Green Sukuk issuance has increased globally in recent years as demand for low-carbon investments has increased. Investors issued $517 billion in green bonds in 2021, a 50 percent increase over 2020 and a 343 percent increase over 2019.
Post the COVID-19 pandemic, investors have recently become more focused on ethical investments.
Sukuks are ethical by definition: they cannot be used to finance illegal activities and are designed to avoid high levels of leverage and speculation.
Islamic finance professionals believe the green sukuk market is set for take-off as demand builds, but global expansion will require greater standardization and regulation, new research shows by IslamicMarkets.com, a leading platform that provides access to expert knowledge and financial opportunities.
The study found that 83 percent of Islamic finance professionals expect demand for green sukuk – Shariah compliant investments in renewable energy and other environmental assets – to increase over the next three years. On the other hand, 25 percent expect a dramatic increase in demand for green sukuk.
Gulf countries decarbonization efforts create market opportunities
Green sukuks showed promising early growth ahead of the pandemic, when they first appeared on the market. Since 2017, Indonesia, Malaysia, Saudi Arabia and the UAE have issued $9 billion worth of green sukuk.
Total issuance of green sukuk has amounted to USD$15 billion since 2017, but the Islamic Finance Council UK (UKIFC) is forecasting the market could expand by another $30 billion to $50 billion by 2025.
Even in the height of COVID-19 in 2020, some $2.56 billion of green sukuks were issued globally.
While issuances dipped to $1.57 billion in 2021, the decarbonization strategies of Gulf countries are set to drive opportunities around funding sustainable projects.
The research pointed out that the GCC can unlock $2 trillion in cumulative GDP contribution.
This will provide over one million jobs in addition to bringing in foreign direct investment in sustainable industries through green finance.
According to the study around 87 percent of Islamic finance professionals agree that GCC’s focus on sustainable projects provides a major boost to the green sukuk market.
For example, Saudi Arabia plans to generate 50 percent of its electricity from clean sources by 2030, while the UAE aims to increase the contribution of clean energy in the total energy mix to 50 percent by 2050.
Bahrain has already achieved 95 percent of the national renewable energy target of 250 megawatts by 2025.
The GCC will be one of the leading regions for renewables with countries having set out national visions and net zero commitments that will see economies favor the green sukuk market.
In September 2020, the Saudi Electricity Company issued a $1.3 billion green sukuk which despite its size was heavily oversubscribed.
The Saudi-based Islamic Development Bank also raised $2.5 billion through green and sustainability targeted sukuk issuances in March 2021.
The next couple of years will be a particularly exciting and important time for green sukuks.
With UN Climate Change Conferences – COP27 and COP28 – both taking place in the Arab world, support for sustainability projects will sharply increase in the region and now is an excellent time for investors to harness the opportunities available.