Select OIC markets dominate sustainable Islamic issuances
A sizeable chunk of sustainable Islamic issuances is concentrated across select Organization of Islamic Cooperation countries (OIC), S&P Global Ratings’ global head of Islamic Finance told Salaam Gateway.
“Most of the sustainable Islamic issuances are concentrated in Saudi Arabia, the UAE, Türkiye and Malaysia. These countries dominate issuances due to the size of their economies and local Islamic finance industries. We expect to see more issuances in these countries and in other countries too, as issuers want to attract investors with sustainability mandates,” said Mohamed Damak, managing director and global head of Islamic Finance at S&P Global Ratings.
Islamic finance itself is typically concentrated across economies that are reliant on hydrocarbons, and harbour greater exposure to energy transition risks. This potentially creates higher demand for sustainable sukuk to help execute the transition of these countries, according to a S&P Global Ratings research report.
Islamic finance builds on the tenet that promotes the establishment of a sustainable, just, and socially responsible financial system. This ideology echoes with sustainable finance’s focus on permeating environmental, social and governance concerns into investment decision-making. Sustainable Islamic financing draws on the strengths and advantages of both verticals.
National sustainability targets ‘key’ driver regionally
Several factors are propelling the growth of sustainable issuances, including top-tier support. As part of their sustainability push, GCC governments have announced net-zero targets in recent times - the UAE looks to achieve net-zero emissions by 2050, Bahrain and Saudi Arabia a decade later. Oman, too, is aiming to reach net-zero carbon emissions by mid-century.
Major companies are aligning their strategies and sustainability goals with those of their state, also giving a tacit push to sustainable financing.
The sustainable sukuk market is, thus, faring well across the GCC. Slightly more than half (51%) of all sustainable issuances across the Gulf region have been in the form of sukuks. Saudi Arabia holds the highest share of established ESG sukuk issuances (48.1%) classified by Fitch Ratings, followed by the UAE (30.5%), Indonesia (19.6%), and Türkiye (1.8%).
“While we note the ramp up in sustainable issuance in the Middle East, its contribution is still marginal globally and domestically. Additionally, in the GCC, large domestic players in highly emitting sectors, such as oil and gas, metals and mining, power, chemicals, and agribusiness, are aligning their strategies with national sustainability targets. This could spur sustainable issuance, but we believe much will depend on the pace of decarbonization strategies at corporates in these sectors,” said S&P’s Damak.
Diverse standards to impede growth
Despite growing issuances and rising awareness of sustainability, governance, and social issues in the region, this segment is yet to mature into a broad-based market. Regulators have released local sustainability standards and taxonomies to offer additional information for stakeholders.
“We have seen regulators moving with different approaches when it comes to the development of the Islamic sustainable finance industry. In Malaysia, for example, the approach was top-down (i.e. the regulators come with a roadmap and different stakeholders execute it) and similar to the overall story of the development of the industry. In the Gulf, the approach is rather bottom up (the development is coming from the issuers) and driven primarily by the players themselves with some support from the regulators,” adds Damak.
Najmul Haque Kawsar, senior consultant at DinarStandard, meanwhile, believes local sustainability standards could pose challenges, especially when they vary from one jurisdiction to another.
“For Islamic financial institutions operating in multiple countries, such as Malaysian institutions in GCC regions or vice versa, this can lead to complexities in compliance. The industry currently struggles with a piecemeal, fragmented approach and often relies on unreliable and dated data, making policy making decisions challenging. This situation underscores the urgent need for a unified vision and a holistic Shariah-compliant taxonomy for sustainable and green finance.”
The need for harmonization or standardization of measurement and practices is evident, Kawsar adds, to ensure smooth operation across different jurisdictions.
