RIYADH: The environmental, social, and governance sukuk market is expected to surpass 7.5 percent of global outstanding Islamic bonds in the coming years, a new report said.
In its new statement, Fitch Ratings said that outstanding sustainable sukuk, which includes all currencies, grew significantly in 2023, reaching $36.1 billion.
The US-based credit rating agency added that the future growth of the ESG market in this area will be driven by issuers’ diversification plans and governments’ sustainable initiatives, pushing it beyond the 4.3 percent share registered at the end of 2023.
“Fitch Ratings expects the ESG sukuk market to cross 7.5 percent of global outstanding sukuk in the coming years ... with growth likely to be supported by issuers’ funding diversification plans, to satisfy international ESG investors’ mandates, and by government sustainability initiatives,” said the report.
ESG sukuk, also known as green sukuk, is a Shariah-compliant financial instrument in which issuers exclusively use the proceeds of the issuance to finance investments in renewable energy or other environmental assets.
Fitch added that issuances of these sustainable sukuks went down 4.6 percent to $10.5 billion in 2023 compared to the previous year.
Bashar Al-Natoor, global head of Islamic Finance at Fitch, said: “Almost all Fitch-rated ESG sukuk are investment-grade.”
He added: “In the medium term, we expect ESG sukuk growth to continue; however, this could be slowed by volatile debt capital markets, governments becoming less willing to pursue sustainable targets, and poor availability of qualified assets.”
The report revealed that the UAE led the ESG sukuk with 41 percent of the total issuances, followed by Malaysia and Saudi Arabia at 28 percent and 21 percent, respectively.
Some 75.4 percent of ESG sukuk were from the Middle East, followed by Asia at 22.9 percent and Europe at 1.7 percent.
Fitch also highlighted various developments that will increase the green sukuk issuance in the near term.
One includes an initiative in the UAE where the Higher Sharia Authority directed Islamic banks and windows to create separate sustainable businesses and activities within existing company lines, including sustainable sukuk issuances and financing.
Similarly, a finance framework was unveiled in Oman, with plans to issue green, social, and sustainable sukuk and bonds.
Additionally, in Malaysia, the tax deduction given on the issuance cost of sustainable sukuk has been extended to 2027 from 2023.
