KUALA LUMPUR: ESG sukuk is expected to cross US$50 billion outstanding globally within the next two years, Fitch Ratings said.
This will be buoyed by issuers aiming to meet their funding diversification goals and ESG mandates, alongside new regulatory frameworks and government-led sustainability initiatives.
"Risks include geopolitical volatilities, surging oil prices that could reduce funding needs in some core sukuk markets, new sharia requirements that could alter sukuk credit risk, and the weakening of the sustainability drive in core markets," the firm said today.
FAlmost 99 per cent 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," said Bashar Al Natoor, global head of Islamic finance at Fitch.
"There is significant ESG sukuk growth potential, and continuous efforts and increasing confidence will be key to unlocking this," he added.
In April, the United Arab Emirates' Securities and Commodities Authority announced the extension of the waiver of registration fees for green or sustainability-linked sukuk and bonds.
Saudi Arabia and Oman have introduced green financing frameworks.
The International Capital Market Association, the Islamic Development Bank and London Stock Exchange Group also published new guidance on the issuance of ESG sukuk.
These initiatives further support ESG ecosystem development Fitch noted.
Global ESG sukuk rose by 60.3 per cent year-on-year (yoy) to reach US$40 billion outstanding at the end of first quarter 2024 (all currencies).
ESG sukuk made up 12 per cent of global outstanding sukuk at end-1Q24 (hard currencies).
Fitch rated about 90 per cent of the global hard-currency ESG sukuk, or US$24.7 billion outstanding, at end-1Q24 (up 56 per cent yoy).
Saudi Arabia has the highest share (45 per cent) of Fitch-rated ESG sukuk, followed by the UAE (33 per cent).
Sukuk has significant share of ESG debt in core markets.
In the GCC 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 remains nascent in most Organisation of Islamic Cooperation countries.