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ESG Investing / Treasury & Capital Markets
ESG sukuk shines amid Islamic finance world
More education, clear frameworks needed, but plenty of room for market to grow
Darryl Yu 29 May 2024

Environmental, social and governance (ESG) sukuk issuance – driven by a convergence of traditional Islamic finance values with modern ESG mandates catering to investors increasingly aware of their actions’ impact on the environment and society – is growing from strength-to-strength, becoming a key element of the overall Islamic finance market

Global ESG sukuk issuance rose by 60.3% year on year to reach US$40 billion outstanding at the end of Q1 2024, according to data from Fitch Ratings, which predicts that issuance will cross the US$50 billion mark in the next two years. This gives some indication of the robust appetite among Shariah-compliant investors for sustainable and ethically aligned financial instruments.

Malaysia, the world’s largest sukuk market, has been a natural location for some key ESG sukuk deals, which have emanated from a range of issuers varying from financial institutions to leading corporates. Some important deals of the past year include PointZone’s 555-million-ringgit (US$117.86 million) sustainability sukuk, the first healthcare sustainability sukuk in the Association of Southeast Asian Nations (Asean) region, and RP Hydro’s 975-million-ringgit Asean green SRI (socially responsible investing) sukuk, the proceeds of which will be used to support a mini-hydro project in Malaysia.  

The momentum for sustainable financing in Malaysia is not letting up anytime soon, with S&P Global Ratings believing that Islamic banks in the country will play a role in advancing inclusive financing in lockstep with Bank Negara Malaysia’s value-based intermediation (VBI) principals.

As of the end-2022, VBI financing made up about 11% of total financing in Malaysia. Of this, 79%, according to S&P, was related to social financing largely directed towards small businesses and affordable housing.  

In Indonesia, corporate ESG sukuk issuance isn’t as prevalent, but the government is leading by example, being a frequent issuer in both domestic and international sukuk markets. Last November, it issued a US$1.5 billion sukuk that included a 10-year green tranche. 

Over in the Middle East, the momentum for ESG sukuk is growing following a number of policy shifts. In the United Arab Emirates, for example, its Securities and Commodities Authority announced an extension to its registration fee waiver for green or sustainability-linked sukuk. The emirate has been the location for several important ESG sukuk deals, including First Abu Dhabi Bank’s 1.3-billion-dirham (US$353.9 million) green sukuk, the first dirham-denominated green sukuk in the market.

Other notable policy adjustments come from Saudi Arabia and Oman, where both countries earlier this year revealed green or sustainable financing frameworks. In the case of Oman, the sultanate has also published a sukuk and bond regulation with detailed disclosure requirements for future ESG issuances.

More education and the adoption of clear frameworks are needed to give issuers and investors more confidence to participate in the ESG sukuk market, and there is a lot of room for the market to grow. As of Q1 2024, ESG sukuk, Fitch Ratings finds, was only around 12% of global outstanding sukuk issuance.

The overall sukuk market, despite ongoing global economic uncertainties and geopolitical tensions, has continued to expand, and it is estimated by the Business Research Company that it will grow at a compound annual growth rate of 18.8% from US$904.5 billion in 2023 to US$2160.55 billion in 2028.

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