RIYADH: The market appetite for sustainable bonds in the Middle East region bucked global trends in 2025, and issuances are on track to reach between $20 billion and $25 billion in 2026, according to S&P Global.

In its latest report, the financial services company said that sustainable bond issuance in the Middle East increased by about 3 percent in 2025, despite a global decline of 21 percent.

The analysis added that the growth in sustainable bond issuance in the region was driven by the Gulf Cooperation Council countries, including Saudi Arabia and the UAE, which largely offset the slowdown in Turkiye, where issuance and value declined by 50 percent and 23 percent, respectively.

A sustainable bond is a type of fixed-income instrument where the proceeds are exclusively used to finance or refinance eligible green or social projects.

These instruments provide investors with a fixed income while supporting environmentally or socially beneficial initiatives.

“Green projects will continue to dominate the bond market in the region. Sustainability and sustainability-linked instruments should remain more favorable in the loans market. Likely growth areas are sustainable sukuks, transition finance, and — to a lesser extent — blue bonds,” said Rawan Oueidat, an S&P Global Ratings analyst based in Dubai.

The report noted that financial institutions will continue to be key to funding the sustainability gap in 2026, while large corporations and government-related entities are also playing an increasingly significant role.

Sustainable bonds: market divergence

According to S&P Global, the labeled market in the region is split across bonds and loans, with some notable divergence between the two.

Sustainable loan issuance was primarily driven by activity in Turkiye, which accounted for approximately 60 to 65 percent of the market by value and 70 to 75 percent of the market by volume, while the remaining originated from the UAE and Saudi Arabia.

“Corporates are key players in the sustainable loan market activity in the region. We think this could be due to a combination of factors, including flexibility--on repayment, but also allocation of use of proceeds--in addition to factors such as interest rate environments,” said S&P Global.

Sectors more exposed to relatively more challenging decarbonization pathways, including non-renewable energy, transportation, and chemicals, are more prevalent in the sustainable loan market.

The bond market is notably driven by the UAE and Saudi Arabia, which accounted for a combined 80 percent of 2025 sustainable bond issuance.

Issuers financing sectors that are relatively more aligned with a low-carbon, resilient future, such as renewables and real estate, are more prevalent in the bond market.

“Sovereigns tend to issue labeled debt in the form of bonds and frequently include adaptation projects, consistent with the public good nature of resilience investments, although we have seen some regional financial institutions also include climate change adaptation in the use of proceeds as well,” said S&P Global.

It added: “Saudi Arabia issued a green bond framework in 2025, and included climate change adaptation in its use of proceeds. We expect this trend to continue, and issuer types to broaden given the region’s high exposure to rising physical climate risks.”

In May, the Kingdom’s Capital Market Authority approved new guidelines for issuing green, social, sustainable, and sustainability-linked debt instruments.

Developed in collaboration with both public and private sector stakeholders, the guidelines serve as a key deliverable under the initiative titled “Establish the regulatory framework for sustainable debt instruments.”

Among these efforts are the creation of regulatory frameworks for green and ESG-linked bonds, the adoption of open finance practices to foster innovation, and the strengthening of corporate governance regulations to boost accountability and investor confidence.

“Green issuance remains prevalent in the Middle East sustainable bond market, in line with global trends. Issuers in the hydrocarbons value chain with credible transition strategies. including direct emissions reductions and management of lock-in risks--may make use of recently introduced transition bond and loan labels,” added S&P Global.

Sustainable sukuk to remain strong

According to the report, sustainable sukuk issuance from GCC countries is expected to maintain growth momentum in 2026.

Total sustainable sukuk volume in the Middle East reached a new record of $11.4 billion in 2025, compared with $7.9 billion in 2024, driven by activities in Saudi Arabia and the UAE.

“We estimate volume could even be higher if we look at sukuk issuances with use of proceeds that focus on social and environmental benefits, but do not refer to sustainable bond principles,” added the report.

The share of sustainable sukuk constituted more than 45 percent of regional sustainable bond issuance in 2025 in value terms and more than 40 percent of the number of issuances.

This compares with 33 percent for value and 24 percent for number, respectively, at the end of 2024.

“We expect the sustainable sukuk market to continue to mature in the coming years. Guidance on green, social, and sustainability sukuk published by the International Capital Market Association in April 2024 has provided additional transparency. Some government-led or regulatory initiatives could also help sustain growth,” S&P Global said.

In a report issued last month, Fitch Ratings projected that the global environmental, social, and governance sukuk is likely to surpass $70 billion in outstanding value by the end of this year, driven by funding diversification, refinancing needs, and sustainability mandates.

Fitch Ratings added that net-zero targets, expected lower interest rates, and oil prices are other crucial factors that accelerate the momentum of ESG sukuk issuance in 2026.

ESG sukuk are designed to finance environmentally sustainable projects, including renewable energy, clean transportation and climate-resilient infrastructure.

In January, S&P Global echoed similar views, stating that ESG sukuk issuance is expected to accelerate, driven by climate transition efforts in the GCC region and incentives for sustainable practices.