Outstanding ESG sukuk expanded by 56.8% yoy to reach USD36.1 billion globally at end-2023 (all currencies). Fitch Ratings says about 66.2%(USD23.9 billion) of all outstanding ESG sukuk was in hard currency, mostly US dollars. In 2023, ESG sukuk issuance totalled USD10.5 billion (down 4.6% yoy), with issuance from the UAE most common at 41%, followed by Malaysia (28%), Saudi Arabia (21%), and Indonesia (10%). ESG sukuk made up 4.3% of global outstanding sukuk at end-2023.
Fitch rated more than 85% of the global hard-currency ESG sukuk, or USD20.5 billion outstanding, at end-2023 (up 36.5% yoy). ESG sukuk are a sizeable 11.8% of all outstanding Fitch-rated sukuk. About 75.4% of Fitch-rated ESG sukuk were from the Middle East, followed by Asia (22.9%) and Europe (1.7%). Saudi Arabia is the source of the highest share (45%) of Fitch-rated ESG sukuk, followed by the UAE (31%). Fitch rates ESG sukuk using Fitch’s Sukuk Rating Criteria. The credit rating of ESG sukuk is driven solely by the originator’s rating and not the use of proceeds, similar to other sukuk or bonds.
As for geographical footprint, Indonesia’s hard-currency ESG debt mix was 56% sukuk, with the rest in bonds, followed by Malaysia (52% sukuk), and the Gulf Cooperation Council (40% sukuk). ESG sukuk has become more diverse, including the issuance of the first UAE dirham-denominated green sukuk by First Abu Dhabi Bank.
In the UAE, the Higher Sharia Authority directed Islamic banks and windows to create separate sustainable businesses and activities within the existing business lines that include sustainable sukuk issuances and financing. In addition, the Dubai Financial Services Authority waived regulatory fees on ESG listings on Nasdaq Dubai for 2024. A sustainable finance framework was unveiled in Oman, with plans to issue green, social and sustainable sukuk and bonds. The proceeds will be used to fund and refinance renewable energy projects, aiming to reduce dependency on fossil fuels and to attract ESG investors. In Malaysia, the tax deduction given on the issuance cost of Sustainable and Responsible Investments sukuk has been extended to 2027. These initiatives could help boost ESG debt issuance in the near term.
Green Assets Scarcity: The scarcity of sustainable projects or green assets obstruct some sovereigns and corporates from issuing ESG sukuk, and instead they issue non-ESG sukuk or bonds. While ESG issues may not always have a pricing advantage, they often widen issuers’ investor bases through attracting ESG-sensitive investors.
Outlook: We expect the ESG sukuk market to cross 7.5% of the global outstanding sukuk in the coming three to four years. Growth is likely to be supported by issuers’ funding diversification plans, so as to satisfy international ESG investors’ mandates, and by government sustainability initiatives.
Fitch says it forecasts both lower oil prices (2024F: USD80/bbl; 2025F: USD70) and interest rates (US policy rate 2024F: 4.75%; 2025F: 3.5%), which could also drive debt issuance, including ESG sukuk.
