Is it possible to sustain eco-friendly projects without incurring the violation of shari’ah principles of Islamic finance? The answer is positive, and the sustainable instrument which allows to do it is the green sukuk.
Sukuk is the plural form of the Arabic word “sakk”. Since the Umayyad period, the sakk represented a payment tool to remunerate state-salaried officials as military forces and government bureaucrats. It functioned as a trustee certificate that entitled the holders to redeem a specific and determined-in-advance number of commodities from the state treasury at a precise time.
In its contemporary meaning, according to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), investment sukuk is classified as “certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity“.
Besides, the World Bank defines sukuk as “an interest-free bond that generates returns to investors without infringing the principles of shari’ah (Islamic law) which prohibits the payment of interest. It is a shari’ah-compliant security backed by a specific pool of underlying assets“.
In this regard, a sukuk to be considered a shari’a-compliant security must assure that the raised funds are used only for halal business activities and that the revenue entitled to the sukuk holders must only be derived from the earnings generated by the sukuk asset itself. Besides, the sukuk issuance cannot guarantee a fixed return since its capacity for getting profit or loss depends on the performance of the underlying assets or projects.
Therefore, when the sukuk combines its nature of proper Islamic financing tool with an eco-friendly purpose, what emerges is the green sukuk which in general terms represents a shari’ah compliant financial product aiming at sustaining environmental and climate-friendly projects.
The debate about green sukuk in Islamic finance started in 2012 when a coordinating platform – known as Green Sukuk Working Group (GSWG) – was jointly established by the Climate Bonds Initiative, the Clean Energy Business Council, and the Gulf Bond and Sukuk Association with the task of defining, developing, and promoting new financial products able to combine shari’a compliant investments with eco-friendly investments. It was in this very framework that the GSWG arrived at defining the green sukuk as «Shari’ah compliant investments in renewable energy and other environmental assets. They address Shari’ah concern for protecting the environment».
In this regard, green sukuk represents a highly flexible financing instrument because it is eligible to sustain both eco-friendly mitigation and adaptation initiatives. For instance, mitigation projects are those initiatives that aim at researching new technologies to reduce greenhouse gas emissions and at improving the energy efficiency of transport systems, industrial facilities, buildings, and waste management; while adaptation projects aim at improving food and agricultural security, at reducing environmental disaster risks, and at managing forests in a sustainable way.
The first green sukuk has been issued in Malaysia by Tadau Energy Sdn. Bhd (Tadau Energy) on 27th July 2017. The initiative is a 10-year project that aims to realize a 50 MW ac solar photovoltaic power plant in Kudat, a district of the Malaysian state of Sabah in the northern portion of Borneo.
Concerning the solidity of the financing operation, the rating agency RAM holdings Berhad has recently confirmed the AA3/Stable rating of the MYR 250 million green sukuk programme (2017/2033). Even though Tadau Energy remains exposed to single-project and regulatory risks and to solar irradiance variability and plant performance risks, the programme is promising. In this regard, the solar power plants extremely well-performed in their energy output which exceeded the production’s previous projection level.
Since its introduction in 2017, the green sukuk as an eco-friendly and shari’ah compliant financing tool has experienced a fast-pacing growth. However, it still represents only a minimal part of the market of green investment at a global level. As a matter of fact, while the global green bond issuance amounted to USD 257 billion in 2019, the green sukuk issuance attested at USD 3.5 billion in the same year.
However, even if it is still limited in terms of market value, green sukuk is a promising financial instrument, and it has the merit to have shown the great potentialities of Islamic finance in tackling environmental concerns.
As far as the awareness regarding environmental protection and sustainable development is expected to increase among Muslim countries day after day, so the demand – and consequently the offer – for environmental-sensitive and shari’ah compliant financial products is bound to accelerate even further in the following years. As a result, green sukuk is bound to increase its crucial role of eco-friendly and Islamic financial instrument soon.
 Bacha, O. I., & Mirakhor, A., (2013). Islamic Capital Market: A Comparative Approach. Singapore: Wiley, pp. 171-210.
 AAOIFI, (2009) AAOIFI’s Shari’a Standard No. 17 – Investment Sukuk, Pub. L. No. 17, p. 468. Source: http://www.nbfi-modaraba.com.pk/Data/Sites/1/skins/nbfi/images/AAOIFI/ShariahStandard17.pdf. Last Access : 27/03/2021.
 World Bank Group, (2020). Pioneering the Green Sukuk: Three Years On, p. 17. Source: https://openknowledge.worldbank.org/bitstream/handle/10986/34569/Pioneering-the-Green-Sukuk-Three-Years-On.pdf?sequence=1&isAllowed=y. Last access : 27/03/2021.
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 Green Sukuk. Climate Bond Initiative. Source: https://www.climatebonds.net/projects/facilitation/green-sukuk. Last access: 27/03/2021.
 Panda, P. (2017). Green Bond: A Socially Responsible Investment (SRI) Instrument, Research Bulletin, Volume 43, No. I, pp. 97-113.
 Rahim, S. R. M., & Mohamad, Z. Z. (2018). Green Sukuk for Financing Renewable Energy Projects, Turkish Journal of Islamic Economics, 5(2), pp. 129-144.
 RAM (2020). RAM Ratings reaffirms Tadau Energy’s AA3 SRI sukuk rating. Source: https://www.ram.com.my/pressrelease/?prviewid=5389. Last access: 28/03/2021.
 Henze, V., (2020) ‘Sustainable Debt Sees Record Issuance At $465Bn in 2019, Up 78% From 2018’ BloombergNEF, source: https://about.bnef.com/blog/sustainable-debt-sees-record-issuance-at-465bn-in-2019-up-78-from-2018/. Last access: 28/03/2021.
 World Bank Group, (2020).