Leveraging untapped Islamic financial capital with green sukuk issuance

Summary

To diversify its economy away from oil, Saudi Arabia’s state-controlled Saudi Electricity Company (SEC) launched its first public green sukuk in international markets in 2020. Green Sukuk is a sharia-compliant bond, where 100% of the proceeds go exclusively to finance or re-finance green projects that contribute to the mitigation and adaptation of climate change as well as the preservation of biodiversity. SEC developed a Green Sukuk Framework, under which SEC and its subsidiaries could raise green sukuk while assuring the green sukuk followed an ‘Ijarah’ structure. This means SEC will pay a predetermined rental fee on a semi-annual basis to lease the assets from the issuer, which can be used to pay the periodic distribution amount to the certificate holders. The issuance marked the first USD-denominated green sukuk from Saudi Arabia, raising over USD 1.3 billion in two tranches maturing in 2025 and 2030. Proceeds were used to buy electricity distribution assets and lease them back, financing smart meters and investing in renewable energy infrastructure in Saudi Arabia. Listed on Euronext Dublin, the green sukuk attracted high interest, being oversubscribed nearly four times and drawing 267 institutional investors from 22 countries across Asia, Europe, and the Middle East.

Key Takeaways:

Verification on the use of the proceeds: A third-party auditor was commissioned to perform an external verification of the environmental and social benefits/impacts of the sukuks to verify if the outcomes of the underlying projects have been achieved.

Islamic finance: Islamic finance shares a common goal with sustainable investing of delivering environmental and societal impacts with green sukuk. Leveraging untapped Islamic financial capital and innovative green finance could be a key driver to close the financing gap for climate action.

Government-linked credit rating: The government-related issuer (SEC) benefited from credit linkages with the government. The issuer rating of A2 by Moody’s reflected the creditworthiness of the SEC through the high level of support from the government.

Leveraging untapped Islamic financial capital with green sukuk issuance

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