Home / GFH Insights / Greek sukuk market is an untapped opportunity set to flourish
Article originally published on 27 April 2022
Article updated on 16 July 2023
What is a green sukuk?
A green sukuk is a sustainability-linked financial product whose terms and structures comply with Shari’ah. It aims to create returns similar to those of conventional green bonds. A green sukuk is issued to finance assets that benefit the environment, such as renewable energy projects.
There are several types of green sukuk, including sovereign (issued by a government) and corporate (issued by a private sector organisation). Unlike conventional bonds, sukuks cannot be used to finance impermissible activities and they are structured to avoid high degrees of leverage and speculation.
Like green bonds, interest has grown steadily in green sukuks in recent years as demand for low-carbon investments and those with a positive environmental impact has increased. In 2022, $8.5 billion of green and sustainable bonds and sukuks were issued in the GCC market alone, compared with $605 million worth of deals in 2021.
With Saudi Arabia accounting for more than 50% of total volumes, the GCC region bucked the global trend, which saw sales of new green and sustainable bonds and sukuk dip by 14% to $739 billion during 2022, due to rising interest rates and economic uncertainty.
While the fledgling green sukuk market is yet to realise its full potential, it has the capacity to mirror the skyrocketing green bond sector, where issuances have grown 5,300% in the last decade, according to the World Bank. In fact, the UKIFC estimates green and sustainability sukuks could raise between $30 billion and $50 billion of capital towards SDGs by 2025.
“In 2022, $8.5 billion of green and sustainable bonds and sukuks were issued in the GCC market alone, compared with $605 million worth of deals in 2021.”
Sukuks in the age of ESG
With the ever-increasingly visible impacts of climate change, most investors have become more focused on ethical investments. Sukuks by their nature are ethical: they cannot be used to finance impermissible activities and they are structured to avoid high degrees of leverage and speculation. Shari’ah compliancy prohibits speculation and demands high levels of transparency, meaning the outcome of transactions must not be entirely dependent on chance and all rights and obligations relating to an investment must be clear.
Moody’s predicted earlier this year that sukuk demand would outpace conventional funding in 2023, driven by strong economies in key markets like the GCC amid higher oil prices. Global sukuk issuance this year is forecast to hit between $170 billion and $175 billion, and green sukuks could comprise a significant portion of the total.
The green sukuk market got off to a strong start in 2023, building on 2022’s performance, which included a $900 million green sukuk issued by Infracorp on the London Stock Exchange – the first-ever green sukuk issued by a Bahraini entity – for which the GFH Financial Group was the Sole Lead Manager. In March 2023, the Islamic Development Bank raised $2 billion while two months later, UAE-based Majid Al Futtaim sold a $500 million green sukuk.
As more sukuk markets come into play – for instance in Africa – the sustainability sukuk sector will continue its growth trajectory despite global economic headwinds. Between 2017 and H2 2022, some $12 billion of green sukuks were issued globally, including $2.56 billion during COVID. Further decarbonisation and the acceleration of climate action will drive more opportunities in the GCC region.
For example, Saudi Arabia plans to generate 50% 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% by 2050. Bahrain has already achieved 95% of the national renewable energy target of 250 megawatts by 2025.
A report from Strategy & Middle East, called Middle East green finance: A $2 trillion opportunity, highlights the incentives for governments to invest in sustainability related projects. It claims the GCC can unlock $2 trillion in cumulative GDP contribution and more than one million jobs in addition to foreign direct investment in sustainable industries through green finance.
“[The report] claims the GCC can unlock $2 trillion in cumulative GDP contribution and more than one million jobs in addition to foreign direct investment in sustainable industries through green finance.”
Cultivating green sukuks
Education is the key to unlocking the potential of green sukuks. It is important that potential investors are made aware of the significant opportunities available around investing in environmental projects. Major infrastructure projects can take many years to plan, build and become operational. Investments in materials, logistics and technologies that support climate change goals are long-term and must be treated so.
Nevertheless, green sukuks generate strong returns and represent low-risk investments. Sectors such as renewable energy are poised for massive growth over the next three decades as the world embarks on an ambitious campaign of decarbonisation. Renewables are set to account for almost 95% of the increase in global power capacity through 2026, with the clean energy market forecasted to reach almost $2 trillion by 2030.
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 favour the green sukuk market. Saudi Arabia provides a good example. The Kingdom’s Public Investment Fund (PIF) in 2022 listed a $3 billon green bond on the London Stock Exchange. The transaction was more than eight times oversubscribed, according to Saudi Press Agency, with orders exceeding $24 billion. PIF expects to invest more than $10 billion by 2026 in eligible green projects, including renewable energy.
This year and the next will be a particularly exciting and important time for green sukuks. With COP28 taking place in the GCC, support for sustainability projects will sharply increase in the region and now is an excellent time for investors to harness the opportunities available. S&P said there is a “strong pipeline” of sustainable bonds coming from the Middle East and green sukuks are set to be a central theme at COP28.
The road ahead
The Islamic financial market has a vital part to play in helping the world achieve net zero and green sukuks are a key mechanism that enable investors to fulfill their ESG responsibilities.
More than that, green sukuks are emerging as some of the most promising and reliable investments available. Despite having longer cycles, they are closely in line with the global trend for building sustainability projects. Globally, green bond issuances are likely to run into the trillions over the next decade. And capitalising on the opportunity today will see investors reap the rewards in the future.
For green sukuks to really take off globally, there needs to be a greater degree of standardisation in the market, including in terms of regulations. Where green finance in general is concerned, we are seeing positive signs.
According to Strategy & Middle East, which is part of PwC, $130 trillion dollars, around 40% of the world’s financial assets, is now committed by financial institutions to align with the Paris Agreement’s climate goals. As a result, all green finance products will become increasingly standardised as the market agrees on common principles for green finance, it predicts.
There also needs to be greater collaboration on a government level to ensure all countries engaged in the Islamic finance market are aligned with one another, as well as their regulatory bodies. With greater alignment and transparency comes trust, which is a key criterion of investing.
Finally, governments should also look at providing incentives. The Malaysian government, a leader in the green sukuk market, does this by paying the costs of third-party checks for issuers of SRI green bonds.
There is a long way to go. But undeniably, the seeds are sown and green sukuks are emerging. Investors now have a chance to not only build robust portfolios that can weather future economic cycles, but perhaps more importantly, to secure a better future for the next generation.
The content on our site is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our site. Although we make reasonable efforts to update the information on our site, we make no representations, warranties or guarantees, whether express or implied, that the content on our site is accurate, complete or up to date.