The green bond market started small sometime around 2007 and, at first, only attracted investors from the public institutions. However, the green bond industry took off in a big way from 2013 and has since achieved phenomenal growth. Today, leading corporations in various sectors, from the auto industry to fast-moving consumer goods (FMCG), tap into green bonds to raise funding.
Toyota Motor Corp revolutionized the green bond market by introducing the auto industry’s first-ever Asset Backed Green Bond in 2014. The French energy group, Electricite de France SA, raised €1.4 billion (RM6.8 billion) in November 2013 to become the first euro-denominated green bond from a large company to finance new wind and solar projects in mainland France. Unilever plc became the first FMCG company to issue a green bond with an issuance of £250 million (RM1.4 billion) – the first-ever green bond in the pound market – in March 2014. In May 2016, the London Taxi Co, which operates the iconic black taxis in the city of London, issued a US$400 million (RM1.56 billion) green bond to finance projects, enabling the production of zero-emission-capable vehicles.
Recognizing the growing momentum and significance of the green bond industry, in September 2016, the Luxembourg Stock Exchange launched the Luxembourg Green Exchange, the world’s first stock exchange for green financial instruments. Green bonds issued in 2016 were about US$80 billion, which is a 92% growth against the size of issuance in 2015. Green bond issuance in 2017 has exceeded the US$100 billion mark.
Not to be left behind, the sukuk industry saw its first launch of the green sukuk in July 2017 by Edra Power Holdings Sdn Bhd’s unit, Tadau Energy Sdn Bhd, with an issuance of RM250 million Green SRI Sukuk to finance a large-scale solar project of 50MW in Kudat, Sabah.
Subsequently in October 2017, Quantum Solar Park Malaysia Sdn Bhd issued its green SRI sukuk worth RM1 billion – the world’s largest to date – to finance the construction of three large-scale solar photovoltaic plants, to be built in the states of Kedah, Melaka and Terengganu, to generate and supply about 282,000MWh of electricity annually to Tenaga Nasional Bhd over a period of 21 years.
In November 2017, as an effort to promote the development and integrity of the green bond market in Asean, the Asean Capital Market Forum launched the Asean Green Bonds Standards which were developed based on International Capital Market Association’s Green Bond Principles.
These initiatives are likely to result in greater growth of the green sukuk market in 2018 and beyond. However, the sukuk industry will have to face a twofold challenge.
First is to convince the issuers to adopt the Sharia-compliant or sukuk route when issuing these social impact debt capital market papers as part of their fundraising initiatives. This may not be very serious in Malaysia where the sukuk issuance outstrips conventional bond issuance.
This matter is more challenging for non-ringgit issuers, as they may find the intricacies of a sukuk, combined with the complex requirements of the green bond issuance too cumbersome to comprehend all at once. If the sukuk learning curve is not flattened quickly, the sukuk industry may find itself left far behind, as more issuers get onto the social impact bandwagon of issuing green bonds.
The second challenge is to achieve critical mass for the green sukuk market in order to achieve optimal costs of issuance and enable a liquid secondary market trading, which in turn will lead to efficient price discovery. This can be addressed as a more diverse set of issuers and investors come to the market to issue and subscribe to green or SRI sukuk issuances across various tenors and risk profiles.
The first two issuances within green sukuk have set the ball rolling in this regard. 2018 will be an exciting time for this new asset class.