– Saudi Arabia sees recent landmark issuance of ESG-related sukuk
– Key jurisdictions register growth in sustainable instruments in 2021
– ESG-linked sukuk projected to grow in 2022 even as broader sukuk growth moderates
Earlier this month Saudi Arabia’s Riyad Bank closed a $750m “sustainability” sukuk (Islamic bond), the latest in a wave of high-profile issuance across different regions. ESG-related sukuk are set to see rapid growth in 2022, even as the broader sukuk market softens.
Part of its ESG programme, Riyad Bank’s sustainability sukuk was an Additional Tier 1 sukuk, the first of its kind globally. It was 4.3 times oversubscribed, with demand peaking at $3.2bn.
The launch followed on the heels of Saudi National Bank’s $750m debut sustainability sukuk in January, the proceeds from which will go towards projects that meet the criteria of the bank’s Sustainable Finance Framework, among them renewable energy facilities.
One of last year’s major developments on this front was Jeddah-based Islamic Development Bank’s issuance of a $2.5bn sustainability sukuk in March.
Other core sukuk markets have also seen significant sustainability or green sukuk activity recently.
For example, Turkey's Kuveyt Türk Katilim Bankasi – which is majority-owned by Kuwait Finance House – launched $350m in sustainability sukuk in September last year; the issuance was 12 times oversubscribed, with an order book of $4bn.
South-east Asia has also been a hotbed of activity.
Indonesia issued the world’s first sovereign green sukuk in 2018, and the country has sustained a leading role in the segment ever since.
In June 2020 the government issued a $2.5bn green sukuk – its third venture into the sustainable debt market – and followed this in June 2021 with a fourth, which raised $3bn.
In terms of corporate green sukuk, neighbouring Malaysia has been a pioneer.
Renewable energy group Tadau Energy issued the first-ever green sukuk in 2017, raising $59m to finance a solar power plant in the country. Since then, Malaysia has been the world’s most diversified market for the instrument, although not its largest.
In April last year Malaysia also launched the world’s first US dollar sustainability sukuk issued by a sovereign, which raised $800m and was 6.4 times oversubscribed.
These and other issuances helped global ESG-related sukuk post significant growth in 2021, with volume expanding by 17.2% to $15bn, according to Fitch Ratings.
In terms of the broader sukuk market, last year was also a robust one, with Fitch calculating that key jurisdictions – namely, the GCC, Malaysia, Indonesia, Turkey and Pakistan – issued a combined $230.2bn.
Nevertheless, Standard & Poor's (S&P) Global Ratings recently forecast that global sukuk issuance is likely to moderate in 2022.
S&P attributed this to three main factors: lower and more expensive global and regional liquidity; the complexity of issuing sukuk; and reduced financing needs in core markets, such as the GCC. This last factor is principally due to the recent rebound in oil prices.
Despite this, many analysts anticipate that the market for ESG-focused sukuk will continue to grow.
At the risk of oversimplification, green sukuk bear the same relationship to green bonds as traditional sukuk do to conventional bonds. In this sense, the overall health of the green bond market, rather than the broader sukuk market, is indicative of how green sukuk may fare going forwards.
The outlook is promising. The green bond market reached $517.4bn in 2021, according to Climate Bonds Market Intelligence. Nearly double last year’s total of $270bn, this is the highest figure since market inception and marks the 10th record year in a row.
As 2022 progresses, investors’ ballooning demand for ESG-compliant finance is expected to drive continued appetite for green and sustainability-focused sukuk.
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