The global ESG sukuk market has experienced substantial growth in the first half of 2024, with a remarkable 41% year-on-year increase, reaching an impressive $43 billion, according to Fitch Ratings. This surge underscores a growing commitment to sustainable and Shariah-compliant financial solutions across the globe. As governments and issuers intensify their focus on ethical investing, the market dynamics of ESG sukuk are evolving rapidly.
Current Market Landscape of ESG Sukuk Market
By the end of 2023, the ESG sukuk market had seen a substantial expansion, with the total outstanding ESG sukuk rising 56.8% year-on-year to $36.1 billion. Notably, a significant portion—66.2%—was denominated in hard currencies, primarily US dollars. ESG sukuk, also referred to as green sukuk, are Shariah-compliant financial instruments where the proceeds are allocated exclusively to investments in renewable energy and other environmentally beneficial projects. This reflects an increased alignment of financial practices with sustainability goals.
Expected Market Trends
Despite the impressive growth observed in early 2024, Fitch Ratings anticipates a potential slowdown in ESG sukuk issuance during the third quarter of the year. This deceleration is consistent with the typical seasonal patterns observed in the global bond market, where activity often tapers off before picking up again. However, Fitch forecasts a rebound in the fourth quarter of 2024, driven by several factors including funding diversification efforts, refinancing requirements, and the need to address budget deficits while supporting government development plans.
The medium-term outlook for the ESG sukuk market remains optimistic. This positive projection is underpinned by increasing governmental commitments to sustainability and issuers’ efforts to align with green mandates and diversify their funding sources. Despite these encouraging signs, the adoption of ESG debt in emerging markets is still at an early stage compared to more developed financial markets, indicating significant room for growth.
Impact of Economic Factors
Economic factors such as oil prices and interest rates play a crucial role in shaping the ESG Sukuk market. Fitch Ratings has forecasted a decline in oil prices, with projections of $80 per barrel for 2024 and $70 per barrel for 2025. This anticipated drop in oil prices could influence broader financial market trends, including the ESG sukuk sector. Lower oil prices may impact economic stability in oil-dependent regions and could affect the overall investment climate.
Additionally, expected interest rate cuts in the third quarter of 2024 are likely to stimulate increased debt issuance, including green sukuk, in the latter part of 2024 and early 2025. Lower interest rates generally make borrowing more attractive, potentially boosting the issuance of various types of debt instruments, including those that adhere to environmental, social, and governance criteria.
Credit Quality and Issuance Trends
In the first half of 2024, an impressive 99% of all Fitch-rated green sukuk were classified as investment-grade, highlighting the strong credit quality within this segment. This level of credit quality is consistent with the previous year, where 98.3% of green sukuk maintained investment-grade ratings. The majority of these high-quality issuances were concentrated in the Middle East and Asia, reflecting the regions’ strong engagement with sustainable finance.
During the first six months of 2024, approximately 90% of global green sukuk issued were denominated in hard currencies, totaling $26.1 billion—a 50% increase from the previous year. The Middle East led with 78.4% of these issuances, followed by Asia at 20.3% and Europe at 1.3%. Saudi Arabia emerged as a major player, accounting for 42.7% of Fitch-rated ESG sukuk, with the UAE following closely at 33.8%. In the Gulf Cooperation Council (GCC) countries, ESG sukuk issuance totaled $18.5 billion, representing 43% of the global ESG sukuk market.
Sector-Specific Developments
In key Islamic finance markets, including the GCC countries, Malaysia, Indonesia, Turkey, and Pakistan, ESG sukuk issuance increased by 13% year-on-year, reaching $6.3 billion by mid-2024. This rise reflects a growing preference for Shariah-compliant financial instruments over non-Shariah-compliant ESG bonds. In contrast, the issuance of non-Shariah-compliant ESG bonds in these markets declined by 34% year-on-year to $7.8 billion.
Recent notable issuances include a $600 million green sukuk by Indonesia, $750 million in financial certificates by Emirates Islamic Bank, and $1 billion in sustainable bonds by Al Rajhi Banking and Investment Corp. in Saudi Arabia. Pakistan is also planning to issue domestic green bonds by December 2024, contributing to the growing momentum in the ESG Sukuk market.
Regulatory Support
Regulatory frameworks and initiatives are critical in supporting the growth and development of the ESG Sukuk market. The Qatar Central Bank recently announced its sustainability strategy for the financial sector, setting a precedent for other nations. Saudi Arabia, Malaysia, the UAE, and Oman have also launched various frameworks and initiatives aimed at fostering the development of ESG sukuk and bonds.
These regulatory efforts are designed to enhance transparency, standardize practices, and provide a supportive environment for the growth of ESG financial instruments. By aligning with international best practices and addressing the specific needs of the local markets, these frameworks are expected to further bolster the ESG sukuk market and promote greater adoption.
Looking ahead, the ESG sukuk market is poised for continued growth, driven by increasing commitments to sustainability, favorable economic conditions, and supportive regulatory environments. While a temporary slowdown in issuance is anticipated, the long-term prospects for the market remain strong. As more governments and issuers embrace sustainable finance principles, the ESG sukuk sector is expected to expand further, offering diverse investment opportunities and contributing to the global shift towards ethical and responsible investing.
In summary, the global ESG sukuk market is experiencing robust growth, with significant contributions from key regions such as the Middle East and Asia. Despite short-term fluctuations, the medium- and long-term outlook remains positive, driven by a combination of economic factors, regulatory support, and increasing market demand for sustainable financial solutions.
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