As an instrument, green Sukuk is a relatively new phenomenon. Malaysia’s Tadau Energy issued the world’s first green Sukuk in July 2017 and has been followed by a handful of others. These funds have raised investment largely in solar power generation projects. In general, green Sukuk is an Islamic financial instrument which has tapped into the trend of social investing. Finance raised from green Sukuk typically supports investments in renewable energy or other environmental assets such as solar parks, biogas plants, wind energy projects, as well as renewable transmission and infrastructure projects, according to S&P.
Malaysia and Southeast Asia have led the way so far for issuances, with Tadau Energy’s aforementioned $58 million Sukuk to finance a solar project within Malaysia being the first. The handful of other green Sukuk that have listed following this in line with the country’s Sustainable and Responsible Investment (SRI) Sukuk framework could represent a model for future green Sukuk listings across the African continent and worldwide. S&P point to green Sukuk as a way for issues to access not only the pool of conventional investors interested in green projects but also Islamic investors. Indeed, many conventional investors have already rewritten their investment guidelines to incorporate a level of social responsibility.
In 2017 Thomson Reuters estimated the shortfall in supply Sukuk at some $143 billion. This should provide further support for issuers as they look to take advantage of the wider pool of investors and unmet demand in the Sukuk markets, leading to potential higher appetite, lower pricing and longer maturity. On the investor side, S&P noted that investors interested in green Sukuk primarily do so for two main reasons. The first of these is that of the Islamic investor looking to find an investment which is compliant with Shari’ah law— at its simplest Islamic investors and institutions simply cannot invest in conventional products. Conventional investors, on the other hand, might be committed to a green Sukuk fund in order to meet their own investment guidelines and objectives.
Due to the nature of this form of social impact investing, investors may further enjoy the additional transparency that green Sukuk provides because the Sukuk’s underlying assets must be identified from the outset, S&P added. Growth in green Sukuk is likely to grow in tandem with the greater demand for green energy and green energy products. This trend can already be seen growing across the African continent, and green Sukuk could provide a way for Islamic investors to support the market in ways that conventional investment products do not normally allow. Renewable energy growth requires considerable investment so the need for green Sukuk is not likely to change in the near-term.
However, growth in Sukuk issuance would greatly benefit from regulatory support. Governments could pull levers to support the market. In addition, a greater standardisation of legal documentation and Shari’ah interpretation would benefit the green Sukuk market, although these are issues that tend to constrain the Islamic finance sector in general. S&P Global Ratings rated the green Sukuk issued by Indonesia in early 2018. The agency said as to its rating that, “The rating was at the same level as the issuer credit rating of Indonesia as the transaction fulfilled the five conditions or our Sukuk criteria. Generally, we equalise the rating