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Strong upsurge in UAE green sukuk ahead of Cop28

Investors at the Abu Dhabi Securities Exchange. Reuters
Investors at the Abu Dhabi Securities Exchange. The exchange has launched a benchmark to rate companies on their ESG performance
  • Green sukuk up 41% in Q3
  • Worth $6.4bn in UAE
  • Global value $33.3bn

The UAE has witnessed a strong push for sukuk to finance green projects, according to data released by Fitch Ratings.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest, and also may finance businesses involved in activities not allowed under Sharia law.

The ratings agency said the pipeline for green sukuk – or environmental, social and governance (ESG) sukuk – in the UAE grew by 41 percent compared with the previous quarter to reach $6.4 billion at the end of September.

Fitch’s findings were announced ahead of the Gulf state hosting the Cop28 climate summit, which begins on Thursday.

This growth across all currencies – more than 90 percent in US dollars and 5.5 percent in UAE dirham – was driven by banks and corporates. 

During the quarter, First Abu Dhabi Bank issued the first UAE dirham green sukuk, valued at $500 million, while Abu Dhabi Islamic Bank and DP World also issued green sukuk worth $500 million and $1.5 billion respectively.

ESG or green sukuk proceeds are used to finance environmentally and socially sustainable projects such as renewable energy.

Global outstanding ESG sukuk reached $33.3 billion in the third quarter, up 66 percent year on year.

About 81 percent of ESG sukuk issuance across all countries came from the UAE ($1.8 billion), up 85 percent compared with the previous quarter. 

Fitch said it expects outstanding ESG sukuk in the UAE to reach up to 20 percent of total sukuk issuance in the medium term as the government seeks to achieve net zero emissions by 2050.

“ESG sukuk in the UAE has increased over the past few years, making up over 12 percent of total outstanding sukuk in Q3, marking a period of prominent growth,” said Bashar Al-Natoor, global head of Islamic finance at Fitch. 

“Sizeable funding is needed to meet the UAE’s energy transition targets, part of which can be met through ESG sukuk, and sovereign ESG sukuk could give an additional boost.”

He added: “Although ESG sukuk issuance is still nascent in the UAE, Cop28 has put ESG sukuk and Islamic finance under the spotlight, which could support industry growth and development.”

Growing regional shares

The UAE holds 19.2 percent of the global pipeline of ESG sukuk, up from less than 15 percent three months ago. It has the largest share in the GCC at 52 percent, followed by Saudi Arabia (40.6 percent). 

Islamic banking in the UAE has a 28 percent market share. Such institutions are key issuers, arrangers and investors of sukuk. While there are no sovereign ESG sukuk, this could change, added Al-Natoor.

ESG sukuk issuances are concentrated in six of the 57 Organisation of Islamic Cooperation countries. Its absence in the remaining Muslim-majority countries stems from the developing nature of debt capital markets and gaps in ESG regulations, said Fitch.

Separately, Abu Dhabi Securities Exchange announced on Tuesday the launch of its ESG benchmark index. 

The FTSE ADX ESG Screened index is designed to provide investors with a transparent and tradable green benchmark that ranks a company based on its ESG scores.

It will initially include 24 companies that are measured across themes including emissions, environmental product innovation and human rights.

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