Last week, Reuters reported that Indonesia was considering adding a ‘green’ tranche to its upcoming US dollar sukuk issuance. Following on the world’s first green sukuk issued last year in the Malaysian market, this would represent a significant upscaling of the prominence of sukuk in the green finance market. The sukuk issuance includes a diverse set of bookrunners including Abu Dhabi Islamic Bank and CIMB (each of which is an RFI member), Citigroup, Dubai Islamic Bank and HSBC, with a strong reach into the Middle East & North Africa region where currency pegs have created strong demand for dollar sukuk.

The issuance would be significant beyond the Islamic finance market because Indonesia would be the first sovereign (apart from tiny Fiji) to issue a green bond of any type at the sovereign level. This matters because, although 2017 was billed as the ‘year of the sovereign’ for green bonds, issuance at the sovereign level did not include any from Asia, where green finance will be an important channel to meet the funding needs of $26 trillion for climate-adjusted infrastructurethrough 2030 based on estimates from the Asian Development Bank. Poland, France, Fiji and Nigeria issued sovereign green bonds during 2017.

An Indonesian sovereign green sukuk would also provide credibility for therecently announced ASEAN Green Bond Standards, under which it qualifies. CICERO, which provided a second opinion on the Malaysian corporate green sukuk, has also provided a second opinion for Indonesia’s sovereign green bond program, including both bonds and sukuk. In that report, which rated Indonesia’s green bond program ‘medium green’ (the middle of three levels), CICERO noted that it “might be possible that some projects include an element of deforestation” but that most projects have environmental impact assessments conducted. The government will also engage an external auditor, which strengthens governance around the use of proceeds.

If the sovereign sukuk is issued, the fact of the issuance and its share of the proceeds would provide an indication of where demand is for Shariah-compliant green finance. It will be of particular interest to compare geographical investor spread to gauge the degree to which green sukuk is able to either tap into new investors or potentially turn off existing sukuk investors, which could happen for a number of reasons. Both Islamic finance and emerging market fixed income investors have a large presence in the sukuk market and both will be needed for sukuk to make a meaningful contribution to Asia’s climate-resilient infrastructure needs.

This article first appeared in the RFI Foundation weekly e-Newsletter on January 30, 2017. Click through to see the full newsletter or click here to subscribe.