ESG-linked Sukuk on growth trajectory, says Fitch

August 4, 2022 (MLN): Environmental, social and governance (ESG)-linked Sukuk is likely to persist as a key issuance theme in core Islamic finance jurisdictions amid government initiatives that promote sustainability and economic diversification, along with rising investor demand and awareness, Fitch Ratings in its latest report said.

The rating agency rates more than 80% of the hard-currency ESG-linked Sukuk market; while 10.4% of all Fitch-rated Sukuk is ESG-linked, the segment’s growth potential remains high.

“Commonalities exist between Islamic finance and ESG principles due to built-in sharia filters, but there are differences,” said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch.

“Islamic finance does not relate only to the use of proceeds, but Islamic products also have to be structured in a way that complies with sharia. The global ESG-linked Sukuk market has flourished in recent years, and we expect growth to continue in the medium term.”

The report noted that outstanding ESG-linked Sukuk expanded by 11.2% QoQ in 2Q22, reaching $19.3 billion. About $4.3bn of ESG-linked Sukuk was issued in 1H22.

Fitch said that key challenges in core Islamic finance markets include a complex issuance process, regulatory constraints as well as a shortage of domestic ESG-focused investors and issuers. Sukuk must also comply with sharia (Islamic rulings).

ESG-related issues, such as water scarcity, climate change and governance reform, are key issues in a number of Organisation of Islamic Cooperation countries, the report said, adding that five out of six countries in the Gulf Cooperation Council region rank in the top 10 globally when it comes to extreme temperature and drought.

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