A new type of financing is being developed to encourage millions of pounds worth of long-term investment in green technology, in particular from the Islamic community.

Hundreds of billions of pounds worth of investment in green technology is required around the world to create the low-carbon future. However, many projects are unattractive to some investors because of their long-term nature.

Also, Shari'ah law forbids the lending of money for gain, yet many green energy projects are required in Islamic nations, such as Saudi Arabia, and yet there is a surplus of cash held in the Muslim world waiting to be utilised.

All three challenges are being tackled by the development of a type of bond called Green Sukuk Climate Bonds.

The Climate Bonds Initiative, the Clean Energy Business Council of the Middle East and North Africa and The Gulf Bond and Sukuk Association are today launching a Green Sukuk Working Group, which will use market expertise to promote the issuance of sukuk for the financing of climate change investments and projects, such as renewable energy projects.

The Working Group is inviting participation from other organisations interested in the potential of green sukuk financing.

Sukuk are financial certificates, or the Islamic equivalent of bonds, which are structured to comply with Shari’ah Islamic law, which prohibits the charging, or paying of interest.

To give an idea of the potential, Standard & Poor estimates that 20% of banking customers in the Persian Gulf and Asia would now choose an Islamic financial product over a conventional one with a similar risk-return profile.

Because the lending of money in Islamic culture has a moral dimension, rather than a financial one, then there is a good fit with the ethical aspect of green financing.

Aaron Bielenberg of the Clean Energy Business Council, a non-profit, non-governmental association established in Masdar City, Abu Dhabi, said that projects in the region are desperate for finance.

“There is a significant and growing number of projects, for example renewable energy in the Middle East, that are ideally suited to sukuk investors," he said. "This group will help investors more easily identify Shari’ah compliant, clean energy investment opportunities.”

Nick Silver of the Climate Bonds Initiative has identified an urgent need for it in order to "mobilise finance for both renewable energy and climate adaptation projects in both the Middle East and in other developing Muslim countries such as Bangladesh and Pakistan".

That there is capital seeking investment is confirmed by Farmida Bi, a partner at the Norton Rose law firm in London: "Banks need more high-grade paper (sukuk) to place their money in, but there is hardly any,” he says.

“There is a lot of pent up demand (for sukuk)," agrees Mohammed Dawood, the head of capital markets at HSBC Amanah, the bank’s Islamic arm.

Michael Grifferty of the Gulf Bond and Sukuk Association says this means the time is right for the launch: “Interest in both Shari’ah compliant and ethical investing is on the rise. Green sukuk can support this trend by expanding the range of available financial instruments. They also support national development strategies by offering longer term finance for essential infrastructure.”

Issuance of Islamic bonds, or sukuk, had a record year in 2011. This year looks set to be even better. In January, the biggest-ever sukuk from Saudi Arabia, and the first government-backed sukuk was struck: a SAR15 billion ($4 billion) 10-year deal for the General Authority for Civil Aviation, led by HSBC Saudi Arabia.

Climate Bond Standard

The scientific and technical aspects of the project eligibility criteria are derived from the International Climate Bond Standards scheme and developed with the help of International Finance Corporation (IFC), Standard & Poor’s, Aviva Investors and KPMG.

Last November, Greg Barker, minister of state for energy and climate change, led the launch of a prototype Climate Bond Standard, where he said that "the capital markets have a vital role to play in tacking climate change by meeting the financial challenge. Here in London we are well placed, if we can’t crack it – then who can?”

This first Standard is a screening tool for investors and governments to support investment in delivering a Low Carbon Economy and allows the certification of project development, corporate and other bonds linked to or backed by wind energy assets.

It is backed by a group of leading global institutional investors and environmental non-government organisations, from America and Britain, including the US Natural Resources Defense Council, the California State Treasurers’ Office, the Investor Group on Climate Change (IGCC), the Carbon Disclosure Project, and the Ceres Investor Network on Climate Risk (INCR).

The Climate Bonds Initiative is an investor-focused not-for-profit organisation that promotes large-scale investment in the low-carbon economy.

It has identified many other types of bond besides the green sukuk, including:

  • Index-linked bonds tied to inflation rates or carbon prices, for example issued with a low base rate of interest, but with bonus payments if carbon prices reach certain higher levels
  • Carbon price floor bonds where the interest rate payable goes up if the carbon price does not meet stated targets
  • Zero-coupon bonds that pay out a guaranteed rate upon maturity, whether 10, 20 or 30 years in the future.
  • Convertible bonds which allow investors to convert their bonds to equity stakes at agreed points in the development
  • Regulated Covered Bonds which provide guaranteed revenue streams from energy generation projects that qualify for feed-in tariffs that are used as collateral for AAA bonds; these are modelled on Germany’s 300 year-old ‘covered bond’ property market.

To pay for renewable energy generation projects, project developers combine investor equity with money borrowed from banks acting for the bond-issuing intermediary.

Story: David Thorpe, News Editor