FIN4715 A1 Group 8

Project Presentation

Ee Su Ling A0203385J
Jet Lee Jun Pei A0189882E
Koh Ser Ming A0202437N
Leo Ke Ying Karine A0188914N
Tan Wen Kai A0183423J
Zachery Lee Kai Jie A0183199N
Introduction
To provide
the government with
5 an avenue to
address climate change
green sukuk issuances while addressing Shari'ah
from 2018 to 2020 concerns for protecting Biodiversity
the environment. Mitigation Adaptation Conservation
Strategies

Allows the government to

set tangible goals and
track the progress of the
projects backed by these
sukuk issuances

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: -
The Republic of Indonesia Green
Sukuk Issuances (2018-2020)
Indonesia Green Sukuks
STRUCTURE OF ANALYSIS

The analysis will be split between the retail sukuks and the global sukuks, as they possess fundamentally
different metrics such as:

Difference in Difference in Maturity term Allocation of

Yield amount raised of sukuks proceeds

Additionally, we will use both the 2018 global green sukuk and the 2019 retail green sukuk as a baseline and
compare them against their next-in-line issuance.

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: -
Retail Green Sukuk Issuance
INFO

Offered with Shariah Retail investors' Government's initiative

principles by the demand for access to a to promote greater
government to individual wider range of retail participation in
local investors investment products the sukuk market

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: -
2019 Retail Green Sukuk Issuance
ABOUT

1st
retail green sukuk issuance

IDR1.46 billion

100%
proceeds allocated to resilience to
climate change for highly vulnerable
areas and sectors, and
disaster risk reduction

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2019 Retail Green Sukuk Issuance
FINANCIAL CONCLUSION

Year Code Bond Yield Period Target (in Realised (in Total
Rating trillions trillions of Rp) Investor (in Public's interest in investing in savings sukuk
of Rp) thousands) was still heavily influenced by the returns
2016 ST-001 Baa3 6.90% 2 years 2.00 2.60 11.338 offered.
2018 ST-002 Baa2 8.30% 2 years 1.00 4.90 16.477
2019 ST-003 Baa2 8.15% 2 years 2.00 3.12 13.932
2019 ST-004 Baa2 7.95% 2 years 2.00 2.63 12.528
2019 ST-005 Baa2 7.40% 2 years 1.71 1.96 10.029
2019 ST-006 Baa2 6.75% 2 years n.a. 1.50 7.735

Significant
decrease in yield

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Khalilurrahman & Mubarrak

 2019 Retail Green Sukuk Issuance
ENVIRONMENTAL & SOCIAL IMPACT CONCLUSION

1 project Reasonable allocation

construction of flood control facilities of proceeds

0.32 million m3 29% of population

Serious floods
may lead
sediment control in agriculture
to unemployment
sector, 13.7%
, loss of income
contribution to the
28 hectares
• Indonesia is one of the most & spread of
disaster-prone countries in the country’s GDP.
diseases.
world improvement of flood facilities and infrastructure
• In particular, the risk index for a
tsunami occurring in Indonesia is
9.7 out of 10 SDGs
3, 5, 6, 8, 10, 11

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: World Bank, Statista, Ministry of Finance Republic of Indonesia

2020 Retail Green Sukuk Issuance
ABOUT

2nd
retail green sukuk issuance

IDR5.4 trillion

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2020 Retail Green Sukuk Issuance
FINANCIAL CONCLUSION

Year Code Bond Yield Period Target (in Realised (in Total
Rating trillions trillions of Rp) Investor (in ST-007 has broken the trend that shows that
of Rp) thousands) public interest in investing in savings sukuk is
2016 ST-001 Baa3 6.90% 2 years 2.00 2.60 11.338 still strongly influenced by the returns
2018 ST-002 Baa2 8.30% 2 years 1.00 4.90 16.477
provided.
2019 ST-003 Baa2 8.15% 2 years 2.00 3.12 13.932
2019 ST-004 Baa2 7.95% 2 years 2.00 2.63 12.528
2019 ST-005 Baa2 7.40% 2 years 1.71 1.96 10.029
2019 ST-006 Baa2 6.75% 2 years n.a. 1.50 7.735
2020 ST-007 Baa2 5.50% 2 years n.a. 5.40 16.992

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Khalilurrahman & Mubarrak, World Government Bonds, IM Insights

 2020 Retail Green Sukuk Issuance
ENVIRONMENTAL & SOCIAL IMPACT Largest IMPACT Second
contribution largest
contribution

IDR2.5 trillion IDR1.25 trillion

developing clean transport systems refinancing the project for renewable energy

1.1 million tonnes SDGs

Drastic rise in motorised transport over reduction in annual GHG emissions 7, 13, 14
the last decade + still developing
infrastructure scene in Indonesia.
SDG CONCLUSION

8, 9, 11, 13 • ST-007 was able to fund more projects

The transport industry currently and fulfil more SDGs.
• Easing of Covid-19 measures -> no. of
accounts for 70-80% of all outdoor
public transport users slowly
pollution as well as 23% of GHG increasing.
emissions in the country. • E-commerce market booming.

