KUALA LUMPUR (April 3): Malaysia accounts for 20% of cumulative issuance of green and sustainability sukuk between 2017 and the first half of 2022, within the Southeast Asian region.

Citing a report published by the International Renewable Energy Agency in March 2023, Sustainable Fitch said the country accounted for US$3.9 billion (RM17.25 billion) or 56% of total Asean sustainable and responsible investing (SRI) sukuk issuance as of November 2021.

Malaysia is second only to Indonesia, which accounted for 27% of the issuance.

Meanwhile, Sustainable Fitch said Malaysia will need to invest between US$375 billion and US$415 billion in renewables and energy-transition efforts in order to achieve its 2050 climate goals under the 1.5 degrees Celsius scenario.

The firm said this is more than double the figure that Malaysia currently invests, so the capital shortfall may prompt the government to consider green and sustainability sukuk issuance to shore up the necessary funding.

The agency said Malaysia has pledged to reduce its greenhouse gas emissions and reach “net-zero” by 2050.

It said the government also announced in 2021 that it would increase its 2025 renewables power mix capacity target to 31% from 20%, with a subsequent target of 40% by 2035.

However, fossil fuels still account for the majority of the country’s current overall power mix, and Malaysia only currently generates about 3% from renewable sources such as solar and biofuels.

Sustainable Fitch said Malaysia, as an Islamic finance hub, may choose to leverage its position as a leader in the sukuk market to address the renewable energy funding gaps.

Sustainable Fitch said Malaysia’s renewables sector is also poised for significant growth, so sukuk may potentially offer better incentives to private and foreign investors than regular environmental, social and governance (ESG)-labelled bonds.

It said this is because of the prospects of better returns since when a sukuk’s asset appreciates, as does the value of the sukuk and the associated returns.

The United Nations Development Programme and the Islamic Finance Council UK previously estimated that up to US$50 billion in capital dedicated to UN Sustainable Development Goals and Climate Change commitments could be raised via green sukuk by 2025, highlighting the scale and funding capacity that sukuk could support.

Sustainable Fitch said challenges also exist in ensuring Shariah compliance of sukuk over the long term due to the evolving nature of Islamic finance.

It said interpretations of Shariah law can change over time, and sukuk that might once have been compliant at the time of issuance may no longer be in future.

This is a particularly pertinent issue for green sukuk as the associated risks may deter investors.