ESG sukuk are likely to continue being a key issuance theme in 2H23 and beyond amid government initiatives in a number of Organisation of Islamic Cooperation (OIC) countries that promote sustainability and economic diversification along with rising issuer and investor demand and awareness, Fitch Ratings says. ESG sukuk maintained strong growth in 2Q23 with USD30.5 billion outstanding; up 22% qoq. We expect ESG sukuk share to exceed 7.5% of global outstanding sukuk over the next five years (1H23: 3.8%).
“With COP28 to be held in the UAE in 2023, ESG sukuk could receive an awareness and issuance boost,” said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “There is a crossover between Islamic finance and ESG principles due to built-in sharia filters. However, Islamic finance needs to go the extra mile to achieve the targeted ESG impact. This is because unlike bonds, ESG sukuk need to be structured in a sharia-compliant manner as well as in a manner that meets green or sustainability mandates.” Fitch rates more than 80% of the global hard-currency ESG sukuk, with almost all issuance investment-grade.
ESG sukuk issuers are concentrated in Saudi Arabia, Indonesia, Malaysia and UAE. Sukuk take a significant share of ESG debt in core Islamic finance markets as Islamic banks are key sukuk investors. In the GCC, 51% of all outstanding hard-currency ESG is in sukuk format, 52% in Malaysia and 23% in Indonesia, with the rest in bonds. The UAE issued regulations exempting companies wishing to list their green or sustainability sukuk or bonds in a local market from registration fees for 2023.
ESG sukuk development faces challenges in most OIC countries, including shortage of domestic ESG-focused investors and issuers, regulatory constraints, a more complex issuance process, and pricing advantage uncertainty.
