Visi Money
TLDR:
Islamic finance and sustainable finance are showing potential synergies in the Middle East and beyond. The regions are developing foundations for a robust sustainable bond market that caters to local needs, with a focus on green bonds and sukuk issuance. Islamic finance principles of profit-sharing and asset-backing overlap with sustainable finance objectives. Efforts are being made to align taxonomies and principles in Islamic countries, driving sustainable sukuk issuance. The volume of sustainable bond issuance is expected to continue to increase, driven by core Islamic finance countries, with a focus on climate transition and water projects.
Article:
S&P Global Ratings sees foundations developing in the Middle East and beyond for a robust sustainable bond market that caters to local needs. Islamic finance can contribute funding for climate transition strategies and sustainable development in the Middle East and Asia. Heightened exposure to climate change, as well as government initiatives and company pledges, could fuel sustainable, mostly green, bond and sukuk issuances in the Middle East. Such issuance should continue to increase in the coming years, supported primarily by government initiatives. The United Arab Emirates (UAE) and Saudi Arabia will likely remain the leaders of the region’s sustainable bond and sukuk market. This is particularly the case through green bonds and sukuk, which S&P Global Ratings believes are likely to continue driving regional issuance over the next three to five years. Meanwhile, across the core countries of Islamic finance, including those of the Gulf Cooperation Council (GCC), Malaysia, Indonesia, and Turkey, efforts are underway to create the foundations for a more vibrant sustainable Islamic finance industry. Global harmonisation of Islamic finance principles could smooth the process for issuing sustainable sukuk to fund climate change mitigation measures in core Islamic finance markets. S&P Global Ratings considers the principles behind Islamic finance to overlap with many of the objectives of sustainable finance and therefore more of a boon than an impediment to sustainable issuance.
Commonalities:
- Sustainable finance related to green, social, sustainability, and sustainability-linked bonds
- Islamic finance complies with Sharia principles, including profit-and-loss sharing and asset-backing
Some regulators across the core Islamic finance countries have released local sustainability standards and taxonomies to provide clarity for potential issuers and investors. Principles for sustainable Islamic finance align with sustainable principles and frameworks available worldwide. Sustainable sukuk issuance is increasing, with a focus on green sukuk and the use of proceeds to purchase sustainable assets.
The volume of sustainable bond issuance is expected to increase over the next two years, driven by core Islamic finance countries. Middle East economies are moving towards sustainable bond issuance to meet national sustainability targets. The region’s reliance on the hydrocarbons sector poses challenges, but efforts are being made to deploy renewable energy to meet climate commitments.
Efforts to align taxonomies and harmonise interpretations in Islamic finance could make sustainable sukuk issuance more straightforward. Robust oversight of proceeds raised from sustainable sukuk may strengthen the integrity of the market. The funding of investments to meet sustainability targets could support demand for sustainable issuance in the coming years. However, regulatory changes and macroeconomic factors could influence growth.
