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Explained: Green bonds and how they work

The aggregate listing value of green bonds and sukuks on Nasdaq Dubai stands at around $24 billion, according to Christian Kunz, DIFC’s chief strategy, innovation and ventures officer.

Regional conglomerates, as well as global companies, have recently used the exchange to raise funds to finance their green projects.

Retail giant Majid Al Futtaim raised $500 million through its green sukuk earlier this year to refinance an older $800 million bond commitment.

Industrial and Commercial Bank of China Limited listed five-tranche carbon-neutrality-themed bonds worth a total of $2.68 billion in July.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest, and also may finance businesses involved in activities not allowed under sharia law.

As the region’s largest debt capital market for green bonds and sukuks, the funding pool is not an issue but investor strategies are. “When you talk about innovation you need patient capital. It’s not short-term thinking, it’s long-term thinking,” said Kunz.

Another challenge is the lack of unified regulation when it comes to the green bonds sector, with over a thousand different standards to choose from around the world, he said.

We should decide on “what we believe is the global standard that we should all merge. Maybe it’s not just one (standard) and could be three or four, but it can’t be 1,000,” he added. 

In addition, the cost of transitioning, for both countries and businesses, is very expensive. One hundred billion dollars needs to be mobilised by developing countries each year to achieve climate goals alone. 

The amount stands at $2 to $5 trillion to achieve all the Sustainable Development Goals set by the United Nations. 

This amount is needed for both new carbon neutral projects as well as to make existing developments more sustainable. 

“The bigger heavylift is to refurbish and transition the things we already have. That is really expensive and also quite difficult to do,” he said.

Watch the full video to understand what green bonds are and how they work.