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Islamic Finance

Why so few green sukuk? Sector still faces longstanding challenges, say practitioners

Green sukuk have gained popularity over the last few years among issuers and investors but they remain a small part of the global sukuk market, according to stakeholders speaking to Salaam Gateway.

In a recent report, Fitch Ratings said sukuk issuance with a maturity longer than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan totalled $42.2 billion in 2019, an increase from $39.8 billion in 2018.

Bashar Al Natoor, global head of Islamic finance at Fitch Ratings said that while Malaysia housed the world’s first green sukuk in 2017 with Indonesia following, in other regions green sukuk issuances continue to be small.

“[Indeed] Green bonds and green financing continues to be a young and small industry in the GCC and other jurisdictions like Turkey and Pakistan,” he said.


Green sukuk are Shariah-compliant investments in environmental assets.

According to the Climate Bond Standards certification, eligible assets for green sukuk can include solar parks, renewable transmission and infrastructure, and financing a government green payment or subsidy.

Following Malaysia and Indonesia’s green sukuk, Dubai-based real estate developer Majid Al Futtaim (MAF) issued the GCC’s first green sukuk in May 2019. The company followed up in October 2019 with another issue. In November, the Islamic Development Bank (IDB) issued its maiden green sukuk, a sale of 1 billion euros.

Globally, green bond, green loan and green sukuk issuance reached $257.7 billion in 2019, up by 51% on 2018, according to the Climate Bonds Initiative. $10 billion, equivalent to around 4%, are green loans. However, the CBI notes that of the total green issuance, sukuk accounted for only $3.1 billion in 2019.


One key challenge in the structuring stage for a lot of issuers is having sufficient assets deemed green to invest the proceeds in.

Debashis Dey, Partner at White & Case in Dubai said that currently for the majority of deals, green bonds or sukuk do not need to rely on green assets to generate the income and principal for repayment.

“The key is that the use of proceeds have to be compliant with standards that qualify for a green bond or sukuk,” he said. “Therefore the question is whether a lot of State Owned Entities (SoEs) and regional corporates have the necessary requirement to raise green finance.”

Issam Al Tawari, Managing Partner at Newbury Consulting, agreed, adding that identifying projects and verifying that they fall under the categories that investors are looking for can be a challenge in the structuring process.

“As well [as] assets, [other challenges are] identifying the investors, most of whom are outside of the region and issuers who have access to arrangers who have access to those investors,” he said. “In addition the size of the sukuk will be restricted by the size of assets issuers can identify.”


The lack of a pricing incentive for issuers particularly from the GCC, has hindered green sukuk issuance, sources suggested.

“The key question issuers always ask is: ‘it cheaper’?” said Debashis Dey. “In addition to obtaining a fatwa, green sukuk requires a green reporting mechanism and expertise from green practitioners, so there is no real pricing advantage for a lot of issuers.”

Other sources said the work involved in structuring green sukuk transactions with no pricing advantage has deterred some issuers from tapping the green market.

“A key issue for many is to do all the work and incur some cost, all for no investor diversity or pricing advantage,” said a Dubai-based corporate DCM banker, who asked not be named as he is not authorised to speak to the media.

While accessing a liquid green investor base outside of the region, another consideration with lack of a pricing treatment is the lack of a tax incentive, particularly in the GCC.

“Almost all GCC states have no tax incentives on income or corporate taxes. So what are there incentives to issue green sukuk?” said Issam Al Tawari.


The lack of internal environmental, social and governance (ESG) standards or sustainability programmes at many issuers is also another impediment.

“Another real challenge is [the] extra layer of reporting and governance for a lot of issuers, especially corporates who may not yet have adopted the required ESG internal frameworks required,” explained White & Case’s Dey.

According to HSBC’s Sustainable Financing and Investing Survey 2019 the MENA region suffers from a lack of ESG data comparability between issuers (54% compared to 26% globally), as well as shortage of expertise or qualified staff (46% compared to 27%)  and a lack of demand from clients (41% against 20%).

“The lack of a track record to compare and contrast makes it difficult to assess the benefits for issuers, investors and regulators,” said Bashar Al Natoor.


The same HSBC Survey notes that 49% of Middle Eastern investors said they will start buying green instruments seriously for the first time in the next two years, while a further 19% will increase their investments.

Some investors in the Gulf said they prefer higher risk adjusted returns over other stakeholder concerns. They argue that ESG and SRI principles play a small role in their strategy when investing in instruments like green sukuk.

