The first green bonds were issued a little over a decade ago by multilateral institutions and municipalities. Green bond issuance is now growing by about 50% annually. Last year, green bond issuance reached a record of US$258bn, much of it coming from the US, France and China.
The first shoots of a similar “green” instrument in the Islamic finance sector emerged not too long ago. In 2017, renewable energy group Tadau Energy issued the first “green” sukuk, raising US$59m to finance a solar power plant in Malaysia, the birthplace of conventional sukuk in the 1990s. Indonesia issued sovereign green sukuk worth US$1.25bn in 2018 and US$750m in 2019 to fund environment-related projects.
There is activity in the Arabian Gulf countries as well. In 2019 Majid Al Futtaim, a UAE-based retail company, raised US$600m with the region’s first corporate green sukuk. This was followed by a €1bn (US$1.12bn) green sukuk by Saudi-based Islamic Development Bank to finance renewable energy, green transportation and pollution control in its member countries.
Still, green sukuk have not come as thick and fast as some proponents would like. This may be because issuers have been constrained by a shortage of certifiable green projects. There are complexities in certifying the “green” credentials of an underlying asset and reporting on its performance; this may deter issuers. A lack of pricing incentive may also have discouraged some issuers.
On the demand side, green sukuk growth will depend partly on that of the broader sukuk market. As Mr Ali of Nasdaq Dubai observes, “you need a thriving sukuk market to create a green version of it”.
If issuers can match investors’ intent with robust reporting—to demonstrate that funds are truly driving sustainable initiatives —green sukuk can play an important role in the race against climate change.