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ANALYSIS

ESG sukuk to top $50bn amid new regulatory frameworks

RIYADH, May 8, 2024

The ESG (environmental, social, and governance) sukuk will cross $50 billion mark globally within the next two years, as issuers aim to meet their funding diversification goals and ESG mandates, alongside new regulatory frameworks, according to Fitch Ratings.
 
Risks include geopolitical volatilities, surging oil prices that could reduce funding needs in some core sukuk markets, new sharia requirements that could alter sukuk credit risk, and the weakening of the sustainability drive in core markets, stated the top ratings agency.
 
"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," remarked Bashar Al Natoor, the 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," he noted.
 
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 and Oman have introduced Green Financing Frameworks. 
 
The International Capital Market Association, the Islamic Development Bank and London Stock Exchange Group also published new guidance on the issuance of ESG sukuk. These initiatives further support ESG ecosystem development.
 
According to Fitch Ratings, the global ESG sukuk rose by 60.3% y-o-y to reach $40 billion outstanding at the end of Q1 2024 (all currencies). ESG sukuk made up 12% of global outstanding sukuk (hard currencies). 
 
Fitch rated about 90% of the global hard-currency ESG sukuk, or $24.7 billion outstanding, at end-Q1 2024 (up 56% yoy). Of this, Saudi Arabia had the highest share (45%) followed by the UAE (33%).
 
The top ratings agency pointed out that the sukuk has significant share of ESG debt in core markets. 
In the GCC countries, ESG sukuk reached $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 (OIC) countries.



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