The global push toward sustainability has highlighted the urgent need for innovative financing mechanisms to support green infrastructure. Among these mechanisms, Islamic finance stands out for combining ethical principles with an emphasis on equitable wealth distribution, particularly in emerging and underserved markets.

Five decades ago, the Arab and Islamic worlds focused heavily on development challenges and aspirations to achieve self-sufficiency. Today, they have introduced the world to Green Sukuk—an essential financial tool for governments, corporations, and institutions to secure liquidity for environmentally sustainable projects. Rooted in Islamic principles and offering competitive costs, Green Sukuk expands funding opportunities and propels the development of eco-friendly initiatives.

Shariah financing in an ESG context

Shariah-compliant financing operates on the principles of profit- and risk-sharing (mudarabah), prohibition of interest (riba), and ethical investments. Its alignment with environmental, social, and governance (ESG) values stems from its emphasis on real economic activities and avoidance of industries deemed harmful, such as gambling and alcohol: principles which naturally lend themselves to promoting sustainable development.

For example, the prohibition of speculative activities (gharar) in Islamic finance ensures that investments are grounded in tangible assets, such as manufacturing or renewable energy infrastructure. This focus on real economy investments directly contributes to the development of sustainable infrastructure and equitable growth.

One notable instrument in Islamic finance is the sukuk, also referred to as ‘shariah-compliant’ bonds. Green sukuk, in particular, has gained traction as a vehicle for financing renewable energy projects and other sustainability initiatives. These instruments not only comply with Islamic principles but also align closely with the UN’s Sustainable Development Goals.

Successful implementations of Shariah financing for sustainability

The practical impact of Islamic finance is evident in several successful projects around the world. In Southeast Asia, Malaysia has actively leveraged Islamic financing mechanisms to support its renewable energy sector. The issuance of green sukuk by private and public entities has enabled the construction of solar farms and hydroelectric projects, contributing to the country’s goal of achieving 40% renewable energy capacity by 2035.

Similarly,  Indonesia has also been a pioneer in using green sukuk to fund sustainable projects. In 2018, the country issued the world’s first sovereign green sukuk, raising $1.25 billion to finance renewable energy, sustainable transportation, and waste management projects. This initiative demonstrated how Islamic finance can mobilise resources for climate change mitigation and adaptation efforts.

Moving around the world, Shariah-compliant financing has also played a crucial role in supporting energy and infrastructure development in Pakistan. Projects like the Quaid-e-Azam Solar Park in Punjab, funded through sukuk, and the Dargai Hydroelectric Project in Khyber Pakhtunkhwa, financed through Islamic loans, highlight the shift toward renewable energy. 

Finally, Saudi Arabia has used Shariah-compliant financing to develop the King Abdullah Economic City (KAEC), a large-scale infrastructure project aligned with Vision 2030. This ambitious development, financed partly through sukuk, promotes sustainable urbanisation, renewable energy integration, and economic diversification, reflecting how Islamic finance can drive long-term development goals.

Next steps for scaling impact

While the achievements of Islamic finance in promoting sustainability are commendable, there remains significant untapped potential. To maximise its impact, the following steps are recommended:

1. Establishing globally recognised standards for Green Sukuk issuance can attract more investors by ensuring transparency and credibility. Collaborative efforts by organisations like the Islamic Development Bank (IsDB) and other international bodies can help achieve this goal.
2. Many underserved markets lack the expertise to design and implement Shariah-compliant financial products. Capacity-building initiatives, such as training programs and knowledge-sharing platforms, can empower local stakeholders to leverage Islamic finance for sustainability.
3. Governments and private entities should collaborate to scale up sustainable projects; Islamic finance can play a crucial role in these partnerships by providing ethical and socially responsible funding options.
4. Leveraging Islamic financial technology (FinTech) can enhance the accessibility and efficiency of Islamic finance. Blockchain, for instance, can improve the transparency of Sukuk issuance and tracking, fostering investor confidence.
5.  It is essential to raise awareness about the benefits of Islamic finance among global investors and policymakers. Advocacy efforts should highlight its compatibility with ESG goals and its potential to bridge funding gaps for sustainability.

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Islamic finance represents a viable and impactful solution for addressing the world’s pressing sustainability challenges. Its focus on tangible economic activities, ethical investments, and equitable resource distribution, aligns seamlessly with the principles of ESG. 

Success stories from around the world illustrate its potential to drive green infrastructure in emerging and underserved markets. Scaling these efforts will further cement Islamic finance as a conduit to sustainable development.