Investing that prioritizes environmental, social and, governance (ESG) issues is rapidly refurbishing the financial landscape of the Gulf and spur demand for green Sukuk.
The total size of the Islamic financial services industry is $2.4 trillion. Yet, sustainable assets reached $40 trillion in 2020 as more and more corporations are weaving ESG principles into their businesses and borrowings.
In the present global capital markets, climate change and sustainability are fundamental considerations to seize opportunities and manage risk. ESG investing is a form of sustainable investing. Investors consider non-financial factors too as a vital part of their analysis process to identify growth opportunities and material risks.
According to Moody’s ESG Solutions, the demand for green Sukuk will benefit from rising global investor interest for ESG. Moody’s Investors Service provides investors with risk analysis, credit ratings and, research for bonds, stocks and, government entities.
In March, a $2.5 billion “sustainability Sukuk” was launched by Jeddah-based Islamic Development Bank with its proceeds used to finance both social and green development projects. Islamic financing emerged almost 50 years ago in countries with large Muslim populations. These countries were determined to ensure that the source of their funding was governed by the principles of Islam and Shariah.
The global energy transition trend could have major implications for Gulf states seeking to invest in the renewables sector. Saudi Arabia aims to power at least half the country with environment-friendly renewable sources by 2030. Sukuk funding of environmentally sustainable projects governed by the requirements of Shariah appeals to both conventional investors and traditional Islamic investors.
The Gulf Cooperation Council or GCC has a natural competitive advantage in solar power and water desalinization. GCC can capitalize on new technologies such as green hydrogen, which is hydrogen produced through hydrolysis using renewable power sources.
The energy transition agenda is a trend that is catching speed. It could face some challenges in the beginning yet, as more awareness of Islamic finance builds up, there will be major opportunities for both Shariah-focused investing and ESG to cater to the rising demand for green Sukuk.