Faris Hadad-Zeros is the World Bank Country Manager for Malaysia.
In 2016 the World Bank Group Global Knowledge and Research Hub joined a Technical Working Group with the Central Bank of Malaysia and the Securities Commission in supporting the Malaysia Green Finance Program, leveraging our experience and expertise in green financing. The program aims to encourage investments in green or sustainable projects through the development of green Islamic finance markets; initially in Malaysia, and subsequently, in the ASEAN region.
The program has supported the launch of the first green sukuk in the world on June 27, 2017. The sukuk is a green Islamic bond, where the proceeds are used to fund a specific environmentally-sustainable infrastructure project, such as the construction of renewable energy generation facilities.
The sukuk should be attractive to conventional investors if they offer reasonable risk-adjusted returns and are properly marketed. A sukuk that meets these criteria and provides funding for an environmentally sustainable project could be particularly attractive to environment focused investors for two principal reasons.
First, sukuk provide investors with a high degree of certainty that their money will be used for a specific purpose. To comply with the underlying Shari’ah principles, the funds raised through the issuance of a sukuk must be applied to investments in identifiable assets or ventures. Therefore, if a sukuk is structured to provide funds for a specified infrastructure project, such as a renewable energy project, there is little chance the investors’ money will be diverted and used for another purpose.
Second, many more environment-focused investment products exist on the equity side of the capital markets than on the fixed-income side. Since most investors in environment sustainability want to know precisely how their money will be used, bonds that are general obligations of an issuer have limited appeal unless all activities of the issuer meet the investor’s environmental standards. Sukuk, which are most like a conventional fixed-income security, could help fill the fixed income supply gap for environmental investors, to the extent the proceeds of a sukuk are earmarked for an environmentally-beneficial purpose.
The Global Knowledge and Research Hub has been partnering with public and private institutions in Malaysia and elsewhere to develop modern and integrated financial services and markets. It is through this partnership that the new green Islamic finance initiative has been spearheaded, and will contribute a new and innovative financial product that can be used throughout the world.
This article was first published on World Bank’s East Asia & Pacific On the Rise blog. To access the blog, visit bit.ly/WB_greensukuk.