World Bank sees massive potential in green sukuk | New Straits Times

KUALA LUMPUR: Tadau Energy Sdn Bhd had made history on July 27 when it became the first entity in the world to issue a green sukuk.

Called Green SRI Sukuk Tadau, the RM250 million Sustainable Responsible Investment (SRI) syariah-compliant bond holds a tenure of up to 16 years and was assigned a long-term rating of “AA3” by RAM Rating Services Bhd prior to its issuance.

The Tadau sukuk has made history in capital markets with its issuance, but what will follow is going to be even more exciting.

In an exclusive interview with NST Business, World Bank representatives explained why this sukuk marked the beginning of a new chapter for the Malaysian capital markets.

The framework underlying the green sukuk’s debut, the SRI Sukuk Framework, is the result of a collaboration between Bank Negara Malaysia, the Securities Commission (SC) and the World Bank.

“The issuance of the green sukuk is a historic event, not just for Malaysia but for the world, as it is the first of its kind,” said World Bank country manager Faris Hadad-Zervos.

“It is also very much in line with the World Bank’s twin goals, which are poverty eradication and shared prosperity. Infrastructure provisions are crucial for sustainable development and according to some estimates, about US$1.7 trillion (RM7.31 trillion) is needed for infrastructure spending while provisions of funding are roughly at some US$900 billion. So there is a huge gap in infrastructure funding and development, and we believe this green initiative can help address this.”

Faris said the Tadau sukuk issuance had been elusive, not because the lack of interest or need, but due to the lack of framework and regulations.

“There have been many efforts across the world to actually explore green Islamic bonds over the years, but this is the first time it has materialised,” he said.

“It has been elusive for a number of reasons. The first reason is getting the appetite and raising awareness of potential investors and issuers, as well as the benefits of such issuances. The second is the lack of the proper framework, which was addressed by the creation of the SC’s SRI Sukuk Framework in 2014.”

In fact, Faris stressed the creation of the framework was key in making the world’s first SRI sukuk a reality.

The question remains though, why did the creation of the first green sukuk take so long when the framework had been around since 2014.

“Yes, the framework was created in 2014, but there needs to be some time for the market to digest what was happening before jumping in,” said World Bank financial sector specialist Ahmad Hafiz Abdul Aziz.

“There was a lack of awareness in the market, especially between the issuer and investors, on what they could do and what was available. From the World Bank’s side, we helped conduct a number of workshops and built on the work that had already been put in by Bank Negara and the SC. It was only then that we started gaining interest from investors to tap into the green sukuk. It is also part of the reason why it all catalysed this year,” said Ahmad Hafiz.

Meanwhile, World Bank financial sector specialist M. Rozani Osman was particularly delighted by the SC’s foresight in creating the framework before there was a strong demand for SRI or green instruments.

“The SC had the foresight to come up with the framework even before there was interest. Naturally, if you’re an issuer, you wouldn’t want this because it is such a tiny market. It is only in the last couple of years that the market started booming,” he said.

“In fact, data from Climate Bonds Initiative showed that although there were some discussions in green conventional bonds, it wasn’t until 2013 that we saw some actions and the boom really came last year when there was almost US$90 billion in green bond issuances. The industry is also estimating there will be a total of US$120 billion in green conventional bonds this year, far surpassing that of last year.”

Faris then drew on the parallel between the SRI and green market and the Islamic finance market.

“Islamic finance was a niche market in the mid to late 2000s and now it is an estimated US$2 trillion industry. And now, we have seen there is a massive appetite for green as well as Islamic finance in general, and putting the two together is quite an opportunity in Malaysia, where it is already the world’s premier Islamic finance capital,” he said.

Faris said there were potentially more green sukuk issuances in the pipeline this year, but did not want to disclose more information.

World Bank financial sector specialist Jose De Luna Martinez said the Tadau sukuk would potentially lead Malaysia to be a green sukuk hub of Asean.

“There is an interest to develop a marketplace because Malaysia has a domestic capital market and it is also the interest of the government to continue the internalisation of the Malaysian capital markets,” said Martinez.

“This type of instrument will attract more foreign direct investments because outside of Malaysia there is a lot of money in the hands of institutional investors, governments and the likes, and some of them have to be allocated in green assets.

“It is possible that neighbouring countries will also use this platform already created in Malaysia to raise money. So we will definitely see that by having a new asset class, Malaysia will be able to attract capital inflows and encourage potential issuers to use this platform and raise money, and ultimately, contribute to the development of the capital market,” he said.

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