PETALING JAYA: Fitch Ratings expects the global environmental, social, and governance (ESG) sukuk market to soften in 2026 as Middle East tensions weigh on issuance.
However, Malaysia is forecast to outperform the broader market and lead global ESG sukuk supply in the second half of the year (2H26).
According to Fitch, issuance in the Gulf Corp Council should moderate as Malaysia is expected to lead global ESG sukuk supply in 2H26, supported by tax incentives, strong investor demand and a deep domestic market, albeit largely in ringgit.
The report said the global ESG sukuk growth could also be weighed down by shifting sustainability priorities, evolving and increasingly complex syariah and ESG requirements, changing investor sentiment towards ESG, and concerns over greenwashing.
Furthermore, Fitch noted that ESG sukuk accounted for a much smaller share of the overall ESG fundraising market in the 1H26.
Its share of US dollar-denominated ESG debt issuance in emerging markets, excluding China, fell sharply to 14% in 1H26 from 41% a year earlier.
Meanwhile, US dollar-denominated ESG sukuk issuance fell 74% year-on-year (y-o-y), in contrast to an 11.5% increase in conventional ESG bond issuance.
Fitch said ESG sukuk issuance globally declined in 1H26, with total issuance across all currencies falling 32% y-o-y to US$4.9bil amid volatility stemming from the Iran war and rising bond yields.
While ESG sukuk issuance worldwide lost momentum, Malaysia outperformed, with local issuers accounting for 67% of total global ESG sukuk issuance, highlighting the country’s dominant position in the sustainable Islamic finance market.
