I am happy to see the investors’ focus gradually shifting to ESG-related instruments, including ESG Sukuk, as all three elements in the symbol ‘ESG’ are good for humanity.
The most active in ESG is ‘E’ which has seen green bonds and Sukuk put together crossing the coveted US$1 trillion mark in 2021 in aggregate issuances since the first green bond surfaced in 2008 issued by the World Bank. This is still small compared to over a 100 trillion-dollar global bonds market.
I personally do not think there is a sudden yearning for the love of our adorable little earth in the minds of instrument buyers which is pushing their sale. Let me explain. I am sure you have heard of killing two birds with one stone? This vernacular fits well here since the investors are not only getting the respectful label of ‘green investor’, they are also getting the fixed income they would have received anyway from the ordinary bonds.
The main concern, based on my discussion with some of the genuine green institutional and individual Sukuk investors, is how far they can rely on the green label of the instrument in the absence of independent authentication from a credible third party to the effect that the funds are invested for environment protection purposes.
As explained in article 179, I have seen the UK-based Climate Bonds Initiative or CBI going the full nine yards in developing the complete set of climate (green) bond standards bearing detailed technical criteria for the issuance of green bonds in each segment of the environment protection scheme.
Not only that, CBI has also backed it up with an exhaustive infrastructure for independent verification of green bonds through the network of its accredited certifiers from across the world. These are reputable organizations from audit, survey and consultancy fields. All of this is to provide much-needed assurance to investors as to the authenticity of the green bond.
From the investors’ perspective, a certified green instrument is far better than a self-declared green bond or Sukuk; however, the originators of such instruments find it cost-intensive and time-consuming. Some of them simply align the instrument with CBI criteria without obtaining the certificate, which is still better than the non-aligned issuances.
A social bond is nearer to the Shariah principles of respecting ethics and morals in interpersonal relationships, including while dealing in money and investment. Therefore, a social Sukuk is assumed to go the full length and embody the Islamic tenets to the core to care for needy people.
In this connection, I personally believe there is great potential for the issuance of social Sukuk by the Islamic countries and applying the proceeds to meet with the UN Sustainable Development Goals (SDGs). I provide below a few examples I presented in a United Nations Development Programme conference on the SDGs on how to accelerate the achievement of these goals in the Islamic world by connecting each goal to the religious teachings since it will inspire the governments and the people to support the SDGs.
For example, the first of the SDGs titled ‘No Poverty’ can be linked to Islamic teachings of paying Zakat (obligatory charity) and Sadaqah (voluntary charity) in the Muslim countries. A Zakat- and Sadaqah-based social Sukuk will collect the donations and use them for alleviation of poverty.
Similarly, the second SDG titled ‘Zero Hunger’ can also be addressed through Zakat- and Sadaqah- based Sukuk. Here, the Sukuk proceeds could also be received in kind, such as grains and other food items, and distributed to the most needy to achieve the zero-hunger goal. The Quranic verses and the sayings of Prophet Mohammed on zero hunger can work as the most effective influencer for the success of such social Sukuk.
The third goal titled ‘Good Health and Well Being’ can involve the players in the healthcare and Islamic insurance sectors in the Islamic countries who can ‘buy’ the social Sukuk in kind by donating healthcare vouchers for up to a certain amount to each needy family for a year which they can use to get an ailing relative treated at zero cost.
The fourth SDG is on quality education. Here, the educational institutions may ‘invest’ in social Sukuk by donating seats to the children from poor families. There is a strong urge in Islam on education and I quote a famous Hadith that one should go as far as China to get education.
Similarly, the other SDGs on clean water and sanitation; responsible consumption and production; climate action; life below water and on land; and lastly peace, justice and strong institutions can all be connected to the Shariah principles and Islamic teachings to create an all-inspiring atmosphere in OIC countries and the social Sukuk vehicle can be effectively utilized to hasten the process of achieving the SDGs well ahead of the target year of 2030.
The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.
Next week: More on ESG Sukuk.