KUALA LUMPUR (May 8): Global environmental, social, and governance (ESG) sukuk is expected to cross US$50 billion (RM237.32 billion) outstanding globally within the next two years, as issuers aim to meet their funding diversification goals and ESG mandates, alongside new regulatory frameworks and government-led sustainability initiatives, according to Fitch Ratings.

In a statement on Tuesday, the rating agency said risks include geopolitical volatilities, surging oil prices that could reduce funding needs in some core sukuk markets, new shariah requirements that could alter sukuk credit risk, and the weakening of the sustainability drive in core markets.

Fitch global head of Islamic finance Bashar Al Natoor said 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.

“There is significant ESG sukuk growth potential, and continuous efforts and increasing confidence will be key to unlocking this,” he said.

Fitch said that in April, the United Arab Emirates' (UAE) Securities and Commodities Authority announced the extension of the waiver of registration fees for green or sustainability-linked sukuk and bonds.

It said Saudi Arabia and Oman have introduced green financing frameworks.

The agency said the International Capital Market Association, the Islamic Development Bank and London Stock Exchange Group also published new guidance on the issuance of ESG sukuk.

It said these initiatives further support ESG ecosystem development.

Fitch said global ESG sukuk rose by 60.3% year-on-year (y-o-y) to reach US$40 billion outstanding at the end of the first quarter of 2024 (1Q2024), for all currencies.

It said ESG sukuk made up 12% of global outstanding sukuk at end-1Q2024 (hard currencies).

Fitch rated about 90% of the global hard-currency ESG sukuk, or US$24.7 billion outstanding, at end-1Q2024 (up 56% y-o-y).

Saudi Arabia has the highest share (45%) of Fitch-rated ESG sukuk, followed by the UAE (33%).

Sukuk has a significant share of ESG debt in core markets.

In the Gulf Cooperation Council countries, ESG sukuk reached US$15.9 billion outstanding, representing 45% of the ESG debt mix, with the balance in bonds. ESG sukuk and bond issuance remain nascent in most Organisation of Islamic Cooperation (OIC) countries.