Sustainable sukuk issuance is on a fast track, fuelled by global decarbonisation efforts and growing investor interest, according to Moody’s Ratings.

While still a small fraction of the overall Islamic finance market, these instruments are gaining traction, particularly in the Middle East and Southeast Asia.

In the first half of 2024, global sustainable sukuk issuance increased 21 per cent year-over-year to $6.8 billion, outpacing the 8pc decline in conventional sustainable bond issuance. However, sustainable sukuk accounted for just 5.4pc of total sukuk issuance compared to conventional sustainable bonds’ 12pc share of overall bond issuance.

“Sustainable sukuk issuance is rising from a low base,” said Abdulla AlHammadi, assistant vice president and analyst at Moody’s. “We expect issuance in 2024 to exceed the $10.6bn logged in 2023, driven by the growing push toward decarbonisation, expanding policy efforts, and robust investor demand.”

The GCC economies, led by the UAE, have been the primary drivers of sustainable sukuk issuance, accounting for 82pc of the total in the first half of 2024.

Decarbonisation plans, renewable energy targets, and the need to reduce reliance on hydrocarbons are driving demand for sustainable sukuk. These instruments not only cater to Islamic investors but also to conventional investors seeking sustainable investment strategies.

Transparency in the use of proceeds is a key appeal of sustainable sukuk, attracting strong international demand. Approximately 74pc of sustainable sukuk have been issued in non-local currencies, indicating global interest.

The International Capital Market Association’s (ICMA) guidance on sustainable sukuk, released in April 2024, provides issuers with clear labelling criteria. Government initiatives, such as sustainable finance taxonomies and incentives, will further boost issuance.

Moody’s expects an increase in sustainable sukuk issuance from both public and private sector entities. Saudi Arabia and Oman are likely to issue their first sustainable sukuk, while more private companies, including financial institutions, will explore these instruments to tap a broader investor base.

 

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