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April 12, 2023updated 14 Apr 2023 8:12am

Sustainable sukuk issuance to boost Malaysia’s net-zero ambitions

Malaysia’s attempts to reach net zero by 2050 could be improved by increasing the issuance of sustainable sukuk, according to a new report by Sustainable Fitch.

By Adrian Murdoch

Sustainable Sukuk
Lofty ambitions. Malaysia is hoping to decrease its reliance on fossil fuels. Sukuks could provide the necessary lift to do this, Sustainable Fitch believes.
  • A jump in sustainable sukuk issuance could help Malaysia reach net zero and achieve its 2050 climate goals.
  • The Malaysian government has pledged to increase its renewable power mix capacity target to 31% by 2025 and 40% by 2035.
  • Malaysia accounted for 20% of the cumulative issuance of green and sustainability sukuk between 2017 and the first half of 2022.

A new report from Sustainable Fitch suggests a boost in sustainable sukuk issuance could help with Malaysia’s attempts to reach its net-zero goal.

The International Renewable Energy Agency estimates the country will need to invest between $375bn and $415bn in renewable and energy-transition efforts if it wants to achieve its 2050 climate goals consistent with the Paris Agreement to keep global warming below 1.5°C.

To this aim, the government pledged to increase its renewables power mix capacity target from 20% to 31% by 2025, and then up that to 40% by 2035.

There is, inevitably, a problem. That is fossil fuels still generate the majority of the country’s power. Led by the energy group Petroliam Nasional (better known as Petronas), one of the largest oil producers in Asia, Malaysia currently generates only 3% of its power from renewable sources such as solar and biofuels.

Much of the funding for this shift in power, Sustainable Fitch reckons, is likely to come from sukuk – an Islamic-compliant fixed-income instrument structured to avoid interest which is not permissible under Shariah law.

It is not an implausible goal. Global green and sustainability sukuk hit $4.4bn in the first half of last year, following total issuance of $6.1bn in 2021. However, it is still not a major financing tool. Green sukuk made up a paltry 1% of ESG bond issuance, however, and only 4% of total sukuk issuance.

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Nonetheless, Malaysia is a hub. It accounted for 20% of the cumulative issuance of green and sustainability sukuk between 2017 and the first half of 2022, according to data from Refinitiv.

Government support

While the majority of green sukuk issuance globally has been in local currencies, Indonesia sold the first US dollar sovereign green sukuk in March 2018 – a $1.25bn 3.75% five-year deal. At the end of April 2021, Malaysia printed the world’s first sustainability sukuk in US dollars.

Structured by HSBC Amanah Malaysia and JP Morgan, it sold the 2.07% $800m 10-year sustainability sukuk to significant demand. The government said at the time it was the lowest-ever yield and spread for a US-dollar sukuk issuance from the sovereign.

Proceeds have predominantly been used for social projects such as healthcare, schools and infrastructure development.

To support the sustainability market, the regulatory statutory body Malaysia Securities Commission introduced the Sukuk Framework for socially responsible investments in 2014. It has been revised a couple of times since then, first in 2019 and then in August last year to encourage more corporate sukuk issuance.

At the same time, the Malaysian government has been supporting investment in renewables via its own 2021-2025 roadmap to promote the green economy and has been pushing international standards.

At last year’s, Bloomberg’s Sustainable Business Summit in Singapore at the end of July, Muhamad Umar Swift, chief executive of the stock exchange, Bursa Malaysia, said the exchange was only now heading towards mandatory ESG disclosures. “What we’ve seen is very good [voluntary] compliance, but the quality of reporting is not quite where we want it,” he added.

It has moved on since then. In what the country’s prime minister Anwar Ibrahim said would help the country “pivot to green”, in mid-March, for example, the Bursa Malaysia and the London Stock Exchange Group launched a centralised sustainability reporting platform from this month (April) to help companies calculate the impact of their carbon emissions.

This will help companies − publicly listed ones as well as non-listed SMEs − to calculate their carbon emission impact and disclose common ESG datasets in a standardised manner that conforms to established global standards, such as the Task Force on Climate-Related Financial Disclosures.

Best-in-class characteristics

These moves by the government to support the move to sustainable energy are timely.

A report published by impact investor ThomasLloyd in mid-March points out that Asia accounts for 45% of total global carbon dioxide emissions.

A Fitch Solutions report published on 4 April looked at national oil companies’ decarbonisation efforts. Malaysia expects emissions from Petronas to fall by 25% by 2030 with 20% of capex over 2022-2026 to be spent on decarbonisation strategies.

In its wake, green sukuk from energy companies have been powering up. In March alone, hydroelectric operator RP Hydro Kelantan said that it planned to sell an up to M$975m ($220m) green project finance sukuk and Malaysia’s largest power company TNB Power Generation sold an upsized M$2bn four-tranche sustainability sukuk.

Other issuers in the last couple of years have included Malaysian oil and gas services company Yinson Holdings as well as renewable energy producers Cenergi, reNIKOLA Solar, UiTM Solar Dua and Edra Solar.

All of the green sukuk have demonstrated “best-in-class characteristics” as they relate to directing proceeds used toward climate and environmental mitigation projects, notes Patrick Drum, senior investment analyst at US-based investment firm Saturna Capital ($5.1bn AUM).

Given the growing emphasis on the renewables market, sukuk may, according to Melissa Cheok, associate director of ESG research at Sustainable Fitch in Singapore and the author of the report, be “poised for significant growth”.

“As more support is given to develop the ESG sukuk market and investor awareness of the instrument grows, we expect these will help to facilitate more investment into green and sustainability sukuk,” the report concludes.

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