Five years since the first green Sukuk was issued, green and sustainability Sukuk have made great strides, gaining traction across several markets in Southeast Asia, the GCC and Africa. A report from Refinitiv provides insights on the development of this market and views from key industry stakeholders and features a roadmap to facilitate its further development.
- Fulfilling ESG investment mandates was found to be the primary motivation for investing in green and sustainability Sukuk, driving higher demand for these Sukuk with average subscription rates of 4.4x, compared to 3.3x traditional Sukuk.
- The Refinitiv report recommends promoting common regional and international standards, developing capacity with issuers, and expanding the wider ecosystem.
- Green and sustainability Sukuk reached $4.4bn in H1 2022, following a record issuance of $6.1bn in 2021.
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Refinitiv has launched its Green and Sustainability Sukuk Report 2022 – Financing a Sustainable Future – in partnership with the Islamic Finance Council UK (UKIFC) and the Global Ethical Finance Initiative (GEFI).
Green and sustainability Sukuk totaled $4.4bn in H1 2022, following record issuance of $6.1bn in 2021, representing only 4 percent of total Sukuk issuance.
These Sukuk have been mostly issued in international markets, with an annual average of 82 percent issued in foreign currencies since 2018. By comparison, international issuances of traditional Sukuk made up 32 percent of annual issuance, on average.
Funding COVID-19 recovery boosts the market
Even before the COVID-19 pandemic, green and sustainability Sukuk had seen huge growth momentum, more than doubling in 2019. During the pandemic, these Sukuk issuances continued their growth trajectory, and set new records in 2020 and 2021.
The pandemic also shifted the dynamics of the market as sustainability Sukuk issuances surged in parallel with the wider ESG bond market, led by the Islamic Development Bank, which raised $4bn in ring-fenced capital to mitigate the health and economic impacts of the coronavirus outbreak and the recovery from the pandemic in its member states.
Green sukuk made up 26 percent of the value of ESG sukuk issued in 2021, down from 91 percent in 2019. The drop in green sukuk issuance was countered by a surge in sustainability and sustainability-linked sukuk following the COVID-19 outbreak in 2020.
ESG mandates driving demand for green and sustainability sukuk
Investor demand for green and sustainability sukuk has been higher than for traditional sukuk.
Based on a sample of reported subscription results, green and sustainability sukuk racked up orders worth 4.4 times their offerings, on average, compared with 3.3 times for comparably sampled traditional sukuk.
This demand has been driven mainly by investors with ESG-centric investment mandates rather than Shariah compliance-focused investors. According to the Refinitiv Sukuk Survey 2022, the primary motivation for investing in green and sustainability Sukuk is to fulfil ESG investment mandates.
This indicates that the higher demand for these Sukuk has not stemmed from a shortage in Shariah-compliant investments. Rather, it has been driven by non-traditional Sukuk investors who are not restricted by Shariah-compliance mandates.
Growth opportunities lie in sight
Although the market is at a nascent stage, considerable growth opportunities lie in sight. According to estimates from the UKIFC, $30bn to $50bn of capital dedicated to Sustainable Development Goals (SDGs) could be raised through green and sustainability Sukuk by 2025.
To capitalise on rising demand and to keep pace with the broader ESG bond market, the report also proposes a roadmap for green and sustainability Sukuk, based on a three-pronged approach for the further development of the market:
High-Level Working Group aims to develop market
The development of the ESG Sukuk ecosystem is also supported and facilitated by the High-Level Working Group on Green and Sustainable Sukuk (HLWG). In 2021, the UKIFC, along with GEFI, IsDB, HM Treasury, Indonesia’s Ministry of Finance and the London Stock Exchange, launched the HLWG at COP26.
The HLWG is a three-year initiative focused on coordinating international efforts to develop and position green and sustainability Sukuk as a viable financial instrument and on directing investments into green and sustainable projects, with the aim of unlocking potential Islamic investments to facilitate SDGs.
The report is one of the key outcomes of HLWG in its first year.
For more insights and key findings, read the report.
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