As
demand for green and sustainable energy sources continues to grow
around the world – owing to a better understanding of the environmental
disadvantages of conventional power production and a reaction to climate
change processes –, there is also an increasing need for sustainable
finance and responsible investment in the sector. According to the UN
Department of Economic and Social Affairs, global investments into clean
energy recorded an increase from $200bn in 2008 to $332bn annually in
2018, with issuances of green bonds having become part of the current
forms of financing for renewable energy.
This is where the value
proposition of Islamic finance kicks in. According to a new report by
the Middle East Islamic Finance Knowledge Center of consultancy Deloitte
jointly released with Kuala Lumpur-based International Shariah Research
Academy for Islamic Finance (ISRA) entitled “Sustainable finance: Can
sukuk become a driver of solar and green energy growth?,” Islamic
financing tools have become an important part of green and sustainable
energy funding. In particular, green sukuk has emerged as a central
Shariah-compliant instrument for the purpose, the report says, noting
that Malaysia and Indonesia were the first countries to issue this type
of sukuk.
In Malaysia, the world’s very first corporate green sukuk
worth 250mn ringgit ($61mn) was issued by Tadau Energy in early 2017 to
co-finance large-scale solar construction. A number of other companies
and institutions followed, including Mudajaya Group, a construction
company in Malaysia, PNB Merdeka Ventures, a Malaysian government-linked
investment firm, Quantum Solar Park Malaysia, the largest solar power
project developer of its kind in Southeast Asia, as well as Malaysia’s
Universiti Teknologi Mara, the first institute of higher learning in the
world to issue a green sukuk. Indonesia became the first country in the
world to issue $1.25bn of sovereign green sukuk in 2018 and another one
in two tranches at a total value of $2bn in February 2019, whose
proceeds will be used to finance renewable energy projects. All those
green sukuk are structured as murabahah, wakalah, istisna or ijarah, or a
combination of them.
“The increase in the adoption of green sukuk to
finance renewable energy projects is attributable to the following
factors: the increase in renewable energy projects, particularly solar
energy projects, low capital costs and the fact that it is a
Shariah-compliant instrument,” says Mohamad Akram Laldin, ISRA’s
executive director.
As Islamic finance in the past has emerged as a
key player to fund social and infrastructure projects and meanwhile
offers various innovative Shariah-compliant structures to both large and
small-scale enterprises in different sectors of the economies, these
structures have been adopted to finance several major solar projects in
the Middle East and North Africa, Asia and Europe. This has also
encouraged many investors to engage in green energy projects and enjoy
benefits offered by their respective governments, many of which have put
renewable energy investments on their agenda. For example, in the
countries of the Gulf Co-operation Council (GCC), the renewable energy
target has become an integral part of national power strategies within
the objectives of UN Framework Convention on Climate Change. According
to the Deloitte report, the GCC had renewable energy capacity of 867
gigawatts as of end-2018 – mostly from photovoltaic and solar power –
and is expected to drastically raise its renewable energy deployment in
the coming years. For instance, Qatar is expected to complete the first
phase of its Al-Kharsaag solar power plant with a total capacity of up
to one gigawatt by 2020. The project is structured as a 25-year build,
own, operate, and transfer public-private partnership with Qatar’s
Electricity and Water Authority Kahramaa. “Both energy developers and
investors alike now have enviable structures of Islamic finance to boost
growth of green energy,” the report concludes, whereby sukuk stood out
as a popular asset class amongst international investors.
Meanwhile,
many international finance firms and agencies have started to reap the
benefits offered by Shariah-compliant financing options for green energy
projects as they lower their debt-to-equity ratios for
capital-intensive projects.
“In the coming years, Islamic finance
will be considered as one of the primary financing strategies for green
energy projects, in particular in the GCC, Jordan, Egypt, Malaysia,
Indonesia and Pakistan. Other countries will follow suit as the market
matures and becomes a driver of the green economy in these regions,” the
report says.
