Cop28 to shed more light on benefits of sustainability-linked sukuk

Total volume of green Islamic bonds increased by about 50 per cent in the first half of 2023, S&P Global says

Climate finance is a key pillar of the Cop28 summit. EPA

The issuance of sustainability-linked Islamic bonds, or sukuk, is expanding rapidly, with the coming Cop28 climate summit in the UAE set to highlight more details on the benefits they provide, a report has said.

The total volume of sustainability-linked sukuk increased by about 50 per cent annually in the first half of 2023, S&P Global ratings said in a report on Wednesday.

“We expect to see higher volumes as issuers meet investor demands and core Islamic finance countries seek to reduce their carbon footprints,” it said.

“The upcoming Cop28 in the UAE is expected to shed more light on the opportunities offered by Islamic finance and sukuk to finance initiatives related to the climate transition.”

The market for green and sustainable bonds and sukuk is booming, specifically in GCC economies, as governments in the oil-rich economic bloc push to meet their net-zero commitments.

Total GCC green and sustainable bond and sukuk issuances last year reached a record $8.5 billion from 15 deals, compared with $605 million from six deals in 2021, amid increased participation from banks and government-related entities, data from Bloomberg’s Capital Markets League Tables showed.

The momentum has continued this year.

In May, Majid Al Futtaim Holding, one of Dubai's biggest private sector companies and the Middle East's largest mall operator, raised $500 million through a green sukuk, its fourth in about four years.

The same month, Aldar Investment Properties, the real estate management unit of the emirate’s largest listed developer, Aldar Properties, also raised $500 million through its debut green sukuk to fund acquisitions and meet its sustainability goals.

Dubai Islamic Bank, the UAE’s biggest Sharia-compliant lender by assets, also raised $1 billion from its second sustainable sukuk earlier this year.

In February, Saudi Arabia’s Public Investment Fund raised $5.5 billion through the sale of a green bond, as the kingdom’s sovereign wealth continues to finance or refinance its green investments.

The green bond deal was the PIF’s second in five months after it raised $3 billion in a debut green bond in October last year.

Earlier this month, the Abu Dhabi Global Market also launched a regulatory framework for sustainable finance.

The regulations include rules on sustainability-orientated investment funds, managed portfolios and bonds as well as requirements for environmental, social and governance disclosures by companies based in the financial centre.

“The lack of available, accessible, affordable finance is putting the world’s climate goals and sustainable development at risk and addressing this issue is one of the top priorities of the Cop28 Presidency,” said Dr Sultan Al Jaber, Minister of Industry and Advanced Technology and President-designate of Cop28.

“To make transformational progress, we need to shift gears in mobilising private finance.”

Speaking at the Net-Zero Delivery summit in London in May, Majid Al Suwaidi, director general and special representative of the UAE for the Cop28 presidency, also outlined an agenda to trigger new finance for addressing climate change at the global gathering in November.

Mr Al Suwaidi said the four paths drawn up by the UAE presidency would address the need for trillions of dollars to respond to the threat to the planet.

“First we need to fundamentally reform the international financial institutions,” he said.

“Second is the need to better leverage private sector finance. Third we need to establish well-functioning carbon markets. Fourth we need to unlock finance for innovation.”

Many core Islamic finance countries are enacting strategies to achieve net-zero greenhouse gas emissions, which could imply future growth for green sukuk issuance, S&P Global said in the report.

“We expect to see much more activity in this space as issuers attract global investors' attention and regulators start offering incentives,” it said.

It cited the example of the UAE's Securities and Commodities Authority, which announced in June an exemption from registration fees for companies that list their sustainability-linked bonds or sukuk in the local market during 2023.

“The social aspect of Islamic finance is less visible, but is also relevant as the economic impact of various political and geopolitical shocks continues to hit populations in some countries,” the report said.

“The Islamic Development Bank and the International Committee for Red Cross are reportedly looking at the possibility of using humanitarian sukuk to help deal with crises in their member countries.

“Overall, we expect the contribution of sustainability-linked sukuk to continue increasing over the next few years.”

The report also found that total sukuk issuance in the first half of the year was down by more than 17 per cent to $83.2 billion.

However, issuance of sukuk denominated in foreign currency was up about 9 per cent in the first six months, driven by Saudi Arabia and a few new issuers.

“We anticipate further issuance this year, since some Gulf issuers are already prepared, just waiting for the best launch window,” the report said.

S&P now forecasts that global sukuk issuance will total $160 billion to $170 billion this year, higher than its initial estimate of $150 billion.