Fitch Ratings expects ESG sukuk to cross USD50 billion globally within the next two years, on the back of issuers aiming to meet their funding diversification goals and ESG mandates, along with new regulatory frameworks and government-led sustainability initiatives.
The ratings firm forecasts both lower oil prices (2024F: USD80/bbl; 2025F: USD70/bbl) and interest rates (US policy rate 2024F: 4.75%; 2025F: 3.5%), which may contribute to a rise in debt, including ESG sukuk.
Continuous efforts and increasing confidence are key to achieving the significant ESG sukuk growth potential. Risks include geopolitical volatilities, surging oil prices that could reduce funding needs in some core sukuk markets, the new sharia requirements that could alter sukuk credit risk, and weakening of the sustainability drive in core markets.
“Almost 99% of all Fitch-rated ESG sukuk are investment-grade. The year started with key regulatory initiatives, which could support standardisation, ecosystem development, and aid transparency,” said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings.
“There is significant ESG sukuk growth potential, and continuous efforts and increasing confidence will be key to unlocking this.”
Sukuk Expanding: Global ESG sukuk rose by 60.3% yoy to reach USD40 billion outstanding at end-1Q24 (all currencies). ESG sukuk was 12% of global outstanding sukuk at end-1Q24 (hard currencies). About 68.5% (USD27.4 billion) of all outstanding ESG sukuk was in hard currency, mostly US dollars.
In 1Q24, ESG sukuk issuance totalled USD3.4billion (up 88% yoy), with issuance from Saudi Arabia (53.5%) and the UAE (28.9%) most common, followed by Qatar (14.5%) and Malaysia (3.1%).
Investment-Grade: Almost all (98.6%) Fitch-rated ESG sukuk is investment-grade. Fitch rated about 90% of the global hard-currency ESG sukuk, or USD24.7 billion outstanding, at end-1Q24 (up 56% yoy). About 79.5% of Fitch-rated ESG sukuk were from the Middle East, followed by Asia (19.1%) and Europe (1.4%). Saudi Arabia has the highest share (45%) of Fitch-rated ESG sukuk, followed by the UAE (33%). Fitch rates ESG sukuk using its Sukuk Rating Criteria.
Developing Regulatory Ecosystem: The year started with key regulatory initiatives, which could support standardisation and ecosystem development, and aid transparency. In April, the UAE’s Securities and Commodities Authority announced the extension of the waiver of registration fees for green or sustainability-linked sukuk and bonds.
Saudi Arabia’s Ministry of Finance introduced Green Financing Framework. In Oman, the regulator published its Sukuk and Bond Regulation, with specific disclosure requirements for ESG issuance.
Oman’s Ministry of Finance launched its Sustainable Finance Framework.
The International Capital Market Association, the Islamic Development Bank and London Stock Exchange Group published new guidance on the issuance of ESG sukuk.
Sukuk has significant share of ESG debt in core markets. In the GCC countries, ESG sukuk reached USD 15.9 billion outstanding, representing 45% of the ESG debt mix, with the balance in bonds. Qatar issued its inaugural sustainable sukuk in 1Q24, issued by Qatar International Islamic Bank. In Indonesia, sukuk had 59% of the hard-currency ESG debt mix, with the rest in bonds, while in Malaysia the sukuk share stood at 52%.
However, ESG sukuk and bond issuance remains nascent in most Organisation of Islamic Cooperation (OIC) countries.
