ESG Sukuk to Cross US$50 Billion in 2025, Key Funding Tool in Emerging Markets

ESG sukuk is a key dollar funding tool in Islamic finance markets, particularly in Saudi Arabia, the UAE, Indonesia, and Malaysia. Fitch Ratings projects the global sukuk market to surpass US$50 billion outstanding in 2025.

The global environmental, social, and governance (ESG) sukuk market is poised to surpass US$50 billion outstanding in 2025, marking a milestone for this Sharia-compliant financial instrument. Fitch Ratings highlights the growing role of ESG sukuk as a key dollar funding tool in Islamic finance markets, particularly in Saudi Arabia, the UAE, Indonesia, and Malaysia. ESG sukuk are also making strides in emerging markets, accounting for 20 percent of ESG dollar debt issuance (excluding China) in 2024, with the remainder being bonds.

ESG sukuk growth drivers

The surge in ESG sukuk issuance is driven by several factors:

1. Funding diversification: Sukuk offers sovereigns, corporates, and financial institutions an alternative avenue to raise capital, diversifying their funding sources.
2. Sustainability initiatives: Many issuers are aligning with net-zero and sustainability goals to attract ESG-focused investors.
3. Regulatory support: Enabling regulations in key Islamic finance markets have facilitated sukuk issuances.
4. Investor demand: Green and sustainable sukuk attract international ESG-sensitive investors from regions such as the US, Europe, and Asia, alongside Islamic finance investors in the Gulf Cooperation Council (GCC).

ESG sukuk have outpaced global ESG bonds in growth, recording a 23 percent year-on-year increase to reach US$45.2 billion in 2024, compared to a 16 percent growth for ESG bonds. Sukuk issuances are also growing faster than traditional sukuk, which saw a 10 percent growth during the same period.

GCC’s role in ESG sukuk market

The GCC region plays a significant role in the ESG sukuk landscape, with 44 percent of its ESG debt capital market—valued at US$46.3 billion in 2024—comprising sukuk. Notably, Nasdaq Dubai has emerged as a leading primary listing venue for ESG sukuk, holding 35 percent of global outstanding volumes as of the end of 2024.

Challenges ahead

Despite its robust growth, the ESG sukuk market faces challenges that could hinder its expansion:

• Sharia compliance complexities: The adherence to evolving standards, such as AAOIFI Sharia Standard No. 62, adds layers of complexity to structuring sukuk.
• Sustainability uncertainties: Weakened global sustainability drives or reduced commitments to climate targets could impact the demand for ESG instruments.
• Geopolitical and economic risks: Geopolitical tensions and oil price volatility in key markets could affect issuances.

Outlook

With ESG sukuk expected to exceed 15 percent of global dollar sukuk issuance in the medium term (up from 12.3 percent in 2024), they remain a crucial funding tool for sustainable development in emerging markets. Governments, corporates, and banks are increasingly leveraging ESG sukuk to align with global sustainability trends, cater to investor preferences, and diversify their funding portfolios.

As the market continues to grow, ESG sukuk will likely play an instrumental role in financing a greener and more inclusive future, particularly in regions where Islamic finance dominates.

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