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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 growing trend toward green bond and sukuk is mainly due to the natural progression of fixed income market, the growing awareness of investors toward ethically and socially responsible investment and the stricter capital requirements for the bank to finance infrastructural projects.
One of the areas that are normally associated with SRI is the environment and its preservation. Green bond therefore becomes a common instrument to serve this aspect of SRI in the global market. For example, in 2007 the European Investment Bank (EIB) launched a EUR 600mln climate awareness bond focusing on renewable energy and energy efficiency.
Subsequently in 2008, World Bank issued a total of USD440mln green bond to support climate-focused program for the Scandinavian pension. In 2013, the African Development Bank issued a USD500mln green bond to finance climate change solution in Africa. As of June 2015, the World Bank has issued over 100 green bond papers valued at USD8.5bln.
In Malaysia, Tadau Energy Sdn Bhd, a Malaysian-based renewable energy and sustainable technology investment firm issued SRI sukuk on the Syariah principles of istisna’ (manufacturing sale) and ijarah (leasing) in July 2017. The RM250 million Green SRI Sukuk Tadau is to finance the construction of large scale solar (LSS) photovoltaic power plants in Kudat, Sabah, with a tenure of two to 16 years.
Following the success of SRI Sukuk Tadau, Quantum Solar Park Malaysia Sdn Bhd launched the world’s largest green SRI sukuk of RM1 billion in October 2017 to fund the construction of Southeast Asia’s largest solar photovoltaic plant project in three districts: Kedah, Melaka and Terengganu.
Securities Commission Malaysia (SC) launch the issuance of Malaysia’s first green sukuk in July 2017 which is an innovative channel to address global funding gaps in green financing under its Sustainable & Responsible Investment (SRI) Sukuk framework. To complement SRI Sukuk framework and promote greater utilisation of green sukuk as a fundraising channel, several incentives are in place to attract green issuers including:
- Tax deduction until year of assessment (YA) 2020 on issuance costs of SRI sukuk approved or authorised by or lodged with the SC;
- Tax incentives for green technology activities in energy, transportation, building, waste management and supporting services activities [www.mida.gov.my and www.myhijau.my]; and
- Financing incentives under the Green Technology Financing Scheme (GTFS) with total funds allocation of RM5 billion until 2022 [www.gtfs.my].
Download ASEAN Green Bond Standards report for additional reading
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