Green energy getting a boost from Islamic finance

Asdemand for green and sustainable energy sources continues to growaround the world – owing to a better understanding of the environmentaldisadvantages of conventional power production and a reaction to climatechange processes –, there is also an increasing need for sustainablefinance and responsible investment in the sector. According to the UNDepartment of Economic and Social Affairs, global investments into cleanenergy recorded an increase from $200bn in 2008 to $332bn annually in2018, with issuances of green bonds having become part of the currentforms of financing for renewable energy.This is where the valueproposition of Islamic finance kicks in. According to a new report bythe Middle East Islamic Finance Knowledge Center of consultancy Deloittejointly released with Kuala Lumpur-based International Shariah ResearchAcademy for Islamic Finance (ISRA) entitled “Sustainable finance: Cansukuk become a driver of solar and green energy growth?,” Islamicfinancing tools have become an important part of green and sustainableenergy funding. In particular, green sukuk has emerged as a centralShariah-compliant instrument for the purpose, the report says, notingthat Malaysia and Indonesia were the first countries to issue this typeof sukuk.In Malaysia, the world’s very first corporate green sukukworth 250mn ringgit ($61mn) was issued by Tadau Energy in early 2017 toco-finance large-scale solar construction. A number of other companiesand institutions followed, including Mudajaya Group, a constructioncompany in Malaysia, PNB Merdeka Ventures, a Malaysian government-linkedinvestment firm, Quantum Solar Park Malaysia, the largest solar powerproject developer of its kind in Southeast Asia, as well as Malaysia’sUniversiti Teknologi Mara, the first institute of higher learning in theworld to issue a green sukuk. Indonesia became the first country in theworld to issue $1.25bn of sovereign green sukuk in 2018 and another onein two tranches at a total value of $2bn in February 2019, whoseproceeds will be used to finance renewable energy projects. All thosegreen sukuk are structured as murabahah, wakalah, istisna or ijarah, or acombination of them.“The increase in the adoption of green sukuk tofinance renewable energy projects is attributable to the followingfactors: the increase in renewable energy projects, particularly solarenergy projects, low capital costs and the fact that it is aShariah-compliant instrument,” says Mohamad Akram Laldin, ISRA’sexecutive director.As Islamic finance in the past has emerged as akey player to fund social and infrastructure projects and meanwhileoffers various innovative Shariah-compliant structures to both large andsmall-scale enterprises in different sectors of the economies, thesestructures have been adopted to finance several major solar projects inthe Middle East and North Africa, Asia and Europe. This has alsoencouraged many investors to engage in green energy projects and enjoybenefits offered by their respective governments, many of which have putrenewable energy investments on their agenda. For example, in thecountries of the Gulf Co-operation Council (GCC), the renewable energytarget has become an integral part of national power strategies withinthe objectives of UN Framework Convention on Climate Change. Accordingto the Deloitte report, the GCC had renewable energy capacity of 867gigawatts as of end-2018 – mostly from photovoltaic and solar power –and is expected to drastically raise its renewable energy deployment inthe coming years. For instance, Qatar is expected to complete the firstphase of its Al-Kharsaag solar power plant with a total capacity of upto one gigawatt by 2020. The project is structured as a 25-year build,own, operate, and transfer public-private partnership with Qatar’sElectricity and Water Authority Kahramaa. “Both energy developers andinvestors alike now have enviable structures of Islamic finance to boostgrowth of green energy,” the report concludes, whereby sukuk stood outas a popular asset class amongst international investors.Meanwhile,many international finance firms and agencies have started to reap thebenefits offered by Shariah-compliant financing options for green energyprojects as they lower their debt-to-equity ratios forcapital-intensive projects.“In the coming years, Islamic financewill be considered as one of the primary financing strategies for greenenergy projects, in particular in the GCC, Jordan, Egypt, Malaysia,Indonesia and Pakistan. Other countries will follow suit as the marketmatures and becomes a driver of the green economy in these regions,” thereport says.