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ICMA sustainable sukuk guidance brings flexibility and risks for issuers with limited green assets
The International Capital Markets Association (ICMA), Islamic Development Bank (IsDB) and LSEG have released guidance on sustainable sukuk, reflecting the growing contribution of Islamic capital markets to the wider sustainable fixed-income market.
Through the first quarter of this year, sustainability-labelled sukuk have been dominated by core Islamic finance jurisdictions including Malaysia, Indonesia, the UAE, Saudi Arabia and the IsDB, but the new guidance has been purposely developed for issuers coming from either sukuk or green bond markets to issue green, social, sustainable, transition or blue sukuk.
One of the areas on which the guidance is silent is the ESG/sustainability evaluation of the underlying asset, which is a structural difference between sukuk and bonds. The absence of guidance on ESG/sustainability screening of the underlying asset similar to what is required for the ultimate use-of-proceeds presents an area of risk that could be mitigated with clearer disclosure.
Even as it represents a risk to the sustainable credentials of the transaction if the asset's sustainability profile differs from investor expectations, it could be easily addressed with additional disclosure. This would mitigate the risks while providing flexibility for green and social sukuk where lack of green assets would otherwise create a barrier to issuers, especially in markets where a substantial share of financial assets are held by Shari'ah sensitive investors and financial institutions.
How transition finance could eclipse sustainability-linked financing
One of the consequential outcomes of COP 28 was the agreement to transition away from fossil fuels in order to reach the global climate goals of limiting warming to 1.5˚ C, which requires reaching Net Zero by 2050. After COP 28 ended there has been a widespread effort to determine the best way to achieve that transition, for which finance plays a key role.
Emerging markets need to be able to absorb much more climate finance than they do today
Following the COP 28 climate summit in Dubai, there will need to be a redoubled effort to drive finance in the direction of alignment with the transition. International private climate finance in particular will need to rise by 15 times from current levels. One of the major challenges in driving this growth is that it often relies on data to guide and assess whether financing flows are moving consistently with the Paris Agreement or inconsistently with these global objectives.
Funding Credible And Bankable Transition Finance After COP28
Following the conclusion of COP 28 last year, OIC financial institutions should now focus on how the final declaration points towards key risks and opportunities arising from climate transition risks, as well as the role they can play within the energy transition. One of the most important elements of financial institutions’ strategies across OIC countries will be the role of transition finance.
This has been a hotly debated issue, all but overlooked by binary green/not-green taxonomies. For emerging markets & developing economies it is a critical piece of amassing enough funding to be able to transform economies in a way that will over time promote economic growth while reducing emissions along science-based pathways.
OIC financial institutions need a comprehensive approach to align with COP 28 outcomes
Since the Paris Agreement was signed at COP 21, one of the most important issues has been defining how the world makes “finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development”. The global stocktake released at the end of COP 28 provides updates on the activities the financial sector will need to align in order to mitigate climate change by 2030.
Transition finance mapping highlights key gaps
Transition finance is a particularly challenging concept to move from idea to reality. In contrast to sustainability, which has been defined in taxonomies, there are far more pieces in the puzzle when creating transition finance. It is made up of more discrete thresholds when evaluating and assessing credible transition thresholds. The Climate Bonds Initiative has compared a range of transition guidance methodologies and created a mapping of the issues covered or omitted from each guidance, some related to transition finance and others focused on corporate transition planning.