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Banks, corporates drive ESG sukuk in UAE ahead of COP28

The UAE government is seeking to achieve its sustainability targets

Driven by a noticeable push for ESG (sukuk as COP28 approaches, outstanding ESG sukuk in the UAE is expected to reach 17.5 per cent–20 per cent of total sukuk issuance in the medium term, Fitch Ratings said.

The UAE government is seeking to achieve its sustainability targets, declaring 2023 as the Year of Sustainability, and aims to achieve net zero emissions by 2050. However, ESG (environmental, social, and governance) sukuk is not isolated from macro volatilities and must also fulfill the sharia-compliance requirements.

“ESG sukuk in the UAE has increased over the past few years, making up over 12 per cent of total outstanding sukuk in 3Q23, marking a period of prominent growth,” said Bashar A Natoor, global head of Islamic Finance at Fitch. “Sizeable funding is needed to meet the UAE’s energy transition targets, part of which can be met through ESG sukuk, and sovereign ESG sukuk could give an additional boost.”

Outstanding ESG sukuk in the UAE expanded by 41 per cent quarter on quarter to reach $6.4 billion at end-Q3 2023 (all currencies), driven by banks and corporates. In Q3 2023, about 80.6 per cent of ESG sukuk issuance across all countries came from the UAE ($1.8 billion; up 85 per cent qoq). The sukuk format accounted for a significant share of the hard-currency ESG debt mix in the UAE (45 per cent) and the GCC (44 per cent)), with the remainder in bond format.

The UAE holds 19.2 per cent of the global outstanding ESG sukuk market (the figure was 14.9 per cent in Q2 2023), and the largest share of ESG sukuk in the GCC (52 per cent in Q3), followed by Saudi Arabia (40.6 per cent)). Islamic banking in the UAE has over a 28 per cent market share, with UAE institutions also being key sukuk issuers, arrangers, and investors. Whilst there are no sovereign ESG sukuk, this could change.

Globally, outstanding ESG sukuk rose by 66 per cent year-on-year to reach $33.3 billion globally as of end-3Q23, and Fitch Ratings expects further growth over the medium term. The segment’s growth is driven primarily by governments’ sustainability initiatives and issuers’ funding diversification goals towards both the sharia and ESG-sensitive investors. ESG sukuk is expected to cross 7.5 per cent of global outstanding sukuk by 2028 (3Q23: 4.1 per cent). However, the segment is not immune from debt capital market (DCM) volatilities.