What do you perceive to be the main challenges to the development of the ESG Sukuk market?
There are current inherent challenges within the sukuk market, applicable to ESG and non-ESG sukuk, relating to the current AAOIFI legislation being a significant issue. In particular, AAOIFI standard 59 prohibits certain types of sukuk from being issued and this has impacted the market. Two specific challenges we see in relation to the development of the ESG Sukuk market are:
- Awareness, understanding and technical knowledge: to issue a green or sustainability sukuk, issuers must develop a framework, using global best practice approaches (such as the Green Bond Principles). This will enable issuers to measure, report and authenticate issuance. The skill sets and processes required to do this are new to sukuk issuers and are additional to the existing Shariah compliance requirements.
- Strategic will: if all other factors (cost, etc.) remain neutral, do issuers genuinely want to do this? Structuring sukuk is more resource-intensive than structuring conventional bonds, so going a step further to structure a green or sustainability sukuk is perhaps, for many, a step too far. Governments and regulators therefore have an important role to stimulate the market and engage stakeholders.
How do you evaluate the current state of market awareness of ESG sukuk?
At present there is limited understanding of ESG sukuk in the market. The work being led by the UKIFC, such as the Global Islamic Finance & SDGs Taskforce, is playing an important role in mobilising stakeholders to raise awareness and inspire practical action. The HLWG launched by the Taskforce at COP26 and showcased during the UN General Assembly has shone an important light on the role ESG sukuk can play in helping countries meet their Nationally Determined Contributions by attracting a wider investor base as the demand for environmentally conscious investments grow. For the first time, this is giving Islamic finance a formal and consistent voice at the global COP platform.
Market pioneers such as IsDB, the Indonesian government and Majid Al Futtaim are playing an important role by issuing benchmark-size, global green and sustainable sukuk. Such issuances offer best-practical examples, at scale, that can help to promote green and sustainability sukuk as viable options for other issuers. In Malaysia, the SC has been issuing useful SRI market frameworks, and from the GCC, CIBAFI have been actively promoting SDG-alignment and sustainability amongst member Islamic banks.
How are you facilitating the policy development and standardisation of streamlining ESG sukuk globally?
In 2021, UNDP Indonesia commissioned the UKIFC to put together a report showcasing Indonesia’s pioneering sovereign green sukuk. The report acts as a toolkit for helping others globally who are considering the issuance of an ESG sukuk.
After COP26, the HLWG, chaired by London Stock Exchange, is facilitating policy development and the standardisation and streamlining of ESG sukuk issuance globally. The working group is bringing together key stakeholders to identify challenges for ESG sukuk and to present practical solutions.
In addition, the Taskforce has already issued a guidance note to assist Islamic banks in reporting under the UN Principles for Responsible Banking, presented ESG sukuk at multiple global events, conducted a global retail survey exploring consumer awareness and appetite for sustainable products, issued a Pakistan country-level sustainability report, and designed a comprehensive structured ESG capacity building programme.
In which markets do you see expansion and growth opportunities for ESG sukuk? Which sectors do you expect will drive issuance growth?
Based on our aforementioned work, the UKIFC estimate an additional $30 billion to $50 billion of capital towards the SDGs can be raised by 2025 through green and sustainability sukuk. There is considerable opportunity for ESG sukuk across the OIC countries, as well as the UK. Indonesia, Pakistan and Malaysia will continue to be important markets and Central Asian markets could become more active in coming years.
Additionally, with COP27 taking place in Egypt this year and COP28 hosted in the UAE in 2023, it is likely some of the large GCC energy, construction and aviation companies will tap into the ESG sukuk market, which can help facilitate their transition to Net Zero and their development work within the clean green energy space.