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Cop28 tipped to feed appetite for green sukuk

ESG sukuk investors are funding clean energy projects such as wind farms Creative Commons/Pexels/Pixababy
ESG sukuk investors are funding clean energy projects such as wind farms
  • Market for sharia-compliant ESG investments to get a boost from summit
  • Fitch points to ‘crossover between Islamic finance and ESG principles’
  • $30.5bn of green sukuk outstanding in second quarter

The Cop28 climate conference in the UAE is expected to boost interest in green sukuk as the market gathers momentum in the GCC, Malaysia and Turkey.

Environmental, social, and governance (ESG) sukuk – sharia-compliant instruments used to fund renewable energy and other green projects – are set to be a central issuance theme for the remainder of this year and beyond, according to Fitch Ratings.

The ratings agency said this followed government initiatives to promote sustainability and economic diversification in a number of Organisation of Islamic Cooperation (OIC) countries, along with rising issuer and investor demand.

In the United Arab Emirates, one of the OIC’s 57 member states, companies that wish to list green sukuk or bonds in a local market have been exempted from registration fees for 2023.

Last month First Abu Dhabi Bank, the UAE’s largest bank, printed the first AED-denominated green sukuk, with an issuance of AED1.3 billion. Hana Al Rostamani, the bank’s CEO, described it as a “landmark achievement” for the green finance and Islamic finance sectors.

The ESG sukuk market recorded strong growth in the second quarter of 2023, with $30.5 billion outstanding. This is up 22 percent on the first quarter.

Fitch expects ESG sukuk to account for 7.5 percent of the total sukuk market over the next five years – double the 3.8 percent in the first half of 2023.

About $3.6 billion of ESG sukuk were issued in the core markets of the GCC, Malaysia and Turkey during the second quarter, up 124 percent compared with Q1.

“With Cop28 to be held in the UAE in 2023, ESG sukuk could receive an awareness and issuance boost,” said Bashar al Natoor, global head of Islamic finance at Fitch. 

“There is a crossover between Islamic finance and ESG principles due to built-in sharia filters. However, Islamic finance needs to go the extra mile to achieve the targeted ESG impact.” 

Fitch rates more than 80 percent of the global hard-currency ESG sukuk, and almost all are considered investment-grade.

ESG sukuk issuers are concentrated in Saudi Arabia, Indonesia, Malaysia and the UAE. ESG development is lagging in other core Islamic finance markets, even though many OIC member states are exposed to climate risk.

In the GCC, 51 percent of all outstanding hard-currency ESG is in sukuk format, with the rest in bonds. The figure is 52 percent in Malaysia and 23 percent in Indonesia.

Fitch added that in other OIC countries, the development of green sukuk is hampered by a shortage of domestic ESG-focused investors and issuers, regulatory constraints and the more complex issuance process.

In January the UAE topped an international ranking for commitment to green finance. A month later, Dubai Islamic Bank unveiled plans for a $1 billion sustainable sukuk.

Cop28 will take place at Expo City, Dubai, from November 30 to December 12.