Green sukuk is in the global limelight in the midst of the pandemic. Green Sukuk are considered as Shariah compliant investments where the sukuk proceeds are used for selected environment friendly projects or green projects and investing in such sukuks will provide investors the certainty that their investments will be utilized only for environment friendly or green projects. It is reported by the World Bank that as of July 2020, USD$ 6.1 billion has been raised through 12 unique green sukuk issuers from Indonesia, Malaysia, the United Arab Emirates and by Islamic Development Bank (IsDB).

 What is Sukuk?

According to Regulation on the Issuance of Sukuk (Regulation No. R-53/2013) issued by the Capital Market Development Authority of Maldives, “Sukuk” is a certificate, document or electronic record evidencing the ownership of an asset or an investment satisfying the shariah principles and concepts approved by the Authority; and evidencing the ownership of the profit generated from the asset or investment. In Maldives, the first corporate sukuk was issued by the Housing Development Finance Corporation Plc in 2013. In 2021, it was reported that the government of Maldives has issued the first sovereign sukuk.

 Green Sukuk Frameworks

There are number of frameworks issued in different countries in the world to facilitate the issuance of green sukuks. For instance, in Indonesia, a Green Bond and Green Sukuk Framework to finance and or re-finance Eligible Green Projects via the issuance of Green Bonds and Green Sukuk is issued. According to this framework, sukuk proceeds can only be used to finance or re-finance expenditure directly related to “Eligible Green Projects.” Eligible Green Projects for the purpose are projects which promote the transition to low-emission economy and climate resilient growth, including climate mitigation, adaptation, and biodiversity in accordance with the criteria and process set out in the framework. However, the Eligible Green Projects shall exclude: new fossil fuel based electric power generation capacity and expenditure related to the improvement in the efficiency of fossil fuel based electric power generation; large scale hydropower plants (>30 MW capacity); and nuclear and nuclear–related asset. On behalf of the government, it is the National Development Planning Agency and the Ministry of Finance will review and approve projects / budget allocation / subsidies to be included in the State Budget. As for the management of the proceeds, it is stated in the framework that the proceeds of each Green Sukuk will be managed within the Government’s general account in accordance with sound and prudent treasury management policy and it is only upon request from the Line Ministries, the Green Bond and Green Sukuk proceeds will be credited to a designated account of the relevant ministries for funding exclusively projects as defined in the Framework. It is also stated in the framework that the Ministry of Finance who represents the Republic of Indonesia will prepare and publish a Green Sukuk report on its official website on annual basis and initially on the date falling no more than one year after the inaugural Green Sukuk issuance and this report shall contain minimum: a list and brief description of the projects to which Green Bond and Green Sukuk proceeds have been allocated; the amount of Green Bonds and Green Sukuk proceeds allocated to such projects; an estimation of the beneficial impact arising from the implementation of Eligible Green Projects; and reporting is expected to include measures of the reduction in greenhouse gas emissions, reduction in resource consumption, the number of parties that benefit from projects funded and other appropriate measures taking into account the nature of the project. It is also stated that the Republic of Indonesia will engage an independent third party to provide assurance on its annual Green Sukuk report and the compliance of each Green Sukuk issued in accordance with the Framework.

In Malaysia, Green Sukuk is part of Sustainable and Responsible Investment (SRI) Sukuk Framework issued by Securities Commission (SC) Malaysia. According to this framework, proceeds raised from the issuance of SRI sukuk shall be used exclusively for the purpose of funding activities or transactions related to the eligible SRI Projects. An internal process for evaluation and selection of the eligible SRI projects shall be established. Also, proceeds allocated for the eligible SRI projects are credited into a designated account or otherwise tracked in an appropriate manner. There must be an annual report prepared and published with at least the following information: Annual reporting on the following: original amount allocated for the eligible SRI projects; amount utilised for the eligible SRI projects; unutilised amount and where such unutilised amount is placed or invested pending utilisation; and list of the eligible SRI projects in which the proceeds have been allocated to as well as brief description of the said eligible SRI projects and their impact or expected impact. An external reviewer may be appointed to assess and provide report on the eligible SRI projects or the issuer’s compliance with the relevant requirements as set out in the SC’s guidelines. The eligible SRI green projects are projects on: renewable energy; energy efficiency; pollution prevention; management of living natural resources and land use; eco-efficient/circular economy adapted products; clean transportation; sustainable water and wastewater management; terrestrial/ aquatic conservation, climate change adaptation; and green building. In Malaysia, under the SRI Sukuk Framework, there are some tax deduction on SRI sukuk issuances which are: tax deduction for the expenditure incurred on the issuance of SRI sukuk approved or authorised by or lodged with the SC until the year of assessment 2023; and 90% of the proceeds raised are solely used for the purpose of funding SRI projects as specified in the Guidelines by the SC. Further, a Green SRI Sukuk Grant Scheme is also provided and the details of this Scheme is shown in the figure below.

Figure: Green SRI Sukuk Grant Scheme under SRI Sukuk Framework issued by Securities Commission (SC) Malaysia

Source: Securities Commission Malaysia (2019)

 Conclusion

Maldives being among the countries most vulnerable to climate change, need to introduce a sustainable framework for funding green projects and in this regard, green sukuk could be introduced to the country. In August 2015, the Ministry of Environment and Energy has introduced Maldives Climate Change Policy Framework (MCCP) has been issued covering sustainable financing where policy goal 1 states that: “ensure and integrate sustainable financing into climate change adaptation opportunities and low emission development measures.” To introduce green sukuk to Maldives, it is imperative to enact a specific framework for the purpose and this framework can be enacted by learning from the experiences of green sukuk issuances made in countries like Malaysia, Indonesia and United Arab Emirates. There is no doubt that by issuing green sukuks, the country can complement the Green Climate Fund initiatives.

Dr. Aishath Muneeza is an Associate Professor at the International Center for Education in Islamic Finance.