Global ESG sukuk issuance set to rise through 2025

October 30, 2024 (MLN): Global ESG sukuk issuance is expected to continue rising over 4Q24-2025, driven by investor demand, funding and diversification goals, and government sustainability initiatives in some Muslim-majority countries, Fitch Ratings says.

The expected US Federal Reserve rate cuts to 4.5% at end-2024 and 3.5% at end-2025 could further improve financing conditions and support issuances.

"ESG sukuk issuance is on a promising upward trajectory, with sukuk becoming a key ESG funding tool in emerging markets (EM). We expect ESG sukuk to exceed USD50 billion by 2025, with favourable financing conditions anticipated and sound credit, with 99% of Fitch-rated ESG sukuk being investment-grade," said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings.

"However, challenges remain, include a weakening sustainability drive, sharia-compliance complexities, geopolitical risks and oil volatilities," he added.

Sukuk were 17.2% of all ESG debt issued in EM (excluding China) in 9M24 (US dollar only). Also, 40% of all ESG bonds and sukuk in EM (outside China) were issued by the core Islamic finance markets – a share that we expect to rise.

Demand from ESG-sensitive international investors could help plug the funding gap for longer tenors. A recent example is the Indonesian sovereign sukuk (BBB).

The 30-year green sukuk tranche attracted 90% investors from Europe, the US and Asia (excluding Malaysia and Indonesia), with more than 85% coming from non-bank investors.

Middle Eastern and Malaysian investors contributed only 9% to the 30-year green sukuk tranche, but over 50% for the five-year and 10-year non-green sukuk tranches.

ESG-sukuk were only 5% of global sukuk outstanding, but had expanded 34% yoy to USD44.6 billion outstanding at end-3Q24 (all currencies), outpacing the global sukuk growth (8.7%).

Among the GCC countries, ESG debt reached USD46.3 billion outstanding, with 42% in sukuk. Fitch rates over 90% of all ESG-sukuk (hard currency).

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