ESG sukuk growth supported by ESG investor mandates, funding diversification

ESG sukuk growth supported by ESG investor mandates, funding diversification

Fitch Ratings-Dubai: Outstanding ESG sukuk grew significantly in 2023, reaching USD36.1 billion globally at year-end (all currencies). Fitch Ratings expects the ESG sukuk market to cross 7.5% of global outstanding sukuk in the coming years (end-2023: 4.3%), with growth likely to be supported by issuers’ funding diversification plans, to satisfy international ESG investors’ mandates, and by government sustainability initiatives.

“Almost all Fitch-rated ESG sukuk are investment-grade,” said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “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”. Fitch rated more than 85% of the global hard-currency ESG sukuk.

ESG sukuk issuance (USD10.5 billion) was down 4.6% yoy in 2023, with issuance from the UAE most common at 41%, followed by Malaysia (28%), Saudi Arabia (21%), and Indonesia (10%). ESG sukuk make up a sizeable 11.8% of all outstanding Fitch-rated hard-currency sukuk. About three quarters of Fitch-rated ESG sukuk were from the Middle East, followed by Asia (22.9%) and Europe (1.7%).

In the UAE, the Higher Sharia Authority directed Islamic banks and windows to create separate sustainable businesses and activities