Starting with Sukuk, I have since covered in the last 32 articles all capital market products and tools currently in use by the Islamic finance industry globally.
In this last topic on Islamic capital markets, I would touch upon green and social Sukuk. But before diving into the subject, I would like to clarify that all the structures, processes and steps detailed in my previous articles on the issuance of Sukuk apply mutatis mutandis on any green or social Sukuk.
Green Sukuk
The purpose of issuing green Sukuk is ostensibly to raise funding to be used for climate and environment protection purposes. To this end, green Sukuk issuance should be in line with the issuance of green bonds or climate bonds with a difference that any project can be green but it is not necessary that every green project is also Shariah compliant.
The International Capital Market Association (ICMA), a voluntary gathering of 600 of the world’s top banks and financial institutions, took the initiative to develop and introduce the Green Bond Principles in 2014 based on a set of four criteria viz. utilization of proceeds, evaluation and selection of green projects for which the bond is issued, how to manage the bond proceeds and reporting on how the funds were actually used.
In addition, ICMA selected certain areas for issuance of green bonds which included energy, buildings, transport, water management, waste management and pollution control, land use, agriculture, forestry, energy-intensive industries and information technology and communications.
However, ICMA did not elaborate on what is green and what is not. This is where Climate Bonds Initiative-UK (CBI) comes in. CBI is non-governmental organization established in 2010 which took it upon itself to develop and publish the green definitions through its climate bond standard and apply them through the comprehensive mechanism of a certification scheme by its accredited organizations.
Through the certification of a green bond, CBI provides much-needed credibility to investors about the correct use of proceeds for climate protection purposes. It also collates and publishes market data on green bonds. The data has three tiers viz. the bonds certified by CBI’s accredited organizations based on its own criteria, the bonds which are self-declared green but aligned to CBI criteria and the bonds which are self-proclaimed as green but are neither certified by nor aligned with CBI criteria. The groups of scientists and industry experts developed the CBI standards.
Such a robust mechanism is missing in Islamic finance and hence it has been seen that the originators of Sukuk from various jurisdictions have come into the market with many self-declared green Sukuk issuances. In order to streamline the increasingly important and growing green Islamic finance sector, Dubai has entered into an arrangement with CBI with a view to develop the Green Sukuk Standards on the lines of CBI criteria.
The need for developing separate standards for green Sukuk was felt due to the fact that, while the proceeds of a certified green paper ought to be utilized in the environment-friendly projects, it is equally important to ensure that the project itself is Shariah compliant. Therefore, it will be impermissible that the green Sukuk proceeds are utilized for a project which does not meet Shariah parameters.
An example is a green hotel or resort where booze is served in a bar/discotheque, or in the room refrigerators, and the mixing of sexes in the gym and swimming pool takes place freely. However, the proceeds of a green Sukuk issuance shall be permitted to be applied to build a resort where the Shariah boundaries are respected.
Another example could be an industrial project where all green principles are honored, but the industrial output is comprised of non-permissible goods viz. pork-related food items or a brewery producing wines and other intoxicating stuff.
No doubt that the few green Sukuk transactions issued so far have been oversubscribed due to high investor demand; however, I would beg to differ that it was purely due to the green element in them. Actually, the originators of green Islamic papers have already been active in the market and, irrespective of green or not, the Sukuk would have invariably been in high demand.
There is another debate going on about whether the environment protection measures should be voluntary or mandatory. I end this article with a question which is: what should one do if he or she realizes that his or her house is on fire?
The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.
Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at [email protected].
Next week: Wrap-up discussion on capital markets shall continue with an emphasis on green and social Sukuk.