“There are a range of factors in the investment selection that have priority such as spread and tenors with corporate social responsibility hardly a factor in the decision making process,” said a GCC-based portfolio manager.  “At the end of the day these green sukuk will trade at a similar correlation to their sukuk counterparts which goes to prove that the region does not differentiate between the two.”

But one Malaysia-based portfolio manager disagreed and said the incentives in terms of pricing are not immediately clear.

“[But] over time for investors it [green sukuk] is attractive because of growing demand for assets, he said. “The super low rate environment also blurs the pricing advantage. Funding is so cheap now that it’s hard to clearly distinguish the discount on funding for an issuer.”


All of the market participants agreed that Southeast Asia-based issuers, primarily in Malaysia and Indonesia, will continue to lead the way in green sukuk and innovation.

One Islamic capital markets specialist noted that SEA countries are directly affected by Sustainable Development Goals (SDGs) and sustainability issues, and are already suffering some of the effects of non-sustainable industries.

“There is a push from their governments to leverage financial engineering for development (pioneers in sukuk and green sovereign funding) whereas GCC have historically been less pressed by funding and SDGs issues,” he said.

A Malaysia-based Islamic DCM banker explained that sustainability is increasingly becoming important for most governments in SEA. “The economies in SEA are more diverse, unlike [the] GCC which are oil-based,” he said. “So the opportunities to apply green proceeds are much larger.”

The sukuk investor profile in SEA and GCC also plays a key role in green sukuk.

“While institutional investors in SEA aren’t very sophisticated when it comes to green or sustainable investments, they are surely more advanced than GCC investors in that area [green sukuk],” he said. “And even for global investors I believe they have better investment opportunities investing into EM in SEA, while investing in sukuk in GCC is limited to sovereigns and financial institutions with very few corporates.”

The Islamic capital markets specialist pointed to the involvement of the World Bank and other organisations like the Asian Development Bank which are active in green and blue initiatives in SEA, including support to Shariah-compliant desalinations.

He notes that retail markets are involved and play an important role in driving the green sukuk market in SEA.

“Sovereign issuances, including sukuk, are distributed to the general public in Indonesia and Malaysia,” he said. “Hence governments can rely on internal demand to subscribe to their issuances rather than depending on international investors or local high net worth individuals.”


In the GCC the picture remains mixed for green sukuk in the immediate term.

Nonetheless the role of regulators and their green finance policies will be important in developing the market.

“It’s all about government initiatives in the GCC,” said one GCC-based Islamic DCM banker. “I see [the] UAE as a promising leader and then followed by Saudi whose government are encouraging such efforts as well. [The] Timeframe will be determined by how serious government efforts are in directing issuers towards green [finance].”

But Debashis Dey said adopting a legislative framework is not enough, as there needs to be a clear policy objective from policymakers to prompt more green bond and sukuk issuances.  “If a government instructs [that] a certain percentage of bond or sukuk have to be green, this will result in more issuances,” he said.

Elsewhere, activity is likely to be limited, but some practitioners are optimistic that other Muslim-majority jurisdictions like Turkey and Pakistan can utilise green sukuk for their financing needs.

“Any oil-importing country will be compelled to do [green sukuk] in the future,” said Dr Jamshaid Anwar Chattha, former Assistant Secretary-General of the Islamic Financial Services Board (IFSB). “This is part of the initiative to diversify the energy needs, especially [in] climate change hit countries. Countries like Pakistan need green sukuk for solar parks, wind energy, infrastructure projects, among others.” 


Despite the modest progress of green sukuk over the last few years, it will take some time for the market to gain momentum as well as become a mainstream asset class among Islamic investors.

“Green sukuk remains small and is unlikely to grow until the medium term,” said Fitch’s Bashar Al Natoor. “We may see 5-8 green sukuk transactions in 2020.

He further noted that there is around $500 billion of outstanding sukuk debt worldwide, with green sukuk – only accounting for $5 billion.

“Interest and discussion around ESG is growing in the Middle East, but it is yet to come into practice. There is still an extremely long way to go until it becomes a pattern,” he said.

But others are more optimistic that ESG principles will become more important.

The Malaysia-based portfolio manager said ESG and SRI is a core component of most asset managers. “Anyone who says they don’t do ESG will be shunned,” he said.

Adding to this, Dr Chattha said that with a growing emphasis on climate agreements, green sukuk are an ideal instrument. “In order to comply with COP21 and U.N. SDGs, green sukuk, being socially and ethically responsible for infrastructure, is a great product for investors,” he said.

(Reporting by Hassan Jivraj; Editing by Emmy Abdul Alim

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