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.