Introduction
Climate change is possibly a matter of utmost importance affecting humanity in today’s world. Its impact has escalated to the point that it has significantly disrupted not just the ecosystems, weather conditions, and human’s well-being, but also economists’ way of thinking. To address the issue at hand, most governments and big corporations are encouraged to develop principles that integrate sustainability and promote environmentally friendly policies as a way to combat climate change. In the financing world, green sukuk is known as the alternative form of finance for governments and big corporations to raise funds or capitals. Apart from its nature of being Shariah compliant (which is increasingly gaining global recognition), green sukuk is seen as an excellent choice among investors as it embraces sustainable financing as well as environmental responsibility.
In general, sukuk serves as an instrument representing either beneficial or legal ownership of a real, tangible asset or underlying service where investors will receive return (profit) instead of interest (riba’) based on the performance of the investment generated from the asset or service. Green sukuk is specifically designed to fund eco-friendly projects such as construction of solar power plants and funding of the infrastructure of green buildings.
Government’s Initiatives to Promote Green Sukuk
Malaysia, being a vital hub to the world’s sukuk market, has introduced few regulatory frameworks to ensure transparency and to facilitate the issuance of green sukuk for both sukuk issuers and investors.
1. Sustainable and Responsible Investment (“SRI”) Sukuk Framework
In August 2014, the Securities Commission of Malaysia (“SC”) launched its SRI Sukuk Framework as a platform to boost Malaysia’s valued proposition as an Islamic finance and sustainable investment hub, attracting foreign investments for green projects.1 Among the key features of the framework is its primary goal to finance green projects which have a positive environmental and social impact (e.g., renewable energy, energy efficiency, sustainable infrastructure, and pollution prevention and control, etc.), the adherence to the Environmental, Social and Governance (ESG) principles to achieve the Sustainable Development Goals (SDG), the process for project evaluation and selection, management, and utilisation of the proceeds.2
2. Partnership with International Organisations
Malaysia’s commitment on the issue can also be shown through the collaboration of the Capital Markets Malaysia with an international organisation, Climate Bonds Initiative (“CBI”) by developing the Transition Strategy Toolkit which is specifically designed to guide corporations in ASEAN countries on the underlying principles and elements in developing climate transition plans. CBI has laid down the following five (5) hallmarks to guide companies and investors to develop a credible climate mitigation transition plan:3
Source: Climate Bonds Initiative, https://www.climatebonds.net/transition-finance-transforming-companies.
In 2016, green sukuk was given the spotlight in the international level via the setting up of the Technical Working Group by the World Bank Global Knowledge and Research Hub, Bank Negara Malaysia and the SC. A group of experts on the green sukuk came together with one mission to encourage investments in the green finance market by promoting the concept of green sukuk, providing guidance on the procedures, identifying eligible green projects and sharing international experience with various stakeholders such as the Ministry of Energy, Green Technology and Water (KeTTHA), Green Tech Malaysia Sdn. Bhd., the Ministry of Finance, financial institutions, and potential sukuk issuers.4
The outcomes of the abovementioned initiatives have contributed to the launch of Malaysia’s first green sukuk in 2017. Tadau Energy Sdn. Bhd., a Malaysian-based solar energy company issued the first green sukuk called “Green SRI Sukuk Tadau” worth RM250 million on 27 July 2017 to finance the construction of large scale solar photovoltaic power plants in Kudat, Sabah.5 The Shariah principles used were Istisna’ (purchase order), Ijarah (leasing) and Ijarah Mawsufah fi Zimmah (forward lease).6 The second issuance of green sukuk was on 6 October 2017 by Quantum Solar Park (Semenanjung) Sdn. Bhd., which was worth RM1 billion. In December 2017, Permodalan Nasional Bhd, via its Special Purpose Vehicle, PNB Merdeka Ventures Sdn Bhd issued a Merdeka ASEAN Green SRI Sukuk worth up to RM2 billion in nominal value, being the first adopter of the ASEAN Green Bond Standards (AGBS) following the SRI Sukuk Framework by the SC. As of April 2020, since the introduction of the SRI Sukuk Framework, there has been a total of thirteen (13) SRI sukuk issuances in Malaysia, including seven (7) SRI sukuk issuances which are dually recognised under the ASEAN standards.7
The demonstration of these notable issuance of green sukuk has successfully paved the path in both local and global markets, making them decent precedents for future possible green projects. Research from data analysis and reports collected from each issuance of green sukuk can play a key role in spreading awareness and knowledge on green sukuk at the corporate level. In a way, it will encourage more environmentally conscious corporations to showcase their commitment to sustainability and be involved in more green projects. With more possible green projects available, it is hoped that it will also attract more foreign investors to participate in the green financing market as it provides a high degree of certainty that their money will be channelled for purposes that benefit the environment.
