KUALA LUMPUR (Aug 9): Environmental, social, and corporate governance (ESG) sukuk are likely to continue being a key issuance theme in the second half of 2023 (2H2023) and beyond amid government initiatives in a number of Organisation of Islamic Cooperation (OIC) countries that promote sustainability and economic diversification along with rising issuer and investor demand and awareness, said Fitch Ratings.
In a statement on Tuesday (Aug 8), the rating agency said ESG sukuk maintained strong growth in the second quarter of 2023 with US$30.5 billion (RM140 billion) outstanding; up 22% quarter-on-quarter.
The firm expects ESG sukuk share to exceed 7.5% of global outstanding sukuk over the next five years (1H2023: 3.8%).
Fitch global head of Islamic finance Bashar Al-Natoor said with the Conference of the Parties of the United Nations Framework Convention on Climate Change, more commonly referred to as COP28, to be held in the United Arab Emirates (UAE) in 2023, ESG sukuk could receive an awareness and issuance boost.
He said there is a crossover between Islamic finance and ESG principles due to built-in shariah filters.
“However, Islamic finance needs to go the extra mile to achieve the targeted ESG impact.
“This is because unlike bonds, ESG sukuk need to be structured in a shariah-compliant manner as well as in a manner that meets green or sustainability mandates,” said Al-Natoor.
Fitch rates more than 80% of the global hard-currency ESG sukuk, with almost all issuance investment-grade.
ESG sukuk issuers are concentrated in Saudi Arabia, Indonesia, Malaysia and UAE.
Sukuk take a significant share of ESG debt in core Islamic finance markets as Islamic banks are key sukuk investors.
In the Gulf Cooperation Council, 51% of all outstanding hard-currency ESG is in sukuk format, 52% in Malaysia and 23% in Indonesia, with the rest in bonds.
The UAE issued regulations exempting companies wishing to list their green or sustainability sukuk or bonds in a local market from registration fees for 2023.
ESG sukuk development faces challenges in most OIC countries, including shortage of domestic ESG-focused investors and issuers, regulatory constraints, a more complex issuance process, and pricing advantage uncertainty.