Sukuk incorporating ESG principles grew 34% year-on-year (y-o-y) to US$44.6 billion outstanding in all currencies at the end of Q3 2024, outpacing the 8.5% y-o-y growth of global Sukuk.
Fitch Ratings’ Global Head of Islamic Finance Bashar Al-Natoor told IFN Investor that while this positive trend should continue into the next year, “the introduction of the AAOIFI Shariah Standard 62 is anticipated to be disruptive”.
Noting this proposed standard’s final form or implementation timeline are still unknowns, Bashar said: “It’s possible that market participants might accelerate their activities to pre-empt any complexities introduced by the new standard. However, the exact response will likely vary based on how these key factors unfold.”
New issuances up to Q3 2024 for ESG Sukuk rose 14.7% y-o-y in the Islamic finance core markets of the GCC, Malaysia, Indonesia, Turkiye and Pakistan) to US$8.9 billion, while ESG bond issuance fell by 18% y-o-y (US$12.9 billion), according to the latest Fitch Rating ‘Global ESG Sukuk outlook dashboard’.
Within the GCC, ESG debt was US$46.3 billion, with about 42% in Sukuk. Fitch Rating expects ESG Sukuk issuance to continue well into 2025 and cross US$50 billion outstanding – driven by investor demand, funding and diversification goals, along with sustainability initiatives in some Muslim-majority countries.
The US Federal Reserve further cutting rates to 4.5% in 2024 and to 3.5% by the end of 2025, as anticipated, “could improve financing conditions and support debt issuance, including ESG Sukuk”.
Bashar noted that supported by regulatory support and favorable financing conditions, “these factors collectively point towards ESG Sukuk remaining a key component of the global Islamic sustainable finance landscape”. The forecast is backed by several key sustainability initiatives in several Muslim-majority countries this year, including:
- Oman: The Central Bank of Oman issued a new circular aimed at strengthening the banking sector’s resilience to climate-related risks. This circular encourages banks to participate in sustainable finance initiatives by issuing sustainable/green Sukuk and bonds and adopting broader ESG factors. The regulator published its Sukuk and Bond Regulation, with specific disclosure requirements for ESG issuance, while Oman’s Ministry of Finance launched its Sustainable Finance Framework.
- UAE: The Higher Sharia Authority directed Islamic banks and windows to create separate sustainable businesses and activities within existing business lines that include sustainable Sukuk issuances and financing. The Dubai Financial Services Authority waived regulatory fees on ESG listings on NASDAQ Dubai for 2024. The Securities and Commodities Authority announced the extension of the waiver of registration fees for green or sustainability-linked Sukuk and bonds.
- Malaysia: Tax deduction on the issuance cost of sustainable and responsible investments Sukuk has been extended to 2027.
- Saudi Arabia: TheMinistry of Finance introduced a Green Financing Framework.
- International guidance: The International Capital Market Association, the IsDB, and London Stock Exchange Group published new guidance on the issuance of ESG Sukuk.
