ESG-linked sukuk issuance treads an upward path

Over $4.3b of ESG-linked sukuk was issued globally in Q2 2022.

The growth potential of environmental, social, and governance (ESG)-linked sukuk remains high, and issuance will likely persist in core Islamic-finance markets, according to a report by Fitch Ratings.

Outstanding ESG-linked sukuk expanded by 11.2% in Q2 from Q1, for a total of $19.3b globally. In the first six months of 2022 alone, $4.3b of ESG-linked sukuk was issued.

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“Commonalities exist between Islamic finance and ESG principles due to built-in sharia filters, but there are differences,” said Bashar Al-Natoor, global head of Islamic Finance at Fitch. “Islamic finance does not relate only to the use of proceeds, but Islamic products also have to be structured in a way that complies with sharia.”
 
The global ESG-linked sukuk growth will continue in the medium term, Al-Natoor added.

However, despite the large potential, challenges still remain even in core Islamic-finance markets. These include navigating the complex issuance process; regulatory constraints; and a shortage of domestic ESG-focused investors and issuers.