On Sept. 10, 2020, Saudi Electricity Company (SEC, A2 negative) finalized the terms of a multi-tranche $1.3 billion green sukuk. SEC reported an order book of more than $5.2 billion for the offering, highlighting the strong investor appetite for sustainable bonds and sukuks. The transaction also highlights the growing importance of sustainability strategies for emerging market issuers including in regions such as the Gulf Cooperation Council (GCC). The issuance comes at a time of increasing focus on sustainable strategies internationally and also supports the growth of Islamic capital markets by the government of Saudi Arabia (A1 negative), which aims to rapidly diversify its economy away from oil. The implementation of sustainable finance guidelines and regulations by the Saudi government will help drive further sustainable debt issuances. They will provide clarity to issuers on criteria such as project eligibility and reporting. Clear guidelines also increase transparency for investors. Saudi Arabia has been leading the growth of Islamic capital markets in the GCC. In the first half of 2020, Saudi Arabia issued around $12.7 billion of local and international sukuk, just under half of the total amount issued in the GCC and broadly in line with the amount it issued in the first half of 2019. The Saudi government accounted for around 54% of the country's issuance with corporate activity limited to SEC. Since April 2017, the Saudi government has issued $11.0 billion of international sukuk and $60.5 billion of local market sukuk. The proceeds of SEC's sukuk will be used to finance green projects relating to energy efficiency and renewable energy. The company plans to roll out around 10 million smart meters and expects this to lead to energy savings of 1% of the country's total consumption compared with the level in 2019. In addition, SEC will invest in transmission and distribution infrastructure to connect renewable energy sources to the grid with the aim of reducing generation emissions (scope 1 and 2) 1 by 25% by 2025. Saudi Arabia is almost exclusively reliant on fossil fuels for power generation and has a high-energy usage per capita because of its reliance on air conditioning and desalinated water. The country faces immense investment needs to finance sustainable development. We expect global green and sustainable sukuk issuances to increase significantly from a very low base. This movement has been led by Malaysia (A3 stable) and Indonesia (Baa2 stable) as both countries seek to attract private capital to help finance low-carbon and climate-resilient infrastructure projects. The green sukuk market is still in its infancy, with only a handful of issuances taking place since Malaysia's Tadau Energy (Edra Power) placed the world's first green sukuk in 2017. As of June 2020, green sukuks accounted for less than 3% of global sukuk issuances. In May 2019, Dubai-based real estate developer Majid Al Futtaim issued the GCC's first green sukuk to finance and refinance green building and energy efficiency investments, following up with a second offering in October 2019. In November 2019, the Islamic Development Bank (Aaa stable) issued its debut green €1 billion sukuk to fund climate-change and green projects across its 57 member countries. In another first for the region, in 2018, Dubai-based port operator DP World Limited (Baa3 stable) repriced and extended loans worth $2 billion, at which point the pricing was linked to the company's preexisting carbon emission intensity reporting. This was the first green loan in the region and of its kind in the sector. Demand for green sukuk will benefit from robust growth in institutional investor demand for products that integrate environmental, social and governance (ESG) considerations, given the natural crossover of sustainable investing and Islamic finance in integrating societal impacts. In common with investors in Shariah-compliant products, some sustainable investors use screening strategies to avoid certain activities and products to better align themselves with the values and goals of developing a sustainable society. For example, Islamic finance principles prohibit investments in certain industries that are forbidden (haram), such as tobacco, alcohol, gambling and weapons, as well as a range of other products and activities. Islamic finance products are selected to avoid such industries and ensure compliance with Shariah principles, similar to some practices used in sustainable investment. Indeed, sukuk funding of environmentally sustainable projects, such as renewable energy assets, appeals to both traditional Islamic investors and conventional investors, such as pension funds, asset managers and financial institutions. Global assets using some form of sustainable investment strategy totaled roughly $30.7 trillion in 2018, far surpassing the $2.2 trillion total size of the Islamic financial services industry. This illustrates the potential for a much larger pool of investors for green and sustainable Islamic bonds. Although sukuk can be relatively complex compared with bonds, familiarity with, and understanding of the instrument is increasing and there are no barriers to investors — both Islamic and conventional — from investing in them. — SG
