming an increasingly lucrative form of investment because of the rising cost of lending from banks. Therefore, investors are looking for an alternative whereby capital markets are a way to raise capital with the issuance of Sukuk. The investors’ increasing interest in socially responsible investment (SRI) has subsequently increased interest in Green Sukuk, as it conceptualises the incorporation of Islamic Finance with Sukuk to help facilitate a broader range of investment in the Sukuk market where investors could now invest ethically. 
The first advantage of Green Sukuk is the increase in demand for energy supply. This is because there is a huge demand for energy efficiency with the future growth of population. The rise of energy financing is due to the increase in energy funding and investment, used to finance efficient projects which address further needs of society in regards to clean energy and resources.
Next, Green Sukuk is also a form of investment that is favourable to Islamic investors because it does not involve non-Shariah compliant characteristics. It is an ethical and socially responsible investment that would further protect the environment and raise capital at the same time. In the same vein, when a company is involved with the issuance of Green Sukuk, it would further improve or boost the company’s corporate image whereby a new form of investment with clean energy and development is involved.
Lastly, Islamic finance ought not to be entirely money-oriented. Therefore, the initiation of Green Sukuk will also stabilise the purpose of Maqasid al-Shariah. 
V. Challenges for Green Sukuk
Although the advancement of Green Sukuk has been positive, its small market size poses numerous problems with the number of regulations available to govern Green Sukuk.
Furthermore, there have been confusions regarding the definition and the basis of Shariah-compliancy of a particular policy due to the various interpretations by different scholars all around the world. This might raise problems for investors as it will be difficult to ascertain the particular company or project that will impact the environment and promote a fruitful capital at the same time. In furtherance of this, investors will tend to compare and contrast the level of each investment – thus affecting the stability of the projects.
Secondly, the market size for Green Sukuk may not be large or profitable enough to attract investors. In order to invest, investors will look for a form of investment that will generate capital to obtain returns. It may be challenging for Green Sukuk to develop as not many companies would issue Sukuk in regards to green purposes which is ethically and socially responsible. However, this conundrum may improve with further education and awareness by the public.
Thirdly, with regard to green technology, there might be difficulties for investors to participate as Green Sukuk involves investment to develop and further contribute to the technology in regards to the environment. The uncertainty and high-risk profile that come with the development of new technology would deter investors from investing due to the fear of not obtaining returns from their investment. Thus, assurance must be given to investors to utilise Sukuk proceeds in line with its economic value and green standards.
Lastly, there might also be a problem with the liquidity constraint to developing Green Sukuk as the market size of Green Sukuk is still new and small.
Although Green Sukuk is still a new and growing form of investment, with time and proper policy and regulations, it could grow to be a million-dollar investment platform. Khazanah’s SRI Sukuk will act as a precedent where other companies would join in and invest in the same area. Nevertheless, a strong infrastructure requires an equally committed government to ensure that measures are taken to approach Islamic Finance holistically. Islamic finance does not only incorporate Sukuk, but instead a whole new way of banking that abides by the Shariah principle. Green Sukuk is the catalyst that would open more doors for Islamic Banking and Finance to develop and expand its horizons – limited not only to Islamic countries but also to the rest of the world.
Written by Amiratu Al Amirat and Lily Sabreena, third year students of the Faculty of Law, University of Malaya.
Edited by Caysseny Boonsiri.
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