Green Sukuks: Islamic banking’s role in financing a sustainable Pakistan

Climate change is no longer a distant concern—it is a pressing reality that is reshaping global finance. As governments, institutions, and investors seek sustainable solutions, Islamic banking is emerging as a natural ally of the green financing movement.

Its core principles—risk-sharing, ethical investment, and real economic activity—resonate closely with environmental, social, and governance (ESG) objectives.

By design, Islamic finance prohibits investment in harmful or speculative industries, emphasising fairness, transparency, and societal benefit. This alignment with ESG frameworks positions Islamic banks to channel capital toward renewable energy, energy efficiency, and climate-resilient projects. One of the most illustrative instruments in this space is the Green Sukuk—Shariah-compliant bonds whose proceeds are earmarked for environmentally sustainable initiatives.

For Pakistan, a country increasingly vulnerable to climate shocks, green financing is no longer optional—it is a strategic imperative.

Globally, Malaysia pioneered Green Sukuks in 2017 with Tadau Energy’s RM 250 million issuance for a solar PV project in Sabah. Landmark projects quickly followed, including Quantum Solar Park’s RM 1 billion issuance funding three solar plants generating an estimated 282,000 MWh annually, and PNB Merdeka Ventures’ RM 2 billion sukuk financing the iconic Merdeka PNB118 Tower. Indonesia has also emerged as a major player, issuing $1.25 billion in 2018 for renewable energy and climate adaptation projects, such as the Sarulla geothermal plant, which alone avoids 1.3 million tonnes of CO₂ annually. By mid-2025, Indonesia had mobilised $6 billion in global dollar-denominated Green Sukuk and $3.6 billion in domestic issuances, establishing itself alongside Malaysia and Saudi Arabia as a top ESG-compliant sukuk issuer.

Also read: Green Sukuk makes debut with Rs20-30bn issue

These global examples demonstrate that Islamic finance is not only compatible with sustainability—it can accelerate the transition to low-carbon economies. For Pakistan, a country increasingly vulnerable to climate shocks, green financing is no longer optional—it is a strategic imperative. Floods, droughts, and rising temperatures threaten both livelihoods and economic stability. Transitioning to renewable energy and sustainable infrastructure is essential for national resilience.

Islamic banks are uniquely positioned to meet this challenge. Nearly one-fifth of Pakistan’s banking assets are Shariah-compliant and growing rapidly. These institutions can mobilise capital for solar, wind, and sustainable infrastructure projects, directly contributing to energy security while reducing carbon emissions.

To unlock the full potential of Islamic green finance in Pakistan, three enablers are critical:

1. Policy and regulatory support – incentives, reporting standards, and frameworks that facilitate Green Sukuk issuance and sustainable project financing.

2. Investor education – increasing awareness among institutional and retail investors about the dual benefits of Shariah-compliant and environmentally responsible finance.

3. Collaboration – coordinated efforts between banks, regulators, multilateral agencies, and the private sector to scale solutions tailored to Pakistan’s unique climate and economic challenges.

The global evidence is compelling: from Malaysia to Indonesia, Green Sukuks have financed renewable energy, sustainable transport, and climate resilience projects at scale. In Pakistan, Islamic banking has the opportunity to replicate and expand these successes, ensuring that faith-driven finance serves both economic and environmental goals. One example of this is Faysal Bank’s full conversion to a pure-play Islamic bank. From supporting rural solar solutions to investing in wind projects along Sindh’s coastline, it is trying to channel capital into sustainable initiatives that generate measurable social and environmental benefits.

Also read: First Rs3bn ‘AAA’ rated Green Sukuk launched for telecom sector

As the world accelerates toward low-carbon growth, Islamic banking in Pakistan stands at the forefront—transforming capital into a tool for climate resilience, sustainable development, and inclusive growth. By merging Shariah compliance with ESG principles, banks can create a financial ecosystem where ethical finance and environmental stewardship go hand in hand.

The article does not necessarily reflect the opinion of Business Recorder or its owners.