27four Investment Managers
17th November 2022
The convergence of Sukuk and Responsible Investment
According to Refinitiv, the size of the Sukuk market is expected to reach $742.3 billion by the end of 2022 and $1.1 trillion in 2027. The global market continues to see an increase in environmental, social and governance (ESG) Sukuk issuances, matching investor appetite for ESG investments. The growth of ESG focussed Sukuk is also supported by non-Shari’ah-compliant investors.
Before addressing the convergence of Sukuk and responsible investment, let’s cover the basics:
What is a Sukuk?
Sukuk is an Arabic word used to refer to financial certificates. Sukuk are defined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) as “securities of equal denomination representing individual ownership interest in a portfolio of eligible existing or future assets”. Generally speaking, a Sukuk is a Shari’ah compliant fixed-income instrument that generates periodic profit returns similar to the coupons of conventional fixed-income instruments like corporate debt instruments or governmental bonds. A Sukuk represents an investor’s proportional interest in a pool of assets, and his/her entitlement to the profit being generated from those assets. Unlike conventional debt instruments, the proceeds from the issuance of Sukuk can only be used for ethical purposes.
What is Responsible Investment?
The United Nations Principles for Responsible Investment defines responsible investment as “a strategy and practice to incorporate ESG factors in investment decisions and active ownership”.
The convergence of responsible investment and Sukuk
Since justice, wealth circulation, communal prosperity and transparency are all pillars of an Islamic economic order and the fact that the rules that govern Shari’ah are set in terms that echo the framework of responsible investing, investing responsibly can be said to be synonymous with Islamic Finance.
There are three different types of ESG Sukuk:
|Green Sukuk||The proceeds are utilised on mitigating the effects of climate change|
|Social impact Sukuk||The proceeds are utilised for projects that qualify as social, such as healthcare, poverty alleviation, and education|
|Sustainability-linked Sukuk||The proceeds are used for a cluster of both green and social projects, offering greater flexibility in terms of project coverage|
On 28 October 2022, the Agrarius Sukuk listed on the JSE, making it the first Sukuk to list on a securities exchange on the African continent. By it being listed on the JSE, the Agrarius Sukuk affords investors with a one-of-a-kind Shari’ah compliant responsible investment opportunity, via a transparent and highly regulated market place.
The Agrarius Sukuk is sustainability-linked and the proceeds from its issuance are being invested in sustainable and green projects in the agriculture sector value chain.
To find out more about the Agrarius Sukuk visit 27four.com/Agrarius