By Dian Andari and Yunice Karina Tumewang

The search for sustainable and Shari’ah compliant investing is over. Green Sukuk is on its way but not without a few bumps on the road. This article highlights Green Sukuk as an environmental-friendly alternative to customary investing as well as the challenges it faces amidst an unknowing public.

 

In 2018, the Environment Performance Index (EPI) by Yale University, which recorded a positive correlation to Gross Domestic Product (GDP), served evidence that material prosperity supports the infrastructure availability to preserve human well-being and ecosystem sustainability1. However, the index still falls below the target noting that there is room for improvement in the environmental and economic agenda. According to the survey, Sub-Saharan Africa, Middle East and North Africa score the lowest in the index by region. Dependencies of countries in the respective region on oil/gas and mining industry, poor public health facilities and low commitment for research and development to promote innovation in alternative renewable energy contribute to the depleted index scores.

Providing financing in creating a sustainability development is familiarly known as green finance. According to Climate Bonds Initiative, sustainable projects and infrastructures could be categorised within several pipelines by sectors including transportation, energy, water and waste management and built environment. Upon the Paris Agreement in 2016, green bonds oversubscribed portraying the global positive response. The global green bond market share is dominated by the United States of America with 20% followed by China, France, Germany, Netherlands with 18%, 8%, 5%, and 4% respectively2. Yet, other countries still keep trying to maximise their market share as a contribution to the sustainable development agenda.

With the size of green market share rises, there is growing concern on the poor representation of Islamic finance in the flourishing environmental conservation agenda, and concrete actions from all stakeholders are needed to improve this situation. Moslem and Moslem-populated countries seem to be left behind in the sustainability development agenda. This is a contradiction to the Islamic finance spirit. Islamic finance emerges as an alternative for the Moslem population to life based on Islamic worldview. Fundamentally, the ultimate goal of Islamic law (maqasid Sharia) to create a just socio-economy by managing resources sustainably should be taken into account. While the growth on material prosperity is constantly advertised through the financial industry, the role of Islamic finance in actively getting involved in environment preserverence remains undistinguished. The focus on wealth creation by disregarding the environment misleads the Islamic finance and economics’ function in achieving prosperity for human and nature.

It seems quite challenging for Green Sukuk to develop as not many companies would issue Sukuk in regards to green purposes which is ethically and socially responsible. Hence, the market size for Green Sukuk may not be attractive enough for investors (public). This conundrum, however, could be improved by further education to bring more awareness to the public.

While most of the Muslim-majority countries are categorised as developing countries with low GDP, the insignificant effort to target environmental performance as the focus of national budget would be allocated on other grounded matters. On the other hand, higher GDP Muslim countries, whose source of national income comes from oil and gas industries,  contribute to the environment depression causing the EPI plunged into low score despite the high level of material wealth. For instance, out of 180 countries, United Emirates Arab placed 77 and Saudi Arabia placed 86. Despite their average total GDP of USD 432.61 billion and USD 769.88 billion, according to the International Monetary Funds (IMF) in 2018, their carbon emission per capita contributes to their failure in achieving higher EPI scores3. There should be reformative actions by the state to tackle the environmental and sustainability issues as GDP only will still fail.

For this reason, in July 2017, Malaysian company Tadau Energy issued the country’s and world’s, first green sukuk with a 250 million Malaysian Ringgit (RM) paper to fund the construction of large-scale solar plants4. Green Sukuk comes with the added value of using the proceeds to finance the world’s transition to a low-carbon economy. As such, green sukuk can help combat climate change by paving the way for climate-smart investments in environmentally friendly projects that are based on sustainable resources.

Following the success of Green Sukuk in Malaysia, Indonesia has tapped the issuance of the first sovereign Green Sukuk denominated in US dollar in 20185. Following the Paris Agreement in 2016, Indonesia inciting the commitment on environmental sustainability promulgated a series of legal and policy instrument including Presidential Regulation (PERPRES) No. 61/2011, National Action Plan to Reduce Greenhouse Gas Emissions (RAN-GRK) and the Presidential Regulation (PERPRES) No. 71/2011, the Implementation of a National Green-House-Gas (GHG) Inventory. Indonesia issues Green Sukuk worth US$ 750 million with a five-and-a-half-year maturity. During the first period of issuance, Indonesia’s Green Sukuk was oversubscribed by the market6. The market reaction was motivate by the need for public company engagement in ecosystem preservation by the public.

