What are the Problems with Green Sukuk?
Sukuk differs from bonds in that they do not represent a lender-borrower relationship, but rather the issuer finds the asset with the proceeds of the Sukuk, whilst the Sukuk holder owns the asset for a set period. Green Sukuk is a variant of normal Sukuk and is a financing tool used to fund projects that fight climate change and promote environmental stewardship, whilst maintaining Islamic finance principles. Green Sukuk projects have to abide by the Green Framework, receive either Green Certification or a second opinion report by an independent reviewer, and then on completion publish a post-issuance Impact Report that demonstrates how funds have been used and their environmental impact.
However, a major problem with the Green Sukuk is the absence of a widely accepted criterion for what constitutes ‘green’. This thereby narrows the scope of projects offered under Green Sukuk, and thus limits its potential as a tool for financing the social development goals. For example, few industries outside of energy and green building projects are viewed as eligible for Green Sukuk financing, and therefore industries such as transportation, agriculture, and disaster mitigation are often overlooked — both by issuers and investors. Calls have therefore been made to develop a stable green taxonomy, to increase investor confidence and therefore scale up green investments.
