Green sukuk to attract private capital to finance low-carbon and climate-resilient infrastructure projects

Context

• Saudi Arabia was almost exclusively reliant on fossil fuels for power generation and had a high energy usage per capita because of its reliance on air conditioning and desalinated water. The country faced immense investment needs to finance sustainable development.
• The country has been hit by both COVID-19 and lower oil prices and was seeking additional financing channels.

Problem

• As the government of Saudi Arabia aimed to rapidly diversify its economy away from oil, there was an increased focus on sustainable strategies and growth of Islamic capital markets.
• Issuers were looking for ways to either diversify their investor base or gain a pricing benefit by adopting sustainable practices. The green sukuk market was an emerging product in the region.

Stakeholders involved

• The Government of Saudi Arabia
• State-controlled Saudi Electricity Company (SEC)
• Saudi Electricity Global Sukuk Company 5
• First Abu Dhabi Bank PJSC
• HSBC
• P. Morgan
• MUFG
• Standard Chartered Bank

Innovation

• SEC established a Green Sukuk Framework, under which SEC and its subsidiaries could raise green sukuk, in conjunction with SEC’s sustainability strategy. According to Moody’s, the certificates follow an ‘Ijarah’ structure whereby proceeds will be used by the issuer to buy certain electricity distribution assets from SEC. SEC will pay a certain rental amount on a semi-annual basis to lease the assets from the issuer, which will then be used to pay the periodic distribution amount to the certificate holders. Implementation of sustainable finance guidelines and regulations by the Saudi government helped drive further sustainable debt issuances and provided clarity to investors on criteria such as project eligibility and reporting.
• Under this framework, this was the first public green issuance from Saudi Arabia in international markets and the first USD-denominated green sukuk issuance, with an effort to diversify its sources of financing and grow its investor base in international markets.

Timeline

Results and impact

• Over USD1.3 billion green certificates issued, split into two tranches, the sukuk was made up of USD650 million green certificates maturing in 2025, with the other USD650 million due in 2030. The certificates have been admitted to trading on the Euronext Dublin,
• Proceeds exclusively used to finance and / or refinance eligible projects. Proceeds from the sukuk will finance and / or refinance in whole or in part green projects focused on procurement and installation of smart metres as well as construction and operation of infrastructure for connecting renewable energy sources to the grid.
• The green sukuk issuance generated high interest from investors and was oversubscribed by almost 4 times. The issuance attracted a combination of more than 267 institutional investors and dedicated green accounts spanning 22 countries from Asia, Europe, and the Middle East.

Key lessons learnt

• Governance: 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.
• Finance: Islamic finance shared the common goal of sustainable investing to deliver societal impacts with green sukuk. Leveraging untapped Islamic financial capital and innovative green finance thus became an alternative to close the financing gap for climate actions and accelerate progress towards the sustainable development goals (SDGs).
• Governance: The government-related issuer (SEC) benefited from credit linkages with the government. The issuer rating of A2 by Moody’s reflected the creditworthiness of SEC where it achieved a very high level of dependence and high level of support from the government.