The Islamic finance industry is responding to sustainability efforts as Saudi Arabia leads adoption of ESG Sukuk globally. Meanwhile, fund managers are launching ESG funds to meet increasing demand post-COP26 and the Islamic world regulates and incentivises ESG-investments.
- Saudi Arabia is at the forefront of the adoption of ESG Sukuk globally. During the first two months of 2022, the Kingdom has issued ESG Sukuk totaling US$1.5bn. The next largest issuers of Sukuk are Indonesia and Malaysia.
- Fund managers in the industry are launching ESG and waqf funds to meet increasing investor demand following the COP26 summit in Glasgow.
- Throughout 2021 and into this year, the Islamic world has been regulating and incentivising further ESG-investments through a number of initiatives.
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In 2021 we saw growing interest in sustainability among Islamic finance industry players from both governments and private sectors, with activities ranging from regulatory developments to the launches of more ESG funds as we bear witness to fast-paced adoption of ESG and green Sukuk.
ESG and green sukuk
US$5.34bn of ESG sukuk was issued around the globe in 2021, according to the Refinitiv Sukuk Now App. This was more than any of the previous years and represents 3.2 percent of the total Sukuk issued in 2021 globally.
The largest ESG Sukuk was issued by the Jeddah-based Islamic Development Bank (IDB). Two notable issuances came from Bangladesh and Nigeria signaling that more Islamic jurisdictions will be joining the club.
The Kingdom of Saudi Arabia is continuing its fast-paced adoption of ESG Sukuk, as seen early in 2022 with two issuances in the first two months of 2022, totaling US$1.5 billion.
The Kingdom is now the biggest issuer of ESG Sukuk in the world, followed by Indonesia and Malaysia – even when we exclude the IDB issuance.
Similarly, we are seeing more Islamic syndications and loans that are deployed for ESG or green projects.
In June 2021, ING Turkey, a part of ING Group, declared the conclusion of its first sustainability linked syndicated loan. The proceeds of the ESG-linked US$37m and US$321m term loan facilities will be used by the bank for general trade finance purposes.
In October the same year, Egypt’s finance ministry launched its first US$2bn syndicated sustainable term loan and Islamic term financing facility with a three-year tenor.
The ESG tranche of the facility will be used to fund green projects as per Egypt’s Green Financing Framework, which was implemented in September 2020.
ESG and waqf funds
During 2021, the world witnessed the launch of more ESG, or sustainability-focused, Islamic funds.
The fourth quarter of the year was perhaps one of the most important periods for sustainable finance, following several announcements made during the UN Climate Change Conference (COP26) hosted in Glasgow. It is not unusual for asset managers to take actions to meet demand for ESG funds after these summits, especially with Islamic mandates.
In December, Brunei saw the launch of the first such fund by the Bank Islam Brunei Darussalam (BIBD) Securities Sdn Bhd in partnership with Arabesque, a global asset management firm that specialises in sustainability, marking one of the key initiatives by BIBD Group towards sustainability.
More Islamic or shariah-compliant funds with ESG focus launched in 2021, including the launches in September of Saudi Arabia’s financial firm SEDCO Capital and Switzerland’s Lombard Odier. Meanwhile in October, two further Shariah equity funds by Saudi SEDCO Capital and Amundi were launched.
Elsewhere, Malaysia’s PHEIM Unit Trusts Bhd launched the Pheim Global ESG Islamic Fund (PGEIF) in December, its first Islamic ESG fund.
Among the waqf-based funds is Malaysia’s Kenenga Investors’ Kenanga Waqf Al-Ihsan Fund. It is based on waqf, an Islamic philanthropic tool that aims to enhance the social and economic prospects of the disadvantaged.
Another Malaysian fund launched based on waqf is Maybank Mixed Assets-I Waqf Fund, which is Maybank’s first waqf fund.
The increase in Islamic ESG funds in Malaysia is in line with the country’s Securities Commission commitment towards sustainable investment.
The latest initiative by the regulator is the launch of the FTSE4Good Bursa Malaysia Shariah index in early July, which measures the companies that demonstrate strong ESG practices.
This will serve as a basis for Malaysian fund managers to form investment products that have both Islamic and ESG mandates. Similarly, Saudi Arabia witnessed the launch of more waqf funds.
Regulations and initiatives
In 2021, regulators and governments in key Islamic capital markets continued to regulate and incentivise ESG- and SDG-related investments.
In January, Securities Commission Malaysia (SC) announced the expansion of its Green SRI Sukuk Grant Scheme, which has since been renamed the SRI Sukuk and Bond Grant Scheme.
The grant is now available to all Sukuk issued under SC’s SRI Sukuk Framework or under the ASEAN Green, Social and Sustainability Bond Standards.
Established in 2018, the grant scheme will offset up to 90 percent of the external review costs, capped at RM300,000 (approx. US$73,000) per issuance, in addition to providing income tax exemptions for a period of five years until 2025.
In July, Oman’s Capital Market Authority released a Sustainable and Responsible Investment (SRI) bond and Sukuk framework with the aim of consolidating and enhancing earlier regulations in place.
The rules will pave the way for sustainability, green, blue and social sukuk, and allow for the issuance of waqf-linked sukuk. The framework will be based on international best practices from the World Bank and the United Nations’ Strategic Development Goals (SDGs).
In September, Saudi’s Public Investment Fund (PIF) – the Kingdom’s sovereign wealth fund – said it is considering a green Sukuk and Saudi-based Arab Petroleum Investments Corporation (APICORP) launched its first green bond framework, which will be used to raise green bonds and Sukuk, in line with the International Capital Market Association’s Green Bond Principles 2021.
In November, the Islamic Finance Council UK (UKIFC), Her Majesty’s Treasury, Ministry of Finance in the Republic of Indonesia Ministry, Islamic Development Bank, London Stock Exchange Group, and the Global Ethical Finance Initiative (GEFI) became founding partners in the launch of a High-Level Working Group on green Sukuk (HLWG).
The three-year initiative will direct investment to reduce greenhouse gas emissions in the world’s regions in most need.
Meanwhile in Turkey, the Capital Markets Board (CMB) submitted the Draft Guidelines on Green Debt Instruments and Green Lease Certificates (tr. Sukuk) (“Draft Guidelines”) for public opinion on 3 November.
This draft serves as a guideline to regulate the principles regarding green debt instruments and lease certificates (“Green Debt Instruments”) to be issued in the financing of investments that will contribute to sustainability.
Following the public opinion process, the Guidelines on Green Debt Instruments, Sustainable Debt Instruments, Green Lease Certificates and Sustainable Lease Certificates (“Guidelines”) was accepted and published with the CMB’s Principle Decision dated 24 February 2022.
In December, The Securities Commission Malaysia (SC) released a consultation paper seeking public feedback on principles-based SRI Taxonomy for the Malaysian capital market.
The SRI Taxonomy was developed to enable capital market participants to identify economic activities that are aligned with environmental, social and sustainability objectives, in line with the recommendation of the SC’s SRI Roadmap for the Malaysian capital market.
As such the Islamic world seems to be catching up with the ESG-SDGs-focused investments and the future of sustainable Islamic finance looks promising.