Fitch Ratings has affirmed the critical role that COP28 will play in raising awareness of sustainability issues in the region and steering investment and financial requirements towards a more environmentally responsible approach.

Bashar Al-Natoor, Global Head of Islamic Finance and Managing Director at Fitch Ratings, expressed optimism about COP28’s potential to accelerate the issuance of sustainable bonds in the near future.

“Given that 51 percent of sustainable issuances in the Gulf region take the form of bonds, there is a strong expectation that they will benefit significantly from the heightened awareness being cultivated by COP28,” he remarked.

In statements to the Emirates News Agency (WAM), Al-Natoor highlighted the substantial growth of ESG (environmental, social, and governance) bonds in the UAE, reaching $6.4 billion by the third quarter of 2023, representing a 41 percent increase from the preceding quarter’s $4.5 billion.

He emphasised that ESG bonds in the UAE constitute over 19 percent of t
he global ESG bond market and account for more than 30 percent of such bonds classified by Fitch Ratings.

Al-Natoor continued, “The UAE emerged as the leading issuer of sustainable bonds globally during the third quarter of 2023, contributing $1.8 billion or approximately 80 percent of the global total, which stood at $2.3 billion.”

He underscored the UAE’s pivotal position in advancing sustainability initiatives and governmental policies, particularly in the current year. He noted that these initiatives have varying timelines, with some yielding immediate results and others bearing long-term benefits.

Al-Natoor emphasised that Islamic finance in the UAE is poised to gain from COP28, citing that Islamic financing accounted for around 29 percent of the total banking sector funding by the end of 2022. UAE institutions are recognised as leading issuers and investors in Sukuk (Islamic bonds) and play a crucial role in arranging Sukuk issuances.

He indicated that all sustainable issuances assessed by Fitch in
the UAE fall under the “investment grade” category, with approximately 35 percent attributable to financial institutions, 25 percent to companies and infrastructure projects, and 38 percent to other companies and sectors.

Al-Natoor noted that there have been no governmental Sukuk issuances within this framework to date. He expressed anticipation of a significant qualitative leap in sustainable issuances in the UAE once the government enters this space.

He clarified that government funding of sustainable projects does not necessarily require Sukuk or bond issuance; alternative funding methods, such as self-funding, are also viable. However, given the UAE’s focus on diversifying funding sources, direct governmental sustainable issuances may emerge in the future.

Regarding green issuances, Al-Natoor stated, “Globally, green issuances constitute about 45 percent of the total ESG issuances during the third quarter of 2023.”

He explained that green Sukuk represents a branch of ESG issuances encompassing green,
blue (water-related), social, or sustainable issuances. The classification of Sukuk is determined by the project’s intended impact. If the project aims to achieve environmental goals or contribute to emissions reduction in a specific field, it is categorised as green. If the project’s goals are related to water conservation or improvement, it is termed blue. And if the project targets specific social objectives, it is labelled social, as exemplified by the Sukuk issued by the Islamic Development Bank during the COVID period to alleviate the pandemic’s socioeconomic impact.

He shed light on the significant growth of globally established ESG sukuk, which expanded by 66 percent annually to reach $33.3 billion in the final quarter of 2023. Notably, 67.2 percent of these sukuk are denominated in hard currency, primarily US dollars. Al-Natoor emphasised that a key motivation for issuing hard currency ESG sukuk is attracting environmentally conscious foreign investors.

Despite a substantial rise in sustainability-
focused investments and a growing awareness of sustainability, governance, and social issues in the region, this segment is yet to mature into a broad-based market.

Regarding the composition of sustainable sukuk issuances in major Islamic finance jurisdictions worldwide, Al-Natoor stated that sukuk accounts for approximately 30 percent of the market, compared to 70 percent for bonds. However, in sustainable issuances, the proportion of sukuk is higher, reaching 51 percent in Gulf countries compared to 49 percent for bonds. This indicates that sustainable or green issuances through sukuk are more prevalent than their proportion in bonds.

Al-Natoor further highlighted that out of the total sukuk assessed by Fitch, approximately 13 percent are categorised as sustainable. Notably, Fitch evaluates over 80 percent of global ESG issuances in hard currency.

He acknowledged that some countries, such as the UAE, prioritise sustainability and have the capacity to drive sustainable initiatives. In contrast, other coun
tries, particularly in Africa, may have the desire to pursue sustainable projects but their financial capabilities necessitate addressing other priorities.

Al-Natoor outlined two key procedural challenges in global sustainable sukuk issuances:

Legislative Frameworks: The need for well-defined legislative frameworks that clearly articulate the nature of sustainable issuances and projects, particularly for private sector initiatives not tied to government programmes.

Country-Specific Priorities: Challenges faced by certain countries that do not prioritise sustainability due to more pressing needs for their development.

ESG sukuk represent 4.1 percent of outstanding global sukuk by the end of the third quarter of 2023. Fitch Agency projects this share to exceed 7.5 percent by 2028, driven by governmental sustainability initiatives and the pursuit of diversified funding sources that align with environmental, social, and governance (ESG) requirements and standards.

In the primary markets of the Gulf Cooperati
on Council (GCC) countries, Malaysia, and Turkiye, $2.3 billion worth of ESG sukuk (4.3 percent of total sukuk) were issued, marking a 36 percent decrease on a quarterly basis. This aligns with the general slowdown in the sukuk and bond markets in the third quarter of 2023 due to the quieter summer period and higher oil prices reducing the sovereign financing needs for some GCC countries.

Fitch categorises over 83 percent of global sukuk in hard currency related to environmental, social, and governance, totalling $18.9 billion. Notably, 98 percent of these sukuk are investment grade, which represents the highest rating (higher than BBB-).

Saudi Arabia holds the highest share of established ESG sukuk issuances (48.1 percent) classified by Fitch, followed by the United Arab Emirates (30.5 percent), Indonesia (19.6 percent), and Turkiye (1.8 percent).

Source: Emirates News Agency (WAM)