Sukuk Seen as Effective Funding Instrument to Manage Sustainability Transitions

Islamic bond or Sukuk is seen as an effective funding instrument to manage sustainability transitions, with approximately US$1.8 billion of sustainable and responsible investment (SRI) Sukuk issued under Malaysia’s SRI Sukuk Framework since 2014.

Securities Commission Malaysia (SC) chairman Datuk Syed Zaid Albar said the issuances have covered a variety of green and social projects, ranging from solar power and sustainable natural resource management to green buildings and trust schools.

“The best part is, Sukuk has much more to offer. It encourages the use of new and sustainable approaches, such as funding the deployment of low carbon technologies, as well as contributing to the growth of transition finance,” he said during his opening address at the Sustainable Finance Week in conjunction with Malaysia’s participation at Expo 2020 Dubai held virtually on Monday (Nov 8).

Citing Malaysia as an example, Syed Zaid said the country has always adopted a pragmatic approach to advance complementary products and asset structures that meet investor needs.

“This extends to our fund management industry, which has strived to provide a diverse range of investment offerings.

“In fact, as a hub for the largest number of Shariah-compliant funds globally, we can see close alignment between Islamic investments on the one hand, and ethical and responsible investing on the other.

“Given the industry’s Islamic expertise, it would be sensible to leverage existing resources and capabilities to grow both segments to appeal to a wider investor base,” he said.

Thus, moving forward, Syed Zaid noted emphasis is needed to lean towards achieving better social outcomes while preserving environmental integrity.

“It is time for sustainable development to be prioritized. This means that the financial sector must not only ensure capital is directed towards productive purposes, but we must also weigh the social value and impact of corporate activities,” he said.

According to Syed Zaid, sustainable finance bonds raised a record US$778 billion during the first nine months of this year, a 57% increase from 2020. He added that nearly half of these bonds were green bonds.

“[Meanwhile,] within Southeast Asia, bonds and Sukuk issued under the ASEAN Green, Social and Sustainability Bond Standards amount to US$16.7 billion. One-fifth of these issuers are Malaysian entities.

“For Malaysia, sustainability has been a long-standing tenet of our Islamic capital market, which was established about 30 years ago. Over these three decades, we have experienced first-hand the benefits of sustainable financing and investments.

“As such, we have continued to introduce dedicated product frameworks and guidelines to encourage product innovation even further to provide a vibrant SRI ecosystem,” he said.

On a related note, Syed Zaid said as sustainable finance enters the mainstream, costs, and returns must stay attractive to maintain its appeal.

He said much like Islamic finance, there will also be opportunities to enhance process and distribution efficiencies.

“Besides digitization, another promising source of growth going forward is Islamic social finance. This includes instruments like Qard Hassan, waqf, and zakat.

“In particular, we see waqf, an Islamic endowment instrument, as an attractive asset class that integrates commercial obligations with sustainability and social objectives,” he said.

Originally published on www.theedgemarkets.com