In recent years as environmental preservation has become the focus of many investors, the the demand for socially responsible investment (SRI) and environmental and socially responsible (ESG) instruments such as green Sukuk has correspondingly increased. The issuance of green Sukuk is designed to finance sustainable, climate-resilient and environmental-friendly projects or investments with the ability to not only generate returns to investors but also create value for the surrounding ecosystem without infringing on Shariah principles.
As a Malaysian, it was heartening to note that Malaysia placed itself at the forefront of Islamic instruments and sustainable financing by pioneering the issuance of green Sukuk. In July 2017, Tadau Energy Sdn Bhd issued a AA3 rated Sukuk of RM250.0 million in aggregate nominal value under the SRI Sukuk framework, being the world’s first green Sukuk under the SRI Sukuk Framework, and received the highest rating by the Center for International Climate and Environment Research Oslo.
The SRI Sukuk framework was launched by the Securities Commission Malaysia (SC) in 2014 in line with the initiative set out under the SC’s Capital Market Masterplan 2 to promote socially responsible financing and investment. The SRI Sukuk Framework complies with international standards and best practices which emphasise the importance of transparency in respect of disclosure requirements.
Given the above, I was honoured and excited to be included in the transaction team when our firm was appointed by RHB Investment Bank Berhad to advise on the establishment of an Islamic Medium Term Note ASEAN Green SRI Sukuk Programme of RM200.0m by Pasukhas Group Berhad, a public company limited by shares which in 2017 diversified its business to renewable energy, providing energy utilities and power generation services via its subsidiary, I.S. Energy Sdn Bhd (IS Energy). IS Energy is principally involved in the development, maintenance and operation of mini hydro plants and the distribution of energy, and has secured feed-in approval tariff from the Malaysian Sustainable Energy Development Authority for its mini hydro power plant with a capacity of 3.2MW at Sungai Rek, Kuala Krai, Kelantan (Sungai Rek Hydro Power Plant).
The Pasukhas ASEAN Green SRI Sukuk was triple-compliant, conforming with the SRI Sukuk Framework, the ASEAN Green Bonds Standards (ASEAN GBS) and the Green Bonds Principles (GBP) respectively. The ASEAN GBS are standards developed by the ASEAN Capital Markets Forum to enhance transparency, consistency, and uniformity of ASEAN Green Bonds, intended for issuers who intend to issue green bonds within the ASEAN region whilst the GBP which have been developed by the International Capital Market Association are guidelines that recommend transparency and disclosure measures for issuers, intended for broad use in the green bond market to facilitate the flow of financing towards climate-friendly solutions.
The proceeds from the issuance of the Pasukhas ASEAN Green SRI Sukuk were to be applied towards the growth of Pasukhas’s portfolio of green assets. Such proceeds were permitted to be used to finance several types of green projects subject to meeting the eligibility requirements prescribed under the SRI Sukuk Framework. Interestingly, part of the issue proceeds from the first tranche of the ASEAN Green SRI Sukuk was also guaranteed by Danajamin Nasional Berhad (“Danajamin”, Malaysia’s only monoline guarantor) under the Islamic principle of al-kafalah and utilised towards the refinancing of a facility obtained for the construction of the Sungai Rek Hydro Power Plant. This constituted Danajamin's first guarantee of a green sukuk programme aimed at funding environmentally sustainable infrastructure in Malaysia.
Electricity generation via hydropower has a much smaller carbon footprint in comparison to fossil-fuel enabled power production. Additionally, the Sungai Rek Hydro Power Plant has the potential to stimulate socioeconomic development of the surrounding community a factor that was comforting to all transaction parties.
It was therefore clear to our team that Malaysian (and Southeast Asian) issuers were paying increasingly greater attention to SRI/ESG financing due to (i) regulatory pressure, as sustainability and climate discussions played an increasing role in politics; (ii) shareholder expectations to be perceived as responsible citizens through reputation-enhancing value creation activities; and (iii) investor/lender preferences towards ESG as part of their respective investment and loan arrangements.
This represented a significant shift from the majority of market standard finance structures and I am pleased to be able to say that my experience in working on such transactions was gratifying and fulfilling not just from a professional perspective, but also from a personal and human one as well.
Over and above this, there are good fiscal reasons to anticipate the growth of ESG issuances, in particular due to the proliferation of ESG-related incentives such as tax exemptions on management fee income for fund management companies managing SRI funds and Shariah-compliant funds, provision of tax deduction on the cost of issuing SRI Sukuk until year of assessment 2023 together with provision of the Green Investment Tax Allowance and Green Income Tax Exemption (GITE) also, until 2023.
Further endorsement for ESG came from the Malaysian Minister of Finance, YB Tengku Dato’ Sri Zafrul Tengku Abdul Aziz, speaking at this year’s Invest Malaysia 2020 forum, the largest annual capital market attended by local and international fund managers in Malaysia, where the Minister said that one of the major themes of Malaysia’s Budget 2021 will be sustainable living and the incorporation of ESG considerations and principles into corporate Malaysia’s forward planning.
