The Middle East is increasingly turning to environmental, social, and governance (ESG) and Green Sukuk to finance their green transitions, as these sustainable financing solutions gain momentum worldwide. In 2022, ESG and Green Sukuk achieved a remarkable growth rate of 35 percent, reaching a global value of total funding deployed of $8.1 billion.
However, the GCC region continues to dominate this financial sector, with the Kingdom of Saudi Arabia (KSA) outperforming other countries in both total issuance and average issuance size, as seven out of the top 10 issuances in 2022 were from KSA. Similarly, other Gulf countries, such as the United Arab Emirates (UAE), are seeing an uptick in private and public sector Sukuk issuances. By addressing the challenges in the Islamic finance sector and increasing ESG and Green Sukuk issuances, the Gulf countries are unlocking new avenues of finance to double down on their climate change strategy and increase their sustainable investments.
Green Sukuk is an Islamic financing vehicle that allows investors to support projects meeting ESG criteria while adhering to Islamic finance principles. Compared to traditional bonds, Green Sukuk relies on a risk-reward sharing mechanism based on shared ownership. This means investors share in both the risks and rewards of the underlying assets, with potential guarantees or collateral from the issuer.
As governments adopt newer and riskier technologies like green hydrogen, the need for risk-reward sharing financing mechanisms has become imperative. This has allowed Sukuk to bridge a gap for issuers in the Gulf, catering to investors looking for Islamically-compliant options.
Notable Issuances:
Dubai Electricity and Water Authority (DEWA):
Islamic Development Bank (IsDB):
Majid Al Futtaim:
These deals demonstrate the potential of Green Sukuk in the region, especially with the upcoming COP28 in the UAE.
Gulf Countries Are Taking Steps to Address the Challenges
Challenges:
Government Initiatives:
How ESG and Green Sukuk Might Enable Gulf Countries to Deepen Their Green Investments in Africa
The deployment of Green and ESG Sukuk will grow as regulatory and capacity gaps are bridged, opening new opportunities for the Gulf region to pursue alternative financing mechanisms globally.
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