The recent issuance of a multi-tranche green sukuk worth $1.3 billion by Saudi Electricity Company (SEC) highlights the strong investor appetite for sustainable bonds and sukuks as well as the growing importance of sustainability strategies for emerging market issuers including in regions such as GCC, according to top ratings agency Moody's.
Saudi Arabia has long been leading the growth of Islamic capital markets in the GCC. In the first half, the kingdom had 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 billion of international sukuk and $60.5 billion of local market sukuk.
SEC, the largest utility company in Mena region, finalised the terms of the multi-tranche $1.3 billion green sukuk. It reported an order book of more than $5.2 billion for the offering, thus highlighting the strong investor appetite for sustainable bonds and sukuks.
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," said Thomas Le Guay, Analyst at Moody’s.
"The implementation of sustainable finance guidelines and regulations by the Saudi government will help drive further sustainable debt issuances, " stated Le Guay.
They will provide clarity to issuers on criteria such as project eligibility and reporting. Clear guidelines also increase transparency for investors, he added.
According to Moody's, 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 by 25% over the next five years.
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," said Moody's in its review.
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, green sukuks account for less than 3% of global Moody's Investors Service Cross-Sector sukuk issuances, it added.-TradeArabia News Service