Fitch Ratings-Dubai: There is a visible push for ESG sukuk in the UAE as COP28 approaches, says Fitch Ratings in a new dashboard. Fitch expects outstanding ESG sukuk in the UAE to reach 17.5%–20% of total sukuk issuance in the medium term. The government is seeking to achieve its sustainability targets, declaring 2023 as the Year of Sustainability, and aims to achieve net zero emissions by 2050. However, ESG sukuk are not isolated from macro volatilities and must also fulfil the sharia-compliance requirements.

“ESG sukuk in the UAE has increased over the past few years, making up over 12% of total outstanding sukuk in 3Q23, marking a period of prominent growth”, said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “Sizeable funding is needed to meet the UAE’s energy transition targets, part of which can be met through ESG sukuk, and sovereign ESG sukuk could give an additional boost.”

Outstanding ESG sukuk in the UAE expanded by 41% qoq to reach USD6.4 billion at end-3Q23 (all currencies), driven by banks and corporates. In 3Q23, about 80.6% of ESG sukuk issuance across all countries came from the UAE (USD1.8 billion; up 85% qoq). The sukuk format accounted for a significant share of the hard-currency ESG debt mix in the UAE (45%) and the GCC (44%), with the remainder in bond format.

The UAE holds 19.2% of the global outstanding ESG sukuk market (2Q23: 14.9%), and the largest share of ESG sukuk in the GCC (3Q23: 52%), followed by Saudi Arabia (40.6%). Islamic banking in the UAE has over a 28% market share, with UAE institutions also being key sukuk issuers, arrangers, and investors. Whilst there are no sovereign ESG sukuk, this could change.

Fitch rates more than 91% of all ESG hard-currency sukuk, all of which is investment-grade.