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Statistics Indonesia, Diez, Antara, Ministry of Finance Republic of Indonesia

Global Green Sukuk Issuance
INFO

Globally, green bonds Potential investor base Indonesia became the

have surged in recent is broadened, with first country in the
years. investors distributed all world to issue a
around the globe. sovereign green Sukuk.

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: -
2018 Global Green Sukuk Issuance
ABOUT

1st
sovereign green sukuk in the world

USD1.25 billion
Breakdown by Sector % of 2016 Breakdown by Sector % of 2018 proceeds
proceeds
Sustainable Transport 46
Sustainable Transport 67 Renewable Energy 4
Waste to Energy and Waste Management 14 Energy Efficiency 10

Renewable Energy 13 Resilience to Climate Change for Highly Vulnerable Areas and 40

Energy Efficiency 6 Sectors/Disaster Risk Reduction

TOTAL 100 TOTAL 100

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2018 Global Green Sukuk Issuance
FINANCIAL CONCLUSION

Baa2 Credit Rating

6.20% • Acceptable for impact investors who are
still able to gain some financial returns
alongside environmental and social
USD Denominated
Indonesia 5-year government bond
goals.

• Having said that, statistics from the

5 years tenor report had shown that 71% of the

2.45%
3.75% Coupon Rate
difference in yield
investors were non-green investors,
hence, this investment might not be as
worthwhile for them.

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2018 Global Green Sukuk Issuance
ENVIRONMENTAL & SOCIAL IMPACT CONCLUSION

Focus on climate change made sense as

5.776 MTon
•
Dark Green 80% of the disaster occurrences in
Renewable Energy and Resilience to CO2e emissions mitigated Indonesia were hydro-meteorological
Climate Change disasters.

Medium to Dark 7,348,180 kWh • Aligned with long-term goals that the
United Nations had set globally shows
additional power the part that the 2018 Global Green
Green Sukuk has played in achieving long term
Sustainable Transport and Waste to Energy
& Waste Management
3,453,241 positive social impact.

households projected to benefit from

improved waste management
Light to Medium
Green SDGs
Energy Efficiency 7, 8, 9, 11, 13

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2019 Global Green Sukuk Issuance
ABOUT

USD750 million
40% lower
than 2018
issuance

Do we then expect a proportional drop in terms of the environmental and social impact?

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2019 Global Green Sukuk Issuance
FINANCIAL CONCLUSION

Comparison of Bond Features

7.56% • When compared with the 2018 issuance,
both sukuk issuance are highly similar
Indonesia 5-year government bond
Factors 2018 2019 with one another, less the tenor of the
sukuk
Credit Rating Baa2 Baa2 • A higher maturity denotes a higher risk
Currency USD USD rating of the sukuk therefore justifying
the relative increase in yield for the 2019
Tenor 5 years 5.5 years sukuk issuance
• Is ”greenium” observed?
Yield 3.75% 3.90%
3.66%
difference in yield

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: World Government Bonds

2019 Global Green Sukuk Issuance
ENVIRONMENTAL & SOCIAL IMPACT CONCLUSION

Allocation of proceeds:

Sectors 2018 2019

SDGs • The varying difference between projected
numbers can be owed to the differences
7, 8, 9, 11, 13 in amounts raised along with the
Sustainable 62% 48% difference in focus towards the sectors
Transport
targeted.
Energy
Efficiency
6% 27%
3.218 MTon • With the rapidly growing transport
sector taking up a sizable portion of GDP,
projected reduction in CO2 emissions
Resilience to 17% 11% observed environmental impacts from
Climate Change
the projects will be monumental
Renewable
Energy
8% 5%
7,249 kWh Indonesia's GDP
Transport
Waste to 7% 9% additional power generated
Sector
Energy
and Waste
Management
Total 100% 100%
2,056,200
households projected to benefit from improved
waste management

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Cekindo
2020 Global Green Sukuk Issuance
ABOUT

USD750 million
Identical to
2019
issuance

Slight shift in allocation from 2019

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Ministry of Finance Republic of Indonesia

2020 Global Green Sukuk Issuance
FINANCIAL CONCLUSION

• Historical green sukuk coupon rate

trended in line with Fed Fund Rate
Factors Mar 2018 Feb 2019 Jun 2020
• Correlation with Fed Fund Rate
could suggest that the lower
Credit Rating Baa2 Baa2 Baa2
coupon rate was possibly due to
the lower interest rate
Tenor 5 years 5.5 years 5 years Significantly environment
lower than
previous
Green Sukuk Coupon issuances
3.75% 3.90% 2.30%
Rate

