The Environmental, Social, and Governance sukuk market has achieved a significant milestone, with its outstanding value exceeding $50 billion by the end of 2024. This growth underscores the increasing integration of ethical and sustainable principles within Islamic finance.
Data from the London Stock Exchange Group indicates that ESG sukuk issuances reached $15.2 billion in 2024, marking a 14.5% annual growth. This represents the eighth consecutive year of record issuances since the market’s inception in 2017. The sustained expansion reflects a growing appetite among investors and issuers for financial instruments that align with responsible investment principles.
Malaysia, Indonesia, and Saudi Arabia have emerged as the leading markets in this sector, collectively accounting for 67% of the global ESG sukuk market value. These countries have been proactive in promoting sustainable finance, implementing policies, and frameworks that encourage the issuance of green and sustainability-linked sukuk.
In Malaysia, the government’s commitment to sustainable development is evident through initiatives such as the Sustainable and Responsible Investment Sukuk framework, which provides guidelines and incentives for issuers. This framework has facilitated numerous green sukuk projects, particularly in renewable energy and infrastructure sectors.
Indonesia has also made strides in this arena, becoming the first country to issue a sovereign green sukuk in 2018. The proceeds have been allocated to various environmentally friendly projects, including sustainable transportation and energy efficiency programs. The success of these issuances has positioned Indonesia as a model for other nations seeking to tap into Islamic green finance.
Saudi Arabia’s Vision 2030 plan emphasizes diversification of the economy and development of the financial sector, with sustainability as a core component. The Kingdom has seen a surge in ESG sukuk issuances, driven by both government entities and private corporations aiming to align with global sustainability standards.
The global push towards sustainability has prompted financial institutions and corporations to explore ESG-compliant instruments. Sukuk, being Sharia-compliant bonds, offer a unique opportunity to combine ethical finance with sustainability objectives. The alignment of ESG principles with the core values of Islamic finance, such as social justice and environmental stewardship, has further propelled the growth of this market.
Investors are increasingly drawn to ESG sukuk due to their potential for positive social and environmental impact, alongside financial returns. The integration of ESG factors into investment decisions is becoming a mainstream practice, driven by a combination of regulatory developments, stakeholder expectations, and a growing body of evidence linking ESG performance to financial resilience.
However, the ESG sukuk market faces challenges, including the need for standardized frameworks and reporting practices. The lack of uniformity can lead to inconsistencies in how ESG criteria are applied and reported, potentially causing confusion among investors. Efforts are underway by various international bodies and standard-setting organizations to harmonize guidelines and enhance transparency in the market.
Another area of focus is the development of a diverse range of ESG sukuk products to cater to varying investor preferences. This includes the creation of instruments targeting specific sustainability themes, such as climate action, social housing, and education. Diversification within the ESG sukuk market can attract a broader investor base and address different impact objectives.
The role of regulatory support cannot be overstated in fostering the growth of the ESG sukuk market. Governments and regulatory authorities in key markets have introduced policies and incentives to encourage issuances. These measures include tax incentives, grants, and the establishment of dedicated platforms for listing and trading ESG sukuk.
For instance, the Securities Commission Malaysia offers tax deductions on issuance costs for SRI sukuk, making it more attractive for issuers to enter the market. Similarly, Indonesia provides incentives for green sukuk issuances, including a streamlined approval process and support in project identification.
The involvement of multilateral development banks and international organizations has also been instrumental in supporting the ESG sukuk market. These institutions often provide technical assistance, capacity building, and co-investment opportunities, enhancing the credibility and appeal of ESG sukuk issuances.