ESG sukuk market to surpass $50bn this year

January 22, 2025 (MLN): The global Environmental, social, and governance (ESG) Sukuk market is set to surpass $50 billion outstanding in 2025.

It will remain one of the key dollar funding tools among the Islamic finance markets in Saudi Arabia, the UAE, Indonesia, and Malaysia, according to Fitch Ratings.

Sukuk has emerged as a significant ESG funding tool in emerging markets, accounting for approximately 20% of the ESG dollar debt issued in 2024, excluding China, with the remainder being bonds.

Growth drivers include funding diversification goals, enabling regulations, sustainability initiatives, and net-zero targets pursued by sovereigns, banks, corporations, and government-related entities.

ESG sukuk is expected to account for over 15% of global dollar sukuk issuance in the medium term, rising from 12.3% in 2024, Fitch Ratings added.

“The ESG sukuk market has a robust credit profile, with nearly all Fitch-rated ESG sukuk being investment grade,” says Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings”.

“Sukuk is now a key ESG funding tool in emerging markets, with growth expected amidst sustainability initiatives, funding needs, and a favorable funding environment", he added.

However, issuances remain concentrated in a handful of countries”, Bashar Al Natoor further said.

In 2024, global ESG sukuk expanded 23% yoy to $45.2bn outstanding, outpacing global ESG bonds, which were up 16%.

ESG sukuk experienced growth that surpassed the 10% global sukuk growth rate, Fitch Ratings further noted.

Green and sustainable sukuk provide issuers with an opportunity to attract demand from ESG-sensitive international investors in the US, Europe, and Asia, along with sukuk-focused Islamic investors in the GCC.

The ESG debt capital market in GCC countries reached $46.3bn outstanding, with 44% of the total issued as Sukuk.

Nasdaq Dubai is the largest primary listing venue for ESG sukuk, holding 35% of the global outstanding volumes at end-2024.

Risks facing ESG sukuk market growth include sharia-compliance complexities, such as those linked to AAOIFI Sharia Standard No. 62, weakening sustainability drives, geopolitical risks, and oil volatilities.

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