How Indonesia Is Using Its Green Sukuk

The increasing use of these Islamic financial instruments reflects the growing sophistication of Indonesia’s capital markets.

By James Guild

From 2018 to 2023, the Indonesian government issued a cumulative $9.6 billion in green sukuk financial instruments. A sukuk is often referred to as an Islamic bond, but it’s not actually a bond. It is a certificate that gives the holder ownership rights in an asset, so is not considered debt. Indonesia’s green sukuk are being used to finance sustainable green projects and are intended to appeal to a wide pool of investors, including those looking for ESG and Shariah-compliant assets.

To date, Indonesia has issued $6 billion worth of dollar-denominated global green sukuk, alongside $3.6 billion of rupiah-denominated sukuk issued domestically. The move has been hailed as an example of the power of green finance, as the Indonesian government is tapping capital markets to invest in sustainable development. But I have recently come across a few misconceptions about these green sukuk and what they are being used for, so I thought it would be a good idea to give a quick run-down and set the record straight.

In particular, it seems some people look at climate finance instruments like Indonesia’s green sukuk and assume they are being used for clean energy, like wind and solar power. A 2023 report from the World Bankon the state of climate finance in Indonesia noted that as of 2023 over $6 billion in green debt had been issued, the majority of it from government bonds or sukuk instruments. According to the report “about 98 percent of all green issuances… stated that proceeds would be allocated (either totally or partly) to projects in the energy sector.”

Perhaps that is what was stated in the prospectus. But if we look at reports from the Ministry of Finance detailing how proceeds from Indonesia’s green sukuk have actually been allocated, the amount being channeled into renewable energy or even energy efficiency is extremely small. As in, almost zero.

Overwhelmingly, Indonesia’s green sukuk have been used to finance investment in water management such as irrigation, flood control, as well as water supply and treatment systems. Some of it has been used for railway infrastructure. The Ministry of Public Works, which is responsible for building roads and dams but generally not power plants, has been the recipient of 98 percent of the sukuk proceeds.

The green sukuk has been a way for the Indonesian government to help finance its overall infrastructure needs. And investing in irrigation, water management, and rail infrastructure is an important part of sustainability. But if people think the Indonesian government has raised billions of dollars in green finance and ploughed it into solar and wind or even geothermal projects, that is not the case.

Overall, I think this is a positive development. It shows that Indonesia’s capital markets are deepening, and that there is demand for innovative financial instruments like green sukuk. I think the state should absolutely be playing a leading role raising capital for these kinds of projects when private actors left to their own devices cannot or will not do so.

But this also underscores that as a general framework sustainable or green finance is very broad, perhaps overly so. Indonesia has raised billions of dollars through its green sukuk, and channeled it into projects that fit the definition of sustainable development. But that definition includes many things. For now, it mostly means irrigation and other water management infrastructure, but not clean energy.

Source: The Diplomat