CASE STUDY Helping Malaysia Develop the Green Sukuk Market Facilitating Sustainable Financing OVERVIEW The green sukuk (green Islamic bond) is a new climate finance instrument that has the potential to channel the US$2 trillion Islamic finance market toward funding of green and sustainable investment projects. The World Bank partnered with the government of Malaysia to develop the green sukuk market in that country. Facilitating Sustainable Financing through Green Islamic Bonds Photo credit: Thinkstock. Background law (Shariah). Sukuk issuance in 2017 reached Because developing countries have limited access to US$97.9 billion, according to S&P Global ratings. capital for investment in sustainable infrastructure, they often resort to local bank loans, which offer a more There are commonalities between sukuk and green expensive source of long-term finance than capital bonds that can easily be leveraged to tap the Islamic markets, as well as other unsuitable terms. capital markets and maximize private sector financing for environmental projects: The green bond is a capital markets instrument that 1. Both raise funds for a specific purpose. The asset- allows sovereigns, cities and municipalities, financial based structure of a sukuk resembles the green bond institutions, and corporates to mobilize resources for structure, as it assures investors that the funds raised low-carbon infrastructure, energy efficiency, and clean are used only for designated purposes. energy. Labeled green bonds also provide the private 2. The values of both are deeply rooted in ethical and sector with the opportunity to participate in achieving socially responsible principles. The assets financed by the United Nations’ Sustainable Development Goals sukuk exclude investments in gambling, weapons, (SDGs) without sacrificing financial returns. As a result pork, and alcohol. of these attractions, annual green bond issuance grew 3. The notion of environmental stewardship—the to more than US$170 billion in 2017. The World Bank, protection of air, water, land, and the ecosystems that which launched the first labeled green bond in 2008, depend on them—is intrinsic to Shariah principles. sees the green bond as an important way to address Despite its huge potential, however, the green sukuk climate change. originally failed to materialize. There were a number of A sukuk is an interest-free bond that generates returns reasons for this. Issuers and investors did not to investors without infringing the principles of Islamic understand the process for and benefits of such issuances, and they had misperceptions about their complexity and pricing. An absence of guidelines from facilitated the participation of local institutions to regulators, lack of consensus and coordination among provide external reviews at low cost government agencies, and lack of bankable green • Identified potential issuers for demonstration projects were also contributing factors. issuances (in collaboration with local World Bank Finance, Innovations and Competitiveness Global Project Objectives Practice staff) and helped the first issuers navigate Malaysia is committed to the SDGs and seeks to government policies and follow international best establish itself as a center for sustainable finance. In practices 2014, Securities Commission Malaysia introduced The technical working group promoted the concept of socially responsible investment (SRI) guidelines for the “green sukuk” and shared international experience sukuk to encourage asset owners to adopt the UN of green bond issuance with the Ministry of Energy, Global Compact Principles, the SDGs, or other Green Technology and Water (KeTTHA), Green Tech environmental, social, and governance (ESG) factors. Malaysia Sdn Bhd, Ministry of Finance, financial Bursa Malaysia also introduced an ESG index the institutions, and potential issuers. same year. As a signatory to the Paris Agreement on climate change, the Malaysian government was Outcome specifically looking to develop an innovative climate On July 27, 2017, Tadau Energy issued the first green finance instrument to help it meet its target of sukuk in the world, raising RM 250 million (US$59 generating 7,200 MW of renewable energy by 2020 (of million) to finance a solar power plant in Sabah, which 2,080 MW is to be contributed by solar energy). Malaysia. The sukuk was issued under Malaysia’s SRI Project Design and Financial Solution sukuk framework and endorsed by the Shariah In January 2017, the World Bank, Malaysian central Advisory Council; it also benefited from an independent bank (Bank Negara), and Securities Commission review by the Center for International Climate and Malaysia established a technical working group to Environmental Research Oslo (CICERO). Key explore options for developing a green Islamic finance evidence of the project’s success was that another market in Malaysia and for encouraging investments in issuer—Quantum Solar—followed quickly with a larger green or sustainable projects. The World Bank (RM 1 billion) issuance. As of December 2018, two Treasury joined the working group as technical more green sukuk and a green bond had been issued experts. in Malaysia. Local rating agencies (RAM Ratings and Malaysian Rating Corporation Berhad) and Green Malaysia has the third-largest bond market relative to Technology Corporation have established GDP in Asia after Japan and the Republic of Korea, methodologies for reviewing green sukuk frameworks and it is also a global leader in sukuk issuance. The in accordance with international best practices. As a World Bank identified the opportunity to leverage result of the Malaysian issuances, other Islamic Malaysia’s role in Islamic finance to create a new countries have begun exploring the possibility of climate finance product that combined the sukuk and tapping the Islamic capital markets for sustainable green bond instruments. More specifically, the World climate investments, including Indonesia, which issued Bank Treasury played the following roles: the first sovereign green sukuk in the world in February • Identified the complementarity between Malaysia’s 2018. SRI sukuk guidelines and Green Bond Principles to enable potential issuers to issue green sukuk in Green sukuk instruments are just one of the ways that the absence of national green bond guidelines the World Bank helps member countries become more resilient to economic shocks. IBRD’s AAA credit rating, • Provided guidance on how the government could market presence, and convening power allow the kick-start the local market through incentives to World Bank Treasury Banking Products team to issuers develop innovative new products that help clients • Provided guidance on eligible green projects maximize financing and mitigate risk. • Advised on the role of independent third-party reviews, convened international certifiers, and For information: Miguel Navarro-Martin, Manager of Banking Products mnavarromartin@worldbank.org, +1 (202) 458 4722