Since their creation in 2008, green bonds have publicized the role finance can play in protecting the planet while opening up new opportunities for investors to use monetary resources to support environmental goals. As of June 2019, the World Bank had issued over 150 green bonds in markets around the world, generating close to $13 billion.
Yet because they are typically structured as interest-bearing investments, conventional green bonds may not meet the needs of investors who adhere to the principles of Islamic finance. For these investors, green sukuk represent an alternative.
What Are Green Sukuk?
Broadly speaking, sukuk are financial instruments designed to comply with Shariʽa law, which is the broad set of rules that define Islamic doctrine. While sukuk are often referred to as “Sharia-compliant bonds,” they are structured more as equity-based financial instruments than fixed income financial instruments, since any form of fixed income or riskless return is not Sharia-compliant. When investing in a sukuk, an investor purchases a certificate from an issuer who uses the proceeds to buy an asset; instead of earning interest, the investor periodically earns a share of the profits. Ventures funded by sukuk must assume some risk to provide a product or service to the market, and as a partial owner, the holder of the sukuk shares in both the risk taken and the resulting revenues. The venture must not benefit from forbidden industries, such as gambling or tobacco. Sukuk were developed in markets where most participants are Muslim, but in recent years there has been broader global demand for them, according to the Association of Corporate Treasurers.
Green sukuk are sukuk used for financing environmentally sustainable initiatives. For example, they may fund renewable energy production, waste management, sustainable agriculture, the construction of energy-efficient buildings, natural resource management, or other endeavors that benefit the environment or mitigate climate change risks. The first green sukuk was issued in 2017 by Malaysia’s Tadau Energy, and the issuance raised $58 million for solar projects. Moreover, the Islamic Development Bank launched its first green sukuk in late 2019, a €1 billion listing on Nasdaq Dubai.
Green Sukuk in Action
Green sukuk have caught the attention of diverse investors. In 2018, Indonesia issued the world’s first sovereign green sukuk, drawing banks, asset managers, and pension funds from Asia, the US, the EU, and other regions. The $1.25 billion in proceeds funded public services such as the development of solar power plants, the construction of a double-track railway to shift transportation away from cargo trucks, improvements to a waste management system, and the building of reservoirs. In addition to environmental impact, projects furthered economic growth and infrastructure development.
The Clean Energy Business Council, the Climate Bonds Initiative, and the Gulf Bond and Sukuk Association have created a working group to design green sukuk to address climate change. The initiative plans to educate the public on green sukuk through industry forums and to have a dialogue with governments and development banks about advancing the green sukuk market.
It has also been suggested that the idea of green sukuk could be modified to create blue sukuk, corresponding to blue bonds, which finance initiatives that conserve ocean resources and facilitate sustainable development in coastal regions.