Global ESG Sukuk Market Shows Strong Growth in Early 2024; Q3 slowdown expected: Fitch
RIYADH: The global environmental, social, and governance sukuk market saw significant growth in the first half of 2024 – up 41 percent year-on-year to $43 billion, according to Fitch.
Data from the credit rating agency shows that this growth underlines the growing interest and dedication of governments and issuers towards sustainable finance.
By the end of 2023, outstanding ESG sukuk were up 56.8 percent year-on-year to reach $36.1 billion globally, with 66.2 percent in hard currency, primarily the US dollar.
The instrument, also known as a green sukuk, is a Shariah-compliant financial instrument in which issuers use the proceeds solely to finance investments in renewable energy or other environmental assets.
Market dynamics and forecasting
Despite strong growth in the first half of this year, Fitch Ratings expects a slowdown in ESG sukuk issuance in the third quarter of 2024. This expected decline is consistent with the typical seasonality observed in the global bond environment.
However, the market is expected to regain momentum in the fourth quarter of 2024.
“The medium-term growth prospects for ESG debt issuance are promising,” Fitch said.
This optimism is underpinned by increasing government commitments to sustainability and issuers' efforts to meet green mandates and diversify their funding sources.
However, the adoption of ESG debt in emerging markets remains at an early stage compared to developed markets.
Fitch Ratings also predicts lower oil prices, with forecasts of $80 per barrel in 2024 and $70 per barrel in 2025.
In addition, interest rate cuts expected in the third quarter of 2024 may contribute to debt issuance, including green sukuk, in the last three months of 2024 and the first quarter of 2025.
Credit ratings and ongoing trends
In the first half of this year, 99 percent of all Fitch-rated green sukuk were investment-grade, demonstrating strong credit quality in this segment.
In 2023, 98.3 percent of them were investment-grade, reflecting strong credit quality with a significant concentration in the Middle East and Asia.
In the first six months of 2024, Fitch rates nearly 90 percent of global green sukuk issued in hard currency, totaling $26.1 billion, up 50 percent year-on-year. Most of these originated from the Middle East, with 78.4 percent, followed by Asia, with 20.3 percent, and Europe, with 1.3 percent.
Saudi Arabia led ESG sukuk issuance, accounting for 42.7 percent of Fitch-rated bonds in the region, followed by the UAE at 33.8 percent.
Green bonds in Gulf Cooperation Council countries total $18.5 billion, representing 43 percent of the global ESG sukuk market.
By the end of 2023, despite a 4.6 percent decrease in new issuance to $10.5 billion, the UAE led with 41 percent of this total, followed by Malaysia, Saudi Arabia and Indonesia.
Sector-specific developments and recent releases
In key Islamic finance markets such as the GCC countries, Malaysia, Indonesia, Turkey and Pakistan, ESG sukuk issuance rose 13 percent year-on-year to $6.3 billion at the end of the first half of 2024.
In contrast, issuance of non-Shariah-compliant ESG bonds in these markets declined by 34 percent year-on-year to $7.8 billion, highlighting a shift in preference to sukuk.
Notable recent issuances include a $600 million green sukuk by Indonesia, a $750 million financial certificate by Emirates Islamic Bank and a $1 billion sustainable bond by Saudi Arabia's Al Rajhi Banking and Investment Corporation.
Pakistan also plans to issue domestic green bonds by December 2024.
Regulatory developments
Regulatory frameworks and initiatives are playing an important role in supporting the growth of ESG sukuk.
The Qatar Central Bank recently announced its sustainability strategy for the financial sector, and Saudi Arabia, Malaysia, the UAE and Oman have launched various frameworks and initiatives to promote the development of ESG sukuk and bonds.
