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Climate change poses one of the greatest global challenges today, calling for innovative financial solutions. In the developing world, especially within the Islamic community, there is a rising demand for instruments that are both environmentally sustainable and Shariah-compliant. Green Sukuk offers such a solution—a Shariah-compliant bond crafted to fund eco-friendly projects.
To grasp the significance of Green Sukuk, we must first understand sukuk. Sukuk is an Islamic financial product, a Shariah compliant alternative to a conventional bond, based on Islamic principles. Unlike traditional bonds that pay interest - which is prohibited in Islam as “riba” - sukuk works differently. The issuer sells certificates to investors, using the funds to invest in tangible assets, such as infrastructure or property, in which investors gain partial ownership. The issuer promises to buy back these certificates at their original value after a set period, linking returns to the asset’s income in the form of rental and ensuring adherence to Islamic principles.
Since its introduction in Malaysia in 2000, followed by Bahrain in 2001, sukuk has gained global traction. Today, Islamic firms and governments widely use sukuk, contributing significantly to the international fixed-income market. By tying investments to tangible assets, sukuk aligns with Islamic financial ethics, offering investors ownership stakes rather than debt claims.
Green Sukuk takes this concept further, directing Islamic investments into renewable energy and other environmentally focused projects. It reflects Shariah’s emphasis on environmental care, with funds used for initiatives like building solar plants, retiring construction debt, or supporting green subsidies approved by the government. Often, it involves securing future income from specific eco-friendly assets or projects.
The global green bond market has surged in recent years, and Islamic finance is well-positioned to tap into this trend. This growth shows how capital markets worldwide are prioritizing climate considerations, a movement mirrored in Islamic finance through Green Sukuk issuances, including sovereign Green Sukuk. Case studies from various countries highlight how sukuk finances certified green projects, revealing enabling factors, challenges, solutions, and valuable lessons learned.
Pakistan is among the world’s most climate-vulnerable nations, despite contributing less than 1% to global carbon emissions. The country faces frequent climate challenges; floods, droughts, heatwaves and long-term risks like glacial melt and water scarcity. The 2022 floods, which displaced millions and caused billions of dollars in losses, highlight the urgent need for climate-resilient infrastructure. Green Sukuk provides a powerful tool to meet this need.
By raising funds for large-scale projects like dams, flood walls, and renewable energy, Green Sukuk helps Pakistan reduce reliance on conventional debt. It offers a sustainable way to address energy shortages and reduce dependence on imported fossil fuels. Shifting to clean energy sources such as solar, wind, and hydropower through Green Sukuk can cut energy costs and lessen environmental harm.
Pakistan’s thriving Islamic finance sector makes it an ideal candidate to leverage Green Sukuk, attracting investments from Islamic banks, sovereign wealth funds, and global ESG-focused investors who prioritize ethical, green projects. This not only boosts Pakistan’s global financial standing but also positions Islamic finance as a leader in sustainability.
Green Sukuk aligns with the Maqasid al-Shariah, the core objectives of Islamic law, which include preserving life, property, and the environment. It promotes sustainable development, environmental stewardship (khalifah), and the principle of avoiding harm (dharar), as noted in the World Bank Report. By offering a Shariah-compliant way to access global capital markets, Green Sukuk enables Islamic countries to uphold their values while pursuing sustainable growth.
Countries like Malaysia, Indonesia, Saudi Arabia, and the United Arab Emirates have successfully issued Green Sukuk, funding projects from clean energy to reforestation. By embracing this instrument, the Islamic world can lead in ethical and green finance, blending financial innovation with moral responsibility. This approach supports the United Nations Sustainable Development Goals (SDGs), establishing Islamic finance as a key player in global sustainability.
As major economies adopt sustainable business practices, Pakistan is recognizing the potential of sustainable investing. This approach integrates Environmental, Social, and Governance (ESG) factors into investment decisions, offering long-term financial benefits while tackling pressing issues like climate change, gender inequality, and socio-economic development. For a country facing both challenges and opportunities, sustainable investing is not just a strategy but a necessity.
With a young, growing population, rapid urbanization, and significant infrastructure needs, Pakistan requires capital to create jobs, reduce inequality, and drive clean, resilient growth. The Global Climate Risk Index ranks Pakistan among the top climate-affected nations, with floods, rising temperatures, droughts, and air pollution threatening agriculture, health, and the economy. Social challenges - gender inequality, poor education, youth unemployment, and limited healthcare - further hinder inclusive growth, while weak governance affects transparency and investor trust.
Sustainable investing bridges the government’s development goals with the financial market. By channeling capital into ESG-compliant projects, Pakistan can foster sustainable businesses, promote climate action, and build a more inclusive economy. In countries like Malaysia and Indonesia, capital markets are providing affordable, long-term financing through green bonds, supporting cities, municipalities, and low-carbon infrastructure. Pakistan, with its robust Islamic finance platform, can develop Shariah-compliant instruments that also prioritize sustainability, funding clean energy, social housing, and infrastructure while meeting both faith-based and ESG standards.
Marking a significant step in its sustainable finance journey, the Government of Pakistan has launched its first domestic Green Sukuk with a target issuance size of PKR 30 billion. This issuance will occur through an auction process, with the Pakistan Stock Exchange (PSX) - along with its infrastructure partners NCCPL and CDC - playing a key role in listing and promoting this innovative instrument. This move will transform Pakistan’s sukuk market by directing investments into eco-friendly projects, boosting economic growth, and aligning with international green financing standards. It reflects the government’s firm commitment to sustainable development through financial markets.
Green Sukuk highlights Pakistan’s dedication to lowering its carbon footprint while providing investors with a chance to support green initiatives. It represents a unique blend of faith, finance, and sustainability, enabling Pakistan to fund climate-resilient and clean energy projects in a Shariah-compliant way. Individuals, small to mid-sized investors, and organizations interested in joining the Green Sukuk auction can participate through licensed brokerage houses of Pakistan Stock Exchange, making this opportunity accessible to a wide range of stakeholders.
