Description

Sukuk are Islamic financial certificates that represent an undivided share in the ownership of tangible assets, usufructs, services, or specific projects in accordance with Shari'ah principles. Unlike conventional bonds, sukuk must be backed by Shari'ah-compliant assets, excluding industries such as alcohol or gambling. They typically mimic the financial and operational characteristics of conventional bonds, such as periodic payments and the ability to trade. Key differences with bonds include the need for Shari'ah board approval and adherence to Islamic finance principles.

Green Sukuk follow similar principles but are specifically used to finance environmentally friendly projects (e.g. renewable energy, clean transport, energy efficiency) in line with Shari'ah-compliant guidelines.

Benefits

Green Sukuk offer similar benefits as green bonds. They appeal to ESG-focused investors, signal a commitment to sustainability, potentially expanding the investor pool and lowering borrowing costs. Green Sukuk also offer advantages specific to Islamic finance. They promote macroeconomic and financial stability through profit and loss sharing and limit reliance on debt.

Case Study

Malaysia Green Sukuk market

The World Bank partnered with the Malaysian government to develop a green sukuk market, recognizing Malaysia's potential as the largest Shari'ah-compliant debt market globally. The World Bank's involvement included forming a Technical Working Group with Malaysia's Central Bank and Securities Commission, promoting green sukuk by sharing international experiences and providing guidance on eligible projects, third-party reviews, and cost-reduction incentives for issuers.

The first green sukuk was issued by Tadau Energy Sdn Bhd in 2017, a renewable energy developer, raising MYR 250 million (USD 59 million) for a solar photovoltaic power plant in Sabah. This pioneering issuance under Malaysia's SRI sukuk framework received the highest environmental rating from the Center for International Climate and Environmental Research Oslo (CICERO).

Following this success, Quantum Solar, a solar project, issued a larger MYR 1 billion green sukuk. Several other projects were in the pipeline at the time of writing. The World Bank continued to support issuers, helping to deepen the green sukuk market and replicating this model in other countries seeking to finance green initiatives through Islamic finance. This development marked a significant step in combining Islamic finance with global sustainable development goals with important learnings for other countries to take inspiration from.

Additional Sources

• ICMA, IsDB, LSEG, Giudance on Green, Social & Sustainability Sukuk, 2024, https://www.icmagroup.org/assets/documents/Sustainable-finance/ICMA-IsDB-LSEG-Guidance-on-Green-Social-and-Sustainability-Sukuk-April-2024.pdf
• World Bank, Green Sukuk, Energy Poverty, and Climate Change, 2018, https://documents1.worldbank.org/curated/en/595861545145005026/pdf/WPS8680.pdf
• https://thedocs.worldbank.org/en/doc/21c2fb7dfb189f10a0503004757b03f4-0340012022/original/Case-Study-Malaysia-Green-Sukuk-Market-Development.pdf