Green, Islamic investors find common ground with Indonesian sukuk

SYDNEY / Reuters

A first sale of green Islamic bonds by Indonesia could help open the door for more crossover deals across Asia, as religious and environmentally-minded investors find a middle ground in the sukuk funding format.
Last week, Indonesia became the first Asian sovereign to sell green sukuk, raising $1.25 billion via a five-year deal, alongside a $1.75 billion 10-year sukuk. Proceeds for the green sukuk will be used on eligible projects, ranging from renewable energy to waste management.
The deal is a positive step for the sukuk market and more issuance are to be expected in the future to meet demand, said Monem Salam, President of Malaysia-based investment firm Saturna Sdn Bhd. “The next phase will be when a company actually does one, that will have more traction from investors as there is a lack of product out there.”
Sukuk are investment certificates that comply with Islamic principles, usually through a contractual agreement that can incorporate several requirements, including environmental, social and governance (ESG) criteria.
Indonesia’s sukuk was based on an agency contract known as wakala and also incorporated a green framework assessed by the Centre for International Climate and Environmental Research (CICERO), a non-profit which specialises in green finance.
Such a convergence of investment principles could widen the appeal of sukuk beyond Asia and the Middle East to include ethical investors in Western countries. Asia is an important growth market for green bonds and sukuk, with the Indonesian deal expected to kick off the national market, said Harald Lund, senior advisor at CICERO. Such potential is coupled with a global trend of ethical investors wanting more transparency in their investments, he added. “In the sukuk market you have transparency of proceeds, so it matches with those ESG requirements.”
CICERO started offering its opinions in Asia back in 2016, and has rated several Malaysian deals to finance solar power projects as well as an environmentally-friendly building. More transactions might be needed to fully test the appetite of green investors for sukuk, as Indonesia’s green sukuk saw stronger takeup from regional investors. Islamic investors received a 32 percent allocation for the five-year green sukuk, with 33 percent going to US and European investors. This compared to a 24 percent allocation for Islamic investors in the 10-year sukuk deal, with 54 percent going to US and European investors.