Isl mic Fin nce nd Clim te A end From Green Sukuk Innov tion to Greener H l l V lue Ch ins NOVEMBER 2025 isdb_stories Islamic Finance and Climate Agenda From Green Sukuk Innovation to Greener Halal Value Chains © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank and the Islamic Development Bank Group. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank and the Islamic Development Bank Group, its Board of Executive Directors, or the governments they represent. 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Bhd./www.gnrsb.com Islamic Finance and Climate Agenda From Green Sukuk Innovation to Greener Halal Value Chains NOVEMBER 2025 Foreword This report is a testament to the multifaceted role of Islamic finance in addressing the global climate risks, which demands urgent, inclusive, and innovative responses. For the 57 member countries of the Organization of Islamic Cooperation (OIC), climate change presents a profound challenge, one that intersects with development priorities, economic resilience, and social equity. Many OIC countries are highly exposed to climate risks yet face constraints in mobilizing the scale of investment needed to transition toward climate-resilient and low-carbon economies that can create new jobs and stimulate innovation. Islamic finance offers a unique and powerful framework to address this challenge. Rooted in principles of justice, fair stewardship, and shared prosperity, Islamic finance can promote the alignment of economic activity with ethical and environmental responsibility. Its emphasis on risk-sharing, asset-backing, and social solidarity provides a compelling foundation for financing climate action in ways that are both impactful and inclusive. The ethos of Islamic finance is universal and linked to the real economy, thereby extending its reach to encompass diverse social and environmental contexts. This joint report by the World Bank Group Inclusive Growth and Sustainable Finance Hub in Malaysia and the Islamic Development Bank explores the nexus between Islamic finance and climate action. It provides a descriptive assessment of market trends, instruments, and innovations across the OIC and highlights the growing momentum for integrating Islamic finance into climate strategies. From green sukuk and takaful to forests waqf and climate fintech, the report showcases the diversity of financial innovation available and the opportunities to scale them. Importantly, this work reflects a shared commitment to collaboration. It draws insights from regulators, financial institutions, halal industry enterprises, and development partners. It is informed by data, grounded in practice, and guided by the belief that Islamic finance can, and must play a central role in advancing climate and development goals. As we look ahead, the imperative is clear: We must act boldly and collectively to unlock Islamic finance's full potential in addressing the climate risks. This report is both a roadmap and a call to action. We hope it will inspire policymakers, financial leaders, and stakeholders across the OIC and beyond to accelerate progress toward a more just, sustainable, and climate-resilient future. Together, we can elevate Islamic finance as a catalyst for climate action and inclusive development, serving communities today and safeguarding the planet for generations to come. Dr. Zafer Mustafaoğlu Dr. Issa Faye Division Director, Director General, Philippines, Malaysia and Brunei, Global Practices & Partnerships, World Bank Islamic Development Bank 6 Islamic Finance and Climate Agenda Acknowledgement The preparation of this report was led by the World Bank Group Inclusive Growth and Sustainable Finance Hub in Malaysia, in collaboration with the Islamic Development Bank (IsDB) Center of Excellence in Kuala Lumpur. The World Bank team was led by Shahira Zaireen Bt Johan Arief Jothi and composed of Adriana Asmaa Binti Mohd Ezane and Thuba Jazil. The IsDB team was composed of Syed Faiq Najeeb, Bradley Hiller, Zafardjon Khotamov, Houssem Eddine Bedoui, and Mehmet Eken Fehmi. The authors thank Tatiana Didier at the World Bank and Ali Sen at the IsDB for useful comments on the draft versions of this report. Abayomi A. Alawode, Basak Yetisen Teker, and Andrius Skarnulis at the World Bank, Sedef Nur Gunsur and Rachel Chi Kiu Mok at the International Finance Corporation, and Muhammad Jameel Yusha’U at the IsDB peer-reviewed the report. This report was developed under the guidance of Zafer Mustafaoğlu, Judith Green, and Ilias Skamnelos at the World Bank and Issa Faye and Samer Elesawi at the IsDB. The team is also grateful for the cooperation of Bank Negara Malaysia, Halal Development Corporation Berhad, Jabatan Kemajuan Islam Malaysia, Labuan Financial Services Authority, Securities Commission of Malaysia, Badan Wakaf Indonesia, Komite Nasional Ekonomi dan Keuangan Syariah, Otoritas Jasa Keuangan, Yayasan Hutan Wakaf Bogor, Halal Industry Development Office of the Philippines Department of Trade and Industry, Islamic Financial Services Board, and Association of Shariah Advisors in Islamic Finance Malaysia. Production of this report was managed by Eunice Ng and her team at Good News Resources Sdn. Bhd., based on commissioned artwork by Goh Ker Jia. Jeannette Goon Chern Yet and Dina Murad led external communications. Marie Stella Ambrose provided administrative support at different stages of this report. The views, thoughts, and opinions expressed in the text belong solely to the authors, and not necessarily to the authors’ employer, organization, committee, or other group or individual. Please contact Shahira Zaireen Bt Johan Arief Jothi (World Bank Senior Financial Sector Specialist for Malaysia) at sjohan3@worldbank.org, or Syed Faiq Najeeb (IsDB Lead Islamic Finance Specialist) at snajeeb@isdb.org for questions, comments, or suggestions regarding this report. Islamic Finance and Climate Agenda 7 Contents Foreword�����������������������������������������������������������������������������������������������������������������������������������������������������������������6 Acknowledgement��������������������������������������������������������������������������������������������������������������������������������������������������7 List of Figures��������������������������������������������������������������������������������������������������������������������������������������������������������9 List of Tables��������������������������������������������������������������������������������������������������������������������������������������������������������11 List of Boxes ��������������������������������������������������������������������������������������������������������������������������������������������������������11 Glossary����������������������������������������������������������������������������������������������������������������������������������������������������������������12 Acronyms��������������������������������������������������������������������������������������������������������������������������������������������������������������14 Executive Summary���������������������������������������������������������������������������������������������������������������������������������������������15 CHAPTER 1 Introduction �������������������������������������������������������������������������������������������������������������������������������������������������������� 18 CHAPTER 2 Islamic Finance and Climate Nexus ������������������������������������������������������������������������������������������������������������������ 26 2.1 Development of Islamic Climate Finance ����������������������������������������������������������������������������������������� 27 2.2 Climate-aligned Development Finance �������������������������������������������������������������������������������������������� 36 2.3 Domestic Islamic Climate Finance Development ����������������������������������������������������������������������������� 40 Special Focus: Greening the Halal Industry�������������������������������������������������������������������������������������������������50 CHAPTER 3 Islamic Climate Finance in Practice ������������������������������������������������������������������������������������������������������������������ 56 3.1 Sukuk ����������������������������������������������������������������������������������������������������������������������������������������������� 57 3.2 Islamic Bank Financing ��������������������������������������������������������������������������������������������������������������������� 62 3.3 Takaful ����������������������������������������������������������������������������������������������������������������������������