The Run Down on the Merdeka Asean Green SRI Sukuk Programme

A. Introduction

Since announced by the Malaysian Prime Minister in 2014, Green Sukuks’ have been an up and coming form of investment as it not only allows for an ethical form of investment, under Islamic law, to take place, but also due to the fact that the proceeds are channeled towards the support of climate issues. Due to this, we can see that more corporations are finding ways in which to establish Green Sukuk programmes in order to not only be Shariah-compliant in their investments, but also to advocate for the development of a greener society in the years to come.

One such corporation is PNB Merdeka Ventures Sdn Bhd. This corporation formulated a one of a kind Green Sukuk in Malaysia known as the PNB Merdeka Ventures Sdn Bhd Green Sukuk, or also known as the Merdeka Asean Green SRI Sukuk Programme. This Green Sukuk programme is unique in its very essence as this particular Sukuk was initiated with the primary purpose of funding the Merdeka PNB118 Tower, with an issuance size of RM 2 billion. This article will discuss the establishment of this Green Sukuk programme, as well as the structure of the Sukuk and how it works in practice.

B. Establishment of the Merdeka Asean Green SRI Sukuk

Established in December 2017, PNB Merdeka Ventures Sdn Bhd started their 15-year tenor Green Sukuk programme. This Sukuk programme was successfully established as a Green Sukuk programme instead of a normal Sukuk programme due to the fact that the Merdeka PNB118 Tower was able to classify itself as a low carbon building, as it fulfilled the Climate Bond’s Initiative taxonomy requirements.

Further, the Merdeka PNB118 Tower will also be the first building in Malaysia to satisfy three main green building accreditations (Green Building Index (GBI), the Green Real Estate (GreenRE), and the Leadership in Energy and Environmental Design (LEED)), which then further solidifies its eligibility as a Green Sukuk programme. In addition to that, it was also established as a Green Sukuk due to the fact that it is also the first Sukuk in Malaysia to adhere to the Asean Green Bond Standards and are compliant with all the requirements under the Securities Commissions guidelines on Sustainable Responsible Investment Sukuk. Hence, due to these factors that led to the establishment of a Green Sukuk, PNB Merdeka Ventures Sdn Bhd was able to place an 83-storey building under a Green Sukuk programme.

As all Green Sukuk programme’s need to be sustainable environmentally, the Merdeka PNB118 Tower has a wide array of sustainable features to be in line with being a green building. These sustainability features include optimizing grey water and harvesting rain water, using solar panels and chilled water energy storage as the main sources of hot and cold water supply, as well as the complete use of low-emitting carbon materials to ensure that there is a lack of pollutants in the atmosphere. However, these features only come into play when the tower is fully in operation. In the construction stages, some of the sustainability features included waste management in the construction site, recycling of installed materials up to 30% as well as the planting of a public green open space to allow for cleaner air and act as a heat control as well.

In totality, all these features ensure that the establishment of the Green Sukuk programme was sustainable towards the environment from the very get-go and not only once the tower becomes in operation.

C. The Structure of the Sukuk

Understanding then the background of this particular sukuk, we now look into the structure of the Merdeka Asean Green SRI Sukuk Programme. This programme combines both a Murabaha Tawarruq arrangement and Wakalah. To understand this sukuk structure in detail, it is then important to look at each one of these elements in isolation first.

Murabaha Tawarruq is also known as a commodity murabaha. This arrangement refers to the a sale and purchase of a commodity, when three parties, namely the buyer, seller and a financier, are involved. The Murabaha Tawarruq is permitted as long as it for pure credit transactions and is used as the final and last resort before liquidity. Wakalah, on the other hand, is a contract where a party, as principal (muwakkil) authorizes another party as his agent (wakil) to perform a particular task on matters that may be delegated, with or without imposition of a fee. The very essence of the Wakalah is the delegation of the authorisation of the agent by a principal, which then leads to a fiduciary duty towards the principal and what he has been authorised to undertake.

Understanding both these concepts, we now look into to the structure of the Merdeka Asean Green SRI Sukuk Programme. As this programme combined a mix of both the Murabaha Tawarruq arrangement and Wakalah, the programme is easily described by the following diagram that was released by PNB Merdeka Ventures Sdn Bhd: –

Picture was taken from the Islamic Green Finance: Development, Ecosystem and Prospects released by Securities Commission Malaysia in March 2019.

As has been illustrated by the diagram, the main Wakalah arrangement is only between the Sukuk holders or the Sukuk trustee and the main facility agent, which in this case is, Malaysian Industrial Development Finance Berhad (MIDF). The other aspects of the structure are focused on the Murabaha Tawarruq arrangement, wherein all three parties in this structure can be easily identified. This combination of both the Murabaha Tawarruq arrangement and Wakalah is quite unique in its sense, as usually most Green Sukuk structure’s focus primarily on a Murabaha Tawarruq arrangement. A Wakalah arrangement is rarely used as it involves an additional layer of a fiduciary duty and thus is deemed to be an additional burden.

Understanding the basic structure, we now look into the other elements of the Merdeka Asean Green SRI Sukuk Programme, which are namely the use of the proceeds as well as how these proceeds are managed.

On the use of the proceeds, a Green Sukuk worth RM 2 billion will be issued, and all proceeds on the Sukuk will be channelled towards the Merdeka PNB118 Tower. Next, on the management of these proceeds, this has been broken up into two stages, namely first, when construction is taking place and second, during the operation of the tower. In looking into the first stage, when construction is taking place, the issuer will maintain a Shariah-complaint bank account and this is the account in which the monies and payments received will be directed towards. Once the construction period is over, and the tower is in operation, the funds in the proceeds account will be transferred towards a secondary account, which in turn will be used to meet construction costs as well as for financing all other payment obligations. The primary proceeds account will be closed as soon as the Merdeka PNB118 Tower is complete, and the funds have been channelled to the secondary account. To comply with the requirements of a Green Sukuk as well, PNB Merdeka Ventures Sdn Bhd will issue annual letters to all investors to not only highlight the use and disbursement of the funds, but also to report on the environmental impact of the tower.

D. Conclusion

In sum, the Merdeka Asean Green SRI Sukuk Programme is a one-of a kind Sukuk programme and it is what got the ball rolling for new ways that Green Sukuk can be introduced. This programme also highlighted the fact that Green Sukuk’s are not limited to only investments that directly correlate to climate change, but also can be extended to other investments such as the Merdeka PNB118 Tower, which had the primary aim of showing the versatility of the Green Sukuk structure. Ultimately, this is one of many instances that the Green Sukuk has been successfully established in Malaysia.

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