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3 November, 2017
Increasing concerns on environmental responsibility and sustainability had given rise to a “green” trend — including finance. There is no precise, established definition of green finance. Generally, it refers to the financing of investments that generate environmental benefits as part of the broader strategy to achieve inclusive, resilient and sustainable development[1].
Green finance has emerged as a new area of banking and is gaining worldwide recognition. In 2016, G20 heads of State, acknowledging the need to scale up green financing in order to support environmentally sustainable growth over the globe, had set out a series of steps to make this happen[2].
In Malaysia, Securities Commission Malaysia (“SCM”) had the foresight to establish a Sustainable & Responsible Investment (“SRI”) Sukuk framework in 2014 before green finance became a trend. The SRI Sukuk framework, being a result of a collaboration between Bank Negara Malaysia, SCM and the World Bank, was launched by SCM in 2014 with the aim to facilitate the financing of sustainable and responsible investment initiatives. The requirements for issuance of SRI Sukuk are set out in the revised guidelines on Sukuk.
Under the revised Sukuk guidelines, the proceeds raised from the issuance of SRI Sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emission[3]. The rising concerns over environmental and social impact of businesses and greater demand for stronger governance and ethics from businesses has led to the launching of the SRI Sukuk framework to ensure the capital market in Malaysia is well-positioned to capitalise on these changing trends and facilitate sustainable and responsible investing[4].
Several years after the launch of the SRI Sukuk framework, SCM has announced the issuance of Malaysia’s very first green Sukuk under the SRI Sukuk framework — Green SRI Sukuk Tadau on 27 July 2017[5]. The RM250 million SRI Shariah-compliant bond holds a tenure of two to 16 years and was assigned a rating of AA3/Stable by RAM Rating Services Bhd. The proceeds raised thereunder will be used to finance a 50MWac solar project in Kudat, Sabah, which will supply energy under two 21-year power purchase agreements entered into with Sabah Electricity Sdn Bhd in December 2016[6].
Despite the SRI Sukuk framework having been introduced a few years ago, it has taken some time before the issuance of the first green Sukuk in Malaysia. One of the reasons for the slow progress of green instruments in Malaysia is due to the lack of awareness, particularly among investors and issuers, as to what they could do and what was available[7]. To address this issue, the World Bank has conducted a number of workshops to raise investors’ interest in green Sukuk.
Further, the lack of a proper framework is also one of the challenges faced by green Sukuk. This was partially addressed by the creation of the SRI Sukuk framework. Nonetheless, there is no comprehensive framework or regulation on SRI instruments in Malaysia. The absence of the standard and verification system for performance measurement of green instruments is one of the reasons why investors and issuers are thinking twice before tapping into green Sukuk[8].
Over the past few years, to complement the SRI Sukuk framework and promote greater utilisation of green Sukuk as a fundraising channel, the Government has come up with several incentives to attract green issuers, including tax deduction until year of assessment 2020 on issuance costs of SRI Sukuk approved or authorised by or lodged with SCM[9]. Furthermore, tax incentives are also provided for green technology projects related to renewable energy, energy efficiency, green building, green data centre and waste management as well as the expenditure incurred by companies on the purchase of green technology assets[10]. This is to encourage investment in green technology projects and to motivate companies to acquire green technology assets[11].
In addition, the Government has also introduced a special financing scheme — Green Technology Financing Scheme (“GTFS”), with a total fund allocation of RM5 billion until 2022[12], to support the development of green technology in Malaysia[13]. GTFS has produced local green technology entrepreneurs with a funding of RM2.96 billion for 272 projects[14]. All these efforts were not in vain. The issuance of the Green SRI Sukuk Tadau marks a significant milestone in the history of green Sukuk not only in Malaysia, but also the entire world, which would give Malaysia potential to be the green hub of ASEAN[15]. Although there are still considerable uncertainties in this new area of fund raising, the transformation of the global economic landscape to green and sustainable finance looks unstoppable.
For further information, please contact:
Tang Jia Yi, Shearn Delamore & Co
tang.jiayi@shearndelamore.com