However, a constant downturn on performance breaks the market expectation on the Green Sukuk’s public enthusiasm. It seems quite challenging for Green Sukuk to develop as not many companies would issue Sukuk in regards to green purposes which is ethically and socially responsible. Hence, the market size for Green Sukuk may not be attractive enough for investors (public). This conundrum, however, could be improved by further education to bring more awareness to the public.

Thus, assurance must be given to investors to utilise Sukuk proceeds in line with its economic value and green standards. At this stage, government support through various regulations with reward and punishment mechanism must be imposed.

Furthermore, its small market size poses numerous problems with the number of regulations available to govern Green Sukuk. There might also be a problem with the liquidity constraint in developing Green Sukuk as the market size of Green Sukuk is still new and small7. Additionally, with regards to green technology, there might be difficulties for investors to participate as Green Sukuk involves investment to develop and further contribute to the technology in regards to the environment8. The uncertainty and high-risk profile that comes with the development of new technology would deter investors from investing due to the fear of not obtaining returns from their investment. Thus, assurance must be given to investors to utilise Sukuk proceeds in line with its economic value and green standards. At this stage, government support through various regulations with reward and punishment mechanism must be imposed.

 

Conclusion

To conclude, we acknowledge that Green Sukuk is still in the infant phase, thus it takes time and requires proper governance and regulations to grow into a million-dollar investment platform.  A strong infrastructure requires an equally committed government to ensure that measures are taken to approach Islamic Finance holistically. Islamic finance does not only incorporate Sukuk, but instead a whole new way of banking that abides by the Shariah principle. Green Sukuk is the catalyst that would open more doors for Islamic Finance to develop and expand its horizons – not limited only to Islamic countries but also to the rest of the world. The notion of Green Sukuk owes itself to when socially responsible investments are made with regards to the environment.

About the Authors

Dian Andari, S.E., M.Sc. earned her Master of Islamic Finance and Management degree from Durham University, United Kingdom. Currently, she is working at Universitas Gadjah Mada Indonesia as an academic assistant. She is interested in corporate reporting, Islamic finance, and governance issues. Her current research involves accounting innovation and regulation trajectories and religious aspects on accountability.

Yunice Karina Tumewang, S.E., M.Sc. currently serves as a lecturer at the Accounting Department of Islamic University of Indonesia. She earned her Master Degree in Islamic Finance from Durham University, United Kingdom. Her research interests are Islamic Banking & Finance, Islamic Pension Fund, Islamic Accounting, and Islamic Social Finance.

 

References

1. Environmental Performance Index, Colombia University, 2018 EPI Report (Environmental Performance Index, Colombia University, n.d.), accessed March 30, 2019, https://epi.envirocenter.yale.edu/2018/report/category/hlt.
2. “Green Bonds: The State of the Market 2018,” Climate Bonds Initiative, last modified March 6, 2019, accessed April 5, 2019, https://www.climatebonds.net/resources/reports/green-bonds-state-market-2018.
3. “World Economic Outlook (October 2018) – GDP, Current Prices,” accessed March 31, 2019, https://www.imf.org/external/datamapper/NGDPD@WEO; “Data for Saudi Arabia, United Arab Emirates | Data,” accessed March 31, 2019, https://data.worldbank.org/?locations=SA-AE.
4. Newsletter, “World’s First ESG Sukuk Fund Another Step Forward for Malaysia’s Responsible Finance,” I-FIKR ISRA, accessed March 31, 2019, https://ifikr.isra.my/news/post/worlds-first-esg-sukuk-fund-another-step-forward-for-malaysias-responsible-finance.
5. Emma Dunkley, “Indonesia Issues World’s First Green Sukuk Bond,” FT.Com; London, February 23, 2018, accessed April 21, 2019, http://search.proquest.com/docview/2121966290/citation/8D7F496D149B4359PQ/1.
6. D Siswantoro, “Performance of Indonesian Green Sukuk (Islamic Bond): A Sovereign Bond Comparison Analysis, Climate Change Concerns?,” IOP Conference Series: Earth and Environmental Science 200 (November 26, 2018): 012056.
7. Lee Irvine, Michael P. Grifferty, and Alice Cowman, “Green Sukuk: The Race to Be First,” Islamic Finance News, November 5, 2014, 44 edition, https://d381ia8eydvlkf.cloudfront.net/wp-content/uploads/2017/05/Green-Sukuk-The-Race-to-be-First.pdf.
8. Raajeev Batra, “Adding a Green Hue to Raising Funds,” Gulf News, March 2, 2016, accessed April 21, 2019, https://gulfnews.com/business/analysis/adding-a-green-hue-to-raising-funds-1.1682828.