ESG Sukuk Rises to $33.3bln; Fitch Expects Further Growth

EKISPEDIA.COM - Environmental, social and corporate governance (ESG) sukuk rose significantly in the third quarter of the year and is expected to grow further to cross nearly 8% of global outstanding sukuk in the next few years, according to Fitch Ratings.

Outstanding ESG sukuk went up by 66% year-on-year to $33.3 billion globally as of the end of the third quarter, as governments rolled out sustainability initiatives and issuers diversify funding to appeal to Shariah and ESG-sensitive investors.

ESG sukuk is forecast to cross 7.5% of global outstanding sukuk by 2028, up from 4.1% in the third quarter of the year.

However, Fitch noted that ESG sukuk has not reached its full potential amid challenges, including lack of green assets of projects, extra costs and complexities linked to both Shariah-compliance and meeting ESG goals, as well as longer time-to-market.

ESG sukuk is also not immune from debt capital market (DCM) volatilities.

“DCMs and ESG themes are lacking development in many Muslim-majority countries in general, with gaps in the necessary regulations, infrastructure and incentives,” said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch.

“Sustainability and climate-related issues have a lower government priority in many markets. However, some – like Saudi Arabia, the UAE, Indonesia and Malaysia – have more developed DCMs and a gradually deepening pool of ESG sukuk and bonds,” said Al-Natoor.

More than half (51%) of all outstanding hard-currency ESG debt in the GCC is in sukuk format, with the rest in bonds.

Saudi Arabia accounts for the highest share (48.1%) of Fitch-rated ESG sukuk, followed by the UAE (30.5%), Indonesia (19.6%) and Turkey (1.8%).

According to PwC’s analysis last year, asset managers globally are expected to increase their ESG-related assets under management to $33.9 trillion by 2026, up from $18.4 trillion in 2021.

ESG assets could constitute 21.5% of total global AuM in less than five years, it said.

Source: zawya