Fitch Ratings reports that the UAE holds a 19% share of the global sustainable bonds market. The agency believes COP28 will be instrumental in raising awareness about sustainability issues in the region, steering investments towards environmentally responsible practices.
Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings, is optimistic about COP28’s potential to boost sustainable bond issuance. He notes the substantial growth of ESG bonds in the UAE, reaching $6.4bn by Q3 2023, a 41% increase from the previous quarter.
Al Natoor underscores the UAE’s leading role in global sustainable bond issuance, contributing $1.8B (80% of the global total) in Q3 2023.
UAE’s Leading Role in Sustainability Drives Islamic Finance Growth
He emphasizes the UAE’s pivotal position in advancing sustainability initiatives and notes the positive impact on Islamic finance, which constituted 29% of total banking sector funding by the end of 2022. UAE institutions are recognized as key players in Sukuk (Islamic bonds) issuance.
Al Natoor highlights that all sustainable issuances in the UAE assessed by Fitch fall under the “investment grade” category, with a diverse distribution across financial institutions, companies, infrastructure projects, and other sectors.
Al Natoor pointed out that there haven’t been any governmental Sukuk issuances within this framework so far. He anticipates a significant qualitative leap in sustainable issuances in the UAE once the government steps into this domain.
Al Natoor clarified that funding sustainable projects by the government doesn’t necessarily require Sukuk or bond issuance; alternative methods like self-funding are also viable. However, considering the UAE’s focus on diversifying funding sources, direct governmental sustainable issuances may emerge in the future, according to Arabian Business.
Concerning green issuances, Al Natoor mentioned, “Globally, green issuances make up about 45 per cent of the total ESG issuances during the third quarter of 2023.” He explained that green Sukuk is a subset of ESG issuances, covering green, blue (water-related), social, or sustainable projects, with the classification based on the project’s intended impact.
Globally Established ESG Sukuk Soars to $33.3B, Led by Strong Annual Growth
Al Natoor highlighted the notable growth of globally established ESG Sukuk, which expanded by 66 per cent annually to reach $33.3B in the final quarter of 2023. Importantly, 67.2 per cent of these Sukuk are denominated in hard currency, primarily US dollars.
He emphasized that a key motivation for issuing hard currency ESG Sukuk is to attract environmentally conscious foreign investors. Despite a substantial rise in sustainability-focused investments and growing awareness of sustainability, governance, and social issues in the region, this segment has yet to mature into a broad-based market.
Concerning the makeup of sustainable sukuk issuances in major Islamic finance jurisdictions globally, Al Natoor noted that sukuk constitutes around 30 per cent of the market, while bonds make up 70 per cent.
However, in sustainable issuances, the proportion of sukuk is higher, reaching 51 per cent in Gulf countries, in contrast to 49 per cent for bonds. This suggests that sustainable or green issuances through sukuk are more prevalent compared to their representation in bonds.
Al Natoor highlighted that, according to Fitch, approximately 13 per cent of the total sukuk assessed are categorised as sustainable. Notably, Fitch evaluates over 80 per cent of global ESG issuances in hard currency.
He acknowledged that countries like the UAE prioritize sustainability and have the capacity to drive sustainable initiatives, while others, particularly in Africa, may desire sustainable projects but face financial constraints.
Two primary procedural challenges in global sustainable sukuk issuances were outlined by Al Natoor:
Legislative Frameworks: The necessity for well-defined legislative frameworks that clearly articulate the nature of sustainable issuances and projects, especially for private sector initiatives not tied to government programs.
Country-Specific Priorities: Challenges faced by certain countries that do not prioritize sustainability due to more pressing needs for their development.
ESG sukuk represent 4.1 per cent of outstanding global sukuk by the end of the third quarter of 2023. Fitch Agency projects this share to exceed 7.5 per cent by 2028, driven by governmental sustainability initiatives and the pursuit of diversified funding sources aligning with environmental, social, and governance (ESG).
In the primary markets of the Gulf Cooperation Council (GCC) countries, Malaysia, and Turkey, $2.3B worth of ESG sukuk (4.3 per cent of total sukuk) were issued, marking a 36 per cent decrease on a quarterly basis.
This aligns with the general slowdown in the sukuk and bond markets in the third quarter of 2023 due to the quieter summer period and higher oil prices reducing sovereign financing needs for some GCC countries.
Fitch categorizes more than 83 per cent of global sukuk in hard currency related to environmental, social, and governance, totaling $18.9B.
Notably, 98 per cent of these sukuk are investment grade, representing the highest rating (higher than BBB-). Saudi Arabia holds the highest share of established ESG sukuk issuances (48.1 per cent) classified by Fitch, followed by the UAE (30.5 per cent), Indonesia (19.6 per cent), and Turkey (1.8 per cent).
