Malaysia is increasingly turning its focus towards environmentally friendly Islamic finance, with new product offerings looking to raise capital for sustainable development projects.
On November 8 state-backed asset management firm Permodalan Nasional Berhad (PNB) unveiled a RM2bn ($512.7m), 15-year green sukuk (Islamic bond) to fund the development of its Merdeka PNB118 tower project.
Merdeka PNB118, a 118-storey tower with office, retail and hospitality space, is being developed as an environmentally sustainable project, employing energy-efficient technology and environmentally friendly construction materials and processes to obtain certification as a LEED Platinum building, the highest standard awarded by the US Green Building Council.
The PNB offering is a significant step forward in the evolution of green sukuk, and a sign the product has entered the mainstream, according to Faris Hadad-Zervos, Malaysia country manager at the World Bank Group. “The fact that it is financing a green building highlights that green sukuk is not just about renewable energy, but also for a wider range of environmentally friendly projects,” he said.
The PNB deal is the third and largest green sukuk to be issued in Malaysia following the release in July last year of a RM250m ($64.1m) offering from Tadau Energy – the world’s first formal green sukuk – and a RM1bn ($256.4m) offering from Quantum Solar in October.
Incentives to encourage green sukuk development
The growing popularity of environmentally friendly Islamic finance products follows the launch in 2014 of the Sustainable Responsible Investment (SRI) framework.
The Securities Commission (SC), the framework’s developer, said that by offering sharia-compliant SRI products, Malaysia would be able to consolidate its leading position in the sukuk market and enhance its value proposition as a centre for Islamic finance and sustainable investment.
To further boost appetite for green sukuk the commission also introduced a package of incentives under the SRI initiative. These include tax deductions on issuance costs of any SRI sukuk approved, authorised by or lodged with the SC before 2020, along with tax breaks for green-technology activities in energy, transport, building, waste management and related services activities.
The SRI initiative was followed by the adoption of ASEAN-wide green bond standards in November. In addition to outlining common guidelines for green finance within the bloc, the standards aim to stimulate funding for eco-friendly projects across the region.
Increase in green bond demand provides growth opportunities
Not only will the development of environmentally sustainable investment tools provide the Islamic financial sector with another avenue in which to channel funds, it may help to arrest a downward slide in Malaysian sovereign sukuk issuances; offerings were down 19% in the first eight months of last year, according to a report released by ratings agency Moody’s in December.
Malaysia’s green sukuk issuances accounted for only a small percentage of global green bonds floated last year, and international trends suggest the segment has significant growth potential.
Global green bond issuances – sukuk or otherwise – grew by 78% in 2017 to reach $155.5bn, according to data released by the Climate Bonds Initiative, which forecasts this year’s total will be between $250bn and $300bn.
Meanwhile, on a regional level, growing populations and increasing infrastructure demands, combined with more awareness of environmental issues and the rise of value-based or ethical investors looks set to drive green investment in South-east Asia.
According to a World Bank report released in January, ASEAN economies are expected to expand by an average annual rate of 5.2% until 2020, while infrastructure investments are estimated to total $470bn over the period. As a result of this continuing growth, the bank predicts green investments will reach $3trn through to 2030, with development of Malaysia’s green sukuk sector set to contribute significantly.
Abdul Rasheed Ghaffour, the deputy governor of Bank Negara Malaysia (BNM), the central bank, also anticipates a rise in sustainable finance, telling the Symposium on Islamic Finance in December that demand for ethical investments to support environmental sustainability will only increase in the coming years.
He cited climate change and the increasing incidence of weather-related disasters as some of the major disruptors to economic activity in the modern world, noting that Malaysia’s Islamic finance sector was looking to combat such challenges.
“Within the Islamic capital market, we already see good examples of innovation in the form of green sukuk, an innovative financing vehicle to combat climate change,” he said.
“The recent issuances of the world’s first green sukuk by two energy companies in Malaysia have kick started the growth of green sukuk market and will significantly boost the ‘cleantech’ movement."
This article was first published in Islamic Finance news, Volume 15, Issue 7, dated February 14, 2018.