KUALA LUMPUR: Outstanding ESG sukuk (all currencies) grew significantly in 2023, reaching US$36.1 billion globally at year-end, Fitch Ratings said.
The firm expects the ESG sukuk market to cross 7.5 per cent of global outstanding sukuk in the coming years (end-2023: 4.3 per cent).
The expected growth is likely to be supported by issuers' funding diversification plans to satisfy international ESG investors' mandates, and by government sustainability initiatives.
"Almost all Fitch-rated ESG sukuk are investment-grade," said Bashar Al-Natoor, global head of Islamic finance at Fitch.
"In the medium term, we expect ESG sukuk growth to continue; however, this could be slowed by volatile debt capital markets, governments becoming less willing to pursue sustainable targets, and poor availability of qualified assets," he added.
Fitch rated more than 85 per cent of the global hard-currency ESG sukuk.
ESG sukuk issuance (US$10.5 billion) was down 4.6 per cent year-on-year (yoy) in 2023, with issuance from the UAE most common at 41 per cent, followed by Malaysia (28 per cent), Saudi Arabia (21 per cent), and Indonesia (10 per cent).
ESG sukuk make up a sizeable 11.8 per cent of all outstanding Fitch-rated hard-currency sukuk. About three quarters of Fitch-rated ESG sukuk were from the Middle East, followed by Asia (22.9 per cent) and Europe (1.7 per cent).
In the UAE, the Higher Sharia Authority directed Islamic banks and windows to create separate sustainable businesses and activities within the existing business lines that include sustainable sukuk issuances and financing.
A sustainable finance framework was unveiled in Oman, with plans to issue green, social and sustainable sukuk and bonds.
In Malaysia, the tax deduction given on the issuance cost of sustainable sukuk has been extended to 2027 from 2023.
These initiatives could help boost ESG debt issuance in the near term.
Fitch rates ESG sukuk using its Sukuk Rating Criteria.
The credit rating of ESG sukuk is driven solely by the originator's rating and not the use of proceeds, similar to other sukuk or bonds.