Global ESG sukuk issuance is expected to keep its growth driven by investor demand, funding and diversification goals and government sustainability initiatives in some Muslim-majority countries, according to Fitch Ratings.
US Federal Reserve rate cuts, projected expected at 4.5% by end-2024 and 3.5% by end-2025, could further improve financing conditions and support issuances, said Fitch’s report titled ‘Global ESG Sukuk Outlook Dashboard: 3Q24’.
“ESG sukuk issuance is on a promising upward trajectory, with sukuk becoming an important ESG funding tool in emerging markets (EM). We expect ESG sukuk to exceed $50bn by 2025, with favourable financing conditions anticipated and sound credit, with 99% of Fitch-rated ESG sukuk being investment-grade,” said Fitch Ratings global head of Islamic Finance Bashar Al Natoor. “However, challenges remain, including a weakening sustainability drive, shariah-compliance complexities, geopolitical risks and oil volatilities,” he said.
Sukuk accounted for 17.2% of all ESG debt issued in EM (excluding China) in first nine months of 2024 (USD-denominated only). Also, 40% of all ESG bonds and sukuk in EM (outside China) were issued by the core Islamic finance markets – a share that Fitch expects will rise.
Demand from ESG-sensitive international investors could help plug the funding gap for longer tenors. For instance, Indonesia’s sovereign sukuk (‘BBB’) included a 30-year green sukuk tranche that drew 90% of its investors from Europe, the US and Asia (excluding Malaysia and Indonesia), with over 85% non-bank investors. Middle Eastern and Malaysian investors contributed only 9% to the 30-year green sukuk tranche, but over 50% to the five-year and 10-year non-green sukuk tranches.
While ESG-sukuk represented only 5% of global sukuk outstanding, the instrument grew 34% y-o-y to $44.6bn outstanding at end-3Q2024 (all currencies), outpacing global sukuk growth (8.7%). In the GCC, ESG debt reached $46.3bn outstanding, with sukuk making up 42% of the total. M