Federal Funds
1.51% 2.40% 0.08%
Effective Rate

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: World Government Bonds

2020 Global Green Sukuk Issuance
ENVIRONMENTAL & SOCIAL IMPACT

The targeted sectors were narrowed

down from five to three sectors: 2,059,094 (i) Fulfil raw water supply needs for drinking
water of 275.5 m3
households projected to benefit from
I. Sustainable Transport improved waste management
(ii) Protect 1920.4 Ha of areas from flooding

II. Waste and Waste to

Energy Management Key
1.415 MTon (iii) Rehabilitate 134,700 Ha of tertiary
irrigation network
focus projected reduction in CO2 emissions
III. Resiliency to Climate Change (iv) Develop 1,071 units of other water source
• In line with the Indonesia
government’s growing Resiliency to (v) Benefit 1,236,000 people
emphasis on the
mitigation and
management of climate
Climate Change (vi) Create and revitalize 12,000 Ha of rice field.
change effects
projects
Biggest Impacts

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Yusuf and Fransisco, Ministry of Finance Republic of Indonesia

CICERO Rating
ANALYSIS CONCLUSION

• Medium green rating for the 2020

Allocation of Proceeds into Projects (%)
retail, 2018 – 2019 global is
Issuance Light to Medium Medium to Dark Dark Green Average Rating justifiable.
2019 Retail 0 0 100.0 Dark Green
• Dark green rating should be
2020 Retail 0 100.0* 0 Medium warranted for the 2019 retail and
2020 global sukuk issuances.
2018 Global 8.0 62.0 30.0 Medium

2019 Global 27.0 57.0 16.0 Medium

2020 Global 0 17.5 82.5 Dark Green

*The only financing project with tangible mitigation able to be measured for the 2020 retail sukuk issuance was for the sustainable transport sector

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: -
Determination of Greenium
ANALYSIS CONCLUSION

• All had coupon rates that were at a

Comparison of Green Sukuk Yield Against Benchmark Rates discount against the yields of their
Green Sukuk Benchmark Security
corresponding benchmarks.
Delta
Date of Coupon Benchmark • Average discount of 2.26%.
Tenor Instrument Tenor
Issuance Rate Rate
Savings
2019 Retail Nov 2019 2 years 6.75%
Sukuk
2 years 7.40% 0.65% • "Greenium" is indeed factored into the
Indonesia
pricing of Green Sukuks.
2020 Retail Nov 2020 2 years 5.50% 2 years 5.63% 0.13%
Gov Bond
Indonesia • While the exact returns of these green
2018 Global Mar 2018 5 years 3.75% 5 years 6.20% 2.45%
Gov Bond sukuks are unknown and may not yield
Indonesia the highest financial returns, investors
2019 Global Feb 2019 5.5 years 3.90% 5 years 7.56% 3.66%
Gov Bond are still inclined to invest because of
2020 Global Jun 2020 5 years 2.30%
Indonesia
5 years 6.73% 4.43%
the other benefits they provide.
Gov Bond

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: World Government Bonds, Khalilurrahman & Mubarrak

Recommendations
Recommendations – Improving Financial Returns
Pay-for-Success Model Tax Benefits
• Investors to be eligible for additional payments from the • Encourage more tax-paying residents of Indonesia to invest in
government if a project is successful existing green sukuks
• Minimizes the government expenditure on green projects and
ü Higher financial returns
ü Greater understanding of the projects’
initiatives; budget can be allocated to more pressing issues
performance and progress towards intended goals • Government may provide these tax incentives in the form of
cash rebates (direct subsidies) to investors to offset net interest
expenses
Private Investors
• Proposed structure present in notable green bond offerings:

Working Repayment and ROI from •1 U.S. Federal Government Clean Renewable Energy Bonds
capital performance-based payments
(CREBs)
Social Impact Government of
Service
Bond-Issuing the Republic of
•2 Qualified Energy Conservation Bonds
Providers Funding for Performance
Organization Indonesia
operating -based
costs payments

ü Spread awareness of social issues that

green sukuk issuances aim to address Private money
ü Obtain sufficient funding for future
issuances Public money

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Center for American Progress, Climate Bonds Initiatives

Recommendations – Improving Social Impact
Social Returns as an Important Aspect of Impact Investing Proposed Solution
• Impact investing involves two primary aspects: Regular and methodical communication to investors:

•1 Increase transparency in the selection of projects and the way

funds are allocated among them
Financial Social • 38% of respondents in a survey cited their fear of
returns returns greenwashing as the greatest obstacle to green
investments

•2 Thorough descriptions of underlying initiatives

ü Competitive return on ü Societal and environmental • Fostering trust and learning among investors
investment impacts created from the • Reassures investors of the processes and progress of the
ü Three types: investment green projects
ü Measured using a non-
ü1 Risk-adjusted market returns standardized framework
ü Trade-off present between
ü2 Below market returns (closer financial and social returns
to market rate)

ü3 Below market returns (closer

to capital preservation)

Introduction Analysis of Green Sukuk Issuances Recommendations

Sources: Climate Bonds Initiative, Harvard Business Review, NN Investment Partners

Thank You!
References
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