Malaysia is often hailed for its prominence in the area, particularly due to its leadership in the sukuk market, as well as in sustainable and responsible investing
By NG MIN SHEN / Pic By MUHD AMIN NAHARUL
Across the world, the move towards sustainable investing is becoming increasingly prominent as investors seek for something that will provide quality returns while benefitting society.
In line with this shift is green finance, which is part of a segment that has been gaining traction due to efforts to support the transformation into a green economy.
It is of note that Malaysia is often hailed for its prominence in the area — particularly due to its leadership in the sukuk market, as well as in sustainable and responsible investing (SRI), the latter being a discipline that considers environmental, social and corporate governance criteria to gene- rate long-term competitive financial returns and positive societal impact.
In Bank Negara Malaysia’s (BNM) report entitled “Sukuk Going Green: Malaysia Continues to Drive Innovation”, the central bank said Malaysia’s development of the necessary frameworks and infrastructure for a conducive green sukuk market is set to become a model in bridging Islamic finance and the SRI industry.
According to the United Nations’ (UN) “The Sustainable Infrastructure Imperative: Financing for Better Growth and Development” study, estimates indicate that the world requires up to US$90 trillion (approximately RM377.32 trillion) worth of infrastructure investment by 2030.
Investments in oil, coal and gas must decrease by about one-third by 2030, while investments in renewables and energy efficiency must increase by at least a similar amount if the global average temperature rise is to be kept below two degrees Celcius.
This presents a significant opportunity for green finance to be part of mainstream investment and financing activities.
Green Finance for a Better World
Green finance involves financing investments that generate benefits to the environment with the ultimate aim to achieve inclusive, resilient and sustainable development.
This includes low-carbon transport
such as rails, metros, trams, cable cars, electric or hybrid buses, and low-emission buildings for new constructions and retrofitted existing buildings.
The acceleration of policy efforts in mobilising finance to green growth investments through policies, incentives, standards and awareness building can be seen across the globe.
Financial centres from New York, London, Hong Kong and Paris are scaling up efforts and mapping out plans to seize green finance opportunities.
According to UN Environment estimates, the number of policy measures to green the financial system has reached some 200 measures across 60 countries.
The green bond market tripled in size in 2014 with more corporate issuers tapping the market following the introduction of the Green Bond Principles, which provided process and reporting guidelines for the use of proceeds of green bonds. In 2016, green bond issuance near doubled to US$90.5 billion from US$47.2 billion the year before.
The market is also becoming increasingly diverse, with corporate issuers such as Apple Inc, Unilever plc and Southern Power Co, as well as educational institution Massachusetts Institute of Technology.
Credit Agricole SA issued the first corporate green bond in November 2013, with an equivalent of US$220.7 million. Proceeds from the issuance were utilised for sustainable energy projects and socially sustainable efforts including job creation in impove-rished areas to reduce poverty levels.
The Next Frontier of Green Finance
Green bonds are similar to conventional bonds in terms of seniority, rating, pricing and the execution process.
The sole distinctive feature of a green bond is the use of proceeds — these are dedicated to climate or environmental projects.
A green bond carries the same rating as the issuer’s other debt, which reflects the issuer’s credit profile. In many cases, green bonds are structured under the issuers’ medium-term note programmes.
Save for a few exceptions, the green bonds are backed by the issuer’s entire balance sheet, ensuring that investors are not exposed solely to the risk of the bond’s underlying projects.
For certification, issuers are encouraged to opt for a “second opinion” to ascertain alignment with the key features of green bonds.
Green bond certification is available in various forms on the market, providing assurance to investors for accurate indication of a specific bond’s compliance to environmental principles.
Pioneering with the World’s 1st Green Sukuk
Islamic bonds, also known as sukuk, are gaining ground as a mainstream financial instrument facilitating growth by funding economic needs of real economic sectors.
A key characteristic of green sukuk is its aim of contributing to global sustainable developments.
A major milestone in both green financing and the global sukuk landscape was made when Malaysia in July 2017 issued the world’s first green SRI sukuk by Tadau Energy Sdn Bhd.
This green sukuk was a collaboration between the Securities Commission Malaysia (SC), BNM and the World Bank Group, with the aim of developing an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to accommodate global infrastructure needs and green financing.
The SC has been at the forefront of facilitating innovation through means such as the SRI Sukuk Framework, launched in 2014 to empower the development of the Shariah-compliant SRI segment.
The framework forms part of the regulator’s developmental agenda to work towards creating an ecosystem conducive for SRI investors and issuers, while promoting SRI as a response to the rising trend of green bonds and social impact bonds worldwide.
The introduction of the framework led to the inaugural issuance of the country’s first SRI sukuk through Ihsan Sukuk Bhd, a special-purpose vehicle of Malaysia’s sovereign wealth fund Khazanah Nasional Bhd.
The first tranche, issued in June 2015, raised funds worth RM100 million with a periodic distribution rate of 4.3% per annum and a seven-year tenure. The second tranche was issued in June this year.
In July 2017, the SC also said it would be launching a SRI investment funds framework by the end of this year to propel the growth of a SRI eco- system — capitalising on the values SRI shares with Islamic finance.
These developments should come as no surprise, given Malaysia’s position as the centre of the global sukuk landscape.
The nation held a 46.4% share of the global sukuk issuance market in 2016, as well as 52.6% of outstanding sukuk worldwide.
Malaysia Set to Lead the Way
Malaysia benefits from a strong legal and regulatory infrastructure, a sound Shariah governance framework, attractive tax incentives and experienced experts in the field.
Its Islamic financial system comprising Islamic banking, takaful and the Islamic money market also provides impetus for headway in the Islamic capital markets.
Thus, the country is well poised to capitalise on the growth potential for green sukuk — as global interest in green financing continues to rise, with focus on innovative fundraising instruments in the form of green sukuk and SRI bonds as a viable solution to address global needs for green, sustainable and responsible financing.