Potential for green, ESG Sukuk | The Express Tribune

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KARACHI:

According to the Green and Sustainability Sukuk Report 2022, green and sustainability Sukuk has the potential to raise an additional $30 billion to $50 billion of capital allocated for sustainable development by 2025.

The global green bond issuance, as per Bloomberg report, has already crossed $500 billion in 2023 showing the immense potential to explore the untapped market for green and ESG Sukuk in Pakistan. Sukuk are Shariah-compliant instruments backed by a specific pool of assets or real economic activity. They are normally defined as certificates of ownership or share representing ownership of a business, real asset or service that conforms to the Islamic commercial law.

Sukuk is a convenient way to generate liquidity for entities, project financing and government funding needs for economic development and budgetary requirements. Sukuk are now widely used by governments to generate funding both locally and internationally under a Shariah-compliant mechanism while avoiding interest.

Sustainable, ESG and green Sukuk are innovations in the area of green and social financial instruments in which proceeds from Sukuk issuance are used to finance environmentally and socially sustainable projects like renewable energy, infrastructure development or social welfare.

Based on findings of a Refinitiv survey, it is evident that 54% of investors have actively incorporated ESG (environmental, social and governance) criteria into their Shariah-compliant investment portfolios. This underscores a clear and compelling demand for the advancement of environmentally friendly and ESG-compliant Sukuk instruments.

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Climate bond standards define multiple eligible uses for green Sukuk including solar parks, biogas plants, wind energy projects, infrastructure projects, light rail, and even payment of subsidies for green initiatives.

Global green Sukuk issuances

In June 2017, Tadau Energy Sendirian Berhad, Malaysia became the first green Sukuk issuer with the issuance of a 250 million ringgit ($58.4 million) Sukuk for financing a 50-megawatt large-scale solar project.

In 2018, the Indonesian government issued the first USD-denominated Sukuk. Since then, the annual issuance of green Sukuk has increased manifold with issuances from Indonesia, Malaysia, Saudi Arabia, the UAE and Bahrain.

The Indonesian government is the largest issuer of green Sukuk while Malaysia has the largest number of private green Sukuk issuers, who are supported by green bond grants and tax incentives.

Taking the lead in green Sukuk issuance, Malaysia has introduced green Sukuk standards called the Sustainable and Responsible Investment (SRI) Sukuk Framework. Under this framework, issuers of green Sukuk that are compliant with Malaysia’s SRI Sukuk Framework receive tax incentives and a subsidy.

Indonesia has also introduced the Green Bond and Green Sukuk Framework to promote green Sukuk.

Prospects for green, ESG Sukuk in Pakistan

The realisation of the severity of global climate change and environmental degradation among world leaders has intensified after the 2021 UN Climate Change Conference in Glasgow.

One of the critical challenges in implementing the Paris Agreement on climate change is the funding required to execute environmentally friendly projects that significantly fight climate change issues and foster a green economy.

By 2030, there will be a substantial annual funding gap of $2.5 trillion for achieving the Sustainable Development Goals (SDGs) in developing countries, including the OIC members.

Notably, this scenario offers a significant financial opportunity for developing and offering a Shariah-compliant Sukuk under a green and ESG framework to countries like Pakistan where the effect of climate change is visible during the flooding and heavy rains in 2022.

In 2021, the Securities and Exchange Commission of Pakistan (SECP) approved national guidelines for green bonds and Sukuk. According to these guidelines, green Sukuk can only be issued based on globally accepted standards such as the International Capital Market Association (ICMA) Green Bond Principles where eligible projects are expected to be mapped to the SDGs.

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Based on the above, it is the right time for Pakistan to develop and offer green and ESG Sukuk for both local and international investors, who are looking for ethical and sustainable investment opportunities.

Policymakers need to be at the forefront of advocating and leading sustainable and green projects in the areas of renewable energy, water preservation, climate protection, forestation, sustainable infrastructure development, healthcare and economic development.

If right policies and incentives are offered, this initiative can help the nation to attract the much-needed investment.

With high demand for Shariah-compliant investments like Sukuk, the cost of financing can also be lower as compared to other debts and financing sources.

The government of Pakistan can also attract global institutional and retail investors both from the GCC and western markets where funding availability for green projects is much more than the investment options. Another beneficial aspect of green Sukuk is that use-of-proceeds requirements will further increase the confidence of Shariah-minded investors, who are looking to support and invest in ethical and economically beneficial projects.

With the government and SBP plans to convert conventional banking into Islamic banking by the year 2027, the development of green and ESG Sukuk can play an important role in fuelling growth of the Islamic finance sector and will be a step in achieving the conversion target. These Sukuk can also be issued using the PSX and will lead to further development of the retail Sukuk market offering an attractive asset class for investors.

Green and ESG Sukuk issuance will not only positively highlight Pakistan’s image and role in sustainability and environmental protection efforts, but will also pave the way for solving various economic problems and help generate much-needed funds for essential projects.

Ahmed Ali Siddiqui is the Director, IBA Centre for Excellence in Islamic Finance and Samia Tahir Jawad is the Research Associate, IBA Centre for Excellence in Islamic Finance

 

Published in The Express Tribune, December 27th, 2023.

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