Government-Backed Incentives and Grant Scheme
Government plays a vital role in stimulating the momentum and spur of the green sukuk market in Malaysia. The following are few ongoing incentives introduced by the Malaysian Government to encourage more SRI sukuk issuances:
1. Tax Deductions
Tax deductions are available for any expenditures incurred on the issuance of SRI sukuk approved or authorised by or lodged with the SC up to the year of assessment 2023. Under Budget 2024, the Government announced an extension of the tax deductions to year of assessment 2027.8 The tax deductions are applicable to SRI sukuk in which ninety percent (90%) of the proceeds raised from the issuance or offering of the SRI sukuk are used solely for the purpose of funding SRI projects as specified in the guidelines by the SC.9
2. Green SRI Sukuk Grant Scheme
In 2018, the SC established Green SRI Sukuk Grant Scheme (“Grant Scheme”), aiming to fund an external review cost relating to the green SRI sukuk issuance under the SRI Sukuk Framework, effective from January 2018 until the grant is fully utilised. The effective date for issuance of green SRI sukuk that qualifies for the Grant Scheme is from July 2017 onwards and the Grant Scheme covers up to ninety percent (90%) of the costs incurred on the actual external review subject to a maximum of RM300,000.00. In August 2022, the coverage of the Grant was also expanded to include SRI-linked sukuk issued under its SRI-Linked Sukuk Framework which aligned with Malaysia’s commitment and transition to a low-carbon and climate resilient economy. This can be seen as an encouragement for carbon-intensive industries to change to better sustainability practices and low-carbon activities.10
Conclusion
Malaysia, being the leader in green sukuk hub worldwide, has shown remarkable efforts in transitioning into a more sustainable, eco-friendly economy. The initiatives and financial incentives provided by the Malaysian Government does not only benefit the local investors and corporations, but also serves as an attraction to foreign investors to participate in the growing green finance market. With ongoing solid support from the Government and more participation by corporations in the green finance industry, the future of green sukuk looks promising and hopefully, its demand will continue to rise in conjunction with the global strategy to curb climate change.
For further information, please contact:
Norazlianaliza Supar, Partner, Azmi & Associates
norazlianaliza@azmilaw.com
- J. S. Keshminder et al., Green Sukuk: Malaysia Taking the Lead (Selangor: Universiti Teknologi MARA, 2019), 4-5.
- Securities Commission Malaysia, Sustainable and Responsible Investment Sukuk Framework: An Overview (Kuala Lumpur: Securities Commission Malaysia, 2019), 8.
- Capital Markets Malaysia, “Climate Bonds Initiative”, last modified 2024, <https://www.capitalmarketsmalaysia.com/transition-strategy-toolkit/methodology/> accessed 24 February 2025.
- Gregory Thomas Wlosinski, Case Study: Helping Malaysia Develop The Green Sukuk Market (The World Bank, Treasury), 2.
- Cheryl Liew Xin Yi, Issuance of Green Sukuk in Malaysia [2018] 1 LNS(A) lxviii.
- Keshminder et al., Green Sukuk: Malaysia Taking The Lead, 6.
- Bond and Sukuk Information Platform Sdn Bhd, SRI Sukuk: The Journey Towards Sustainable and Responsible Investment (July 23, 2020), <https://www.bixmalaysia.com/learning-center/articles-tutorials/sri-sukuk-the-journey-towards-sustainable-and-responsible-investment> accessed 24 February 2025.
- Income Tax (Exemption) (No. 5) Order 2021 (Amendment) Order 2024 (P.U. (A) 106/2024).
- Income Tax (Deduction for Expenditure on Issuance or Offering of Sustainable and Responsible Investment Sukuk) (Amendment) Rules 2021 (P.U. (A) 2).
- Bond and Sukuk Information Platform Sdn Bhd, Green Bond and Sukuk in Malaysia (August 7, 2024), <https://www.bixmalaysia.com/learning-center/articles-tutorials/green-bond-and-sukuk-in-malaysia> accessed 24 February 2025.
