ESG sukuk are set to cross US$50 billion outstanding globally within the next two years, Fitch Ratings has said, amid new regulatory frameworks and government-led sustainability initiatives. The trend is also led by issuers aiming to meet their funding diversification goals and ESG mandates. Global all-currency ESG sukuk rose by 60.3% year-on-year to reach US$40 billion outstanding at the end of Q1 this year, making up 12% of global outstanding sukuk. “The year started with key regulatory initiatives, which could support standardisation and ecosystem development, and aid transparency,” said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings. “There is significant ESG sukuk growth potential, continuous efforts and increasing confidence will be key to unlocking this.” In April, the United Arab Emirates’ Securities and Commodities Authority announced the extension of a waiver of registration fees for green or sustainability-linked sukuk and bonds, while Saudi Arabia and Oman have introduced Green Financing Frameworks. Meanwhile, the International Capital Market Association, the Islamic Development Bank and the London Stock Exchange Group co-published new guidance on the issuance of ESG sukuk last month. All these initiatives have helped further support the development of the ESG sukuk ecosystem, Fitch explained. However, risks such as geopolitical volatilities and surging oil prices could reduce funding needs in some core sukuk markets, while the sustainability drive could weaken in core markets, and new sharia requirements could alter sukuk credit risk. “Sukuk has significant share of ESG debt in core markets,” it added. “In GCC [Gulf Cooperation Council] countries, ESG sukuk reached US$15.9 billion outstanding, representing 45% of the ESG debt mix, with the balance in bonds. ESG sukuk and bond issuance remains nascent in most Organisation of Islamic Cooperation countries.”
