As sustainable finance has grown, Islamic finance has also expanded notably, gaining prominence in global financial markets. Both share core ethics, responsibility and transparency principles, particularly in social and responsible investing (SRI). This overlap is evident in the fixed income market through the issuance of sustainable bonds and sustainable sukuk.
Sukuk are Islamic financial certificates that provide returns through profit-sharing or rental agreements, complying with Shariah law by avoiding interest payments. Sustainable sukuk, similar to sustainable bonds, funds projects that meet environmental, social and governance (ESG) criteria.
Sustainable sukuk — also known as ESG sukuk or SRI sukuk — can be further broken into the projects it aims to finance, namely green sukuk, social sukuk and sustainability sukuk.
The first sustainable sukuk was issued in 2017, when Malaysia’s Tadau Energy issued a green sukuk to raise RM250 million to finance the construction of large-scale photovoltaic power plants in Kudat, Sabah. The sukuk was issued under Malaysia’s SRI sukuk framework, endorsed by the Shariah Advisory Council.
Since then, the market has grown tremendously, seeing its seventh consecutive record year since inception, according to the London Stock Exchange Group’s (LSEG) Islamic Finance Report 2023, released May 21. According to LSEG, ESG sukuk issuances reached US$13.4 billion ($18.09 billion) in 2023, up 42% from 2022. There has also been a rebound in green sukuk issuance during the year, making up 58.1% of the total.
In 2023, ESG sukuk comprised 6.2% of the total sukuk issued, which amounted to US$214.9 billion — 9% higher y-o-y. Notably, sukuk issuances slowed in 2022 due to multiple interest rate hikes and volatility in global capital markets.
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Providing clarity
Maybank Investment Banking Group’s head of sustainable finance, Valerie Ng, says the growth of the sustainable sukuk market can be attributed to the development of guidelines and taxonomies over the years. These aim to provide more clarity and guidance for market participants to identify activities that qualify as sustainable investments and mitigate greenwashing risks.
She adds that regulators in Singapore, Malaysia, Thailand, Indonesia and Vietnam have proactively led the development of sustainable finance-related taxonomies to guide market players further. For example, in Malaysia, the tax deduction on the issuance cost of sustainable sukuk has been extended to 2027 from 2023.
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Akmal Hassan, managing director at AIIMAN Asset Management, agrees with Ng, noting that sustainable sukuk have benefited from the growing focus on ESG integration and sustainable investments worldwide. This shift has provided clearer guidance for both issuers and investors.
At the COP28 climate conference in Dubai last year, the International Capital Market Association (ICMA), the Islamic Development Bank (IsDB) and the LSEG came together to develop guidance for market participants. They targeted potential green and sustainability sukuk issuers and investors who are less familiar with the structure of these instruments.
The guidance, released on April 29, aims to provide key market participants with practical information on how sukuk may carry labels such as green, social or sustainability. It is aligned with the ICMA Principles through examples, case studies and best practices, thus helping develop the sustainable sukuk market.
Akmal says there is room for improvement in fostering broader adoption in the market. He believes continued efforts by stakeholders to promote transparency, education and market development will be key to unlocking the full potential of sustainable sukuk as a financing tool for ESG development.
Agreeing, Ng adds: “There are still gaps in awareness in the region. Wherever possible, we play our part in creating awareness.”
Broader range of issuers
In the ESG sukuk market, corporate issuers have become increasingly active, accounting for 43.2% of cumulative value issued by the end of 2023. Meanwhile, the Indonesian and Malaysian governments remain the only sovereign issuers.
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In terms of market share, the top 10 ESG sukuk issuers in 2023 are the Indonesian government (23.1%), Islamic Development Bank (12.5%), Malaysian government (8.8%), Saudi Electricity Company (6.2%), Dubai Islamic Bank (4.3%), Masjid Al Futtaim Properties (4.2%), DP World (3.7%), Amanat Lebuhraya Rakyat (2.9%), Al Rajhi Bank (2.5%) and Infracorp (2.2%).
With the momentum towards sustainable investing, Ng believes corporate issuers are set to continue increasing their issuances. She says traditional sukuk issuers recognise that by issuing sustainable sukuk, they can diversify their funding sources and broaden their investor base, translating into better distribution and pricing outcomes.
“We believe this trend will continue given the clear market signals from the demand side, which has committed to net zero. We are seeing active sustainable issuances from energy, utilities and real estate sectors,” says Ng.
Based on current dynamics and emerging trends, Akmal expects the sustainable sukuk market to experience further growth in the next 12 to 24 months. He also believes a broader range of issuers would enter the sustainable sukuk market, including sovereigns and corporate entities.
He adds that sovereign issuers, in particular, may play a significant role in driving the market forward, given their ability to set policy agendas and mobilise large-scale financing for sustainable development projects.
“Improved regulatory support as regulatory frameworks and guidelines for sustainable finance will likely evolve, providing further clarity and incentives for issuers to engage in sustainable sukuk issuance,” says Akmal. “Governments and regulatory bodies may introduce new initiatives or incentives to encourage the issuance of sustainable sukuk, including tax incentives or subsidies for green or social projects.”
