KUALA LUMPUR: Fitch Ratings expects environmental, social and governance (ESG) sukuk issuance to keep rising through the fourth quarter of 2024 and into 2025, potentially surpassing US$50 billion in outstanding value.
This will bevdriven by strong investor demand, financing, diversification objectives and sustainability efforts in some Muslim-majority nations.
Fitch also expects the US Federal Reserve to further lower rates to 4.5 per cent by the end of 2024 and down to 3.5 per cent by the end of 2025.
This could enhance financing conditions and support debt issuance, including ESG sukuk.
"Sukuk are becoming a key ESG funding tool in emerging markets (EM outside China), reaching 17.2 per cent of all ESG debt issued in nine months of 2024 (9M24) (US dollar only).
"In addition, 40 per cent of all ESG bonds and sukuk in EM were issued by the core Islamic finance markets of the United Arab Emirates (UAE), Saudi Arabia, Qatar, Turkiye and Indonesia.
"We expect this share to rise. Risks include a weakening sustainability drive, sukuk shariah-compliance complexities, geopolitical risks and oil volatilities," it said.
Fitch said ESG sukuk could help issuers diversify funding and tap ESG-sensitive international investors.
"These investors could also plug the funding gap for tenors longer than seven years, because Islamic investors (primarily Islamic banks) generally prefer sukuk with maturities of three to seven years.
"Additionally, longer tenors could also help increase investor participation from asset managers, insurance companies and pension funds," it added.
Fitch cited Indonesia's July 2024 US dollar sovereign sukuk (rated BBB) as a notable example.
It said the 30-year green sukuk tranche drew 90 per cent of its investors from Europe, the US,l and Asia (excluding Malaysia and Indonesia).
In comparison, the regions made up 41 per cent of investors in the five-year non-green sukuk tranche and 31 per cent in the 10-year non-green tranche.
"Middle Eastern and Malaysian investors contributed only nine per cent to the 30-year green sukuk tranche, but were over half for the other two tenors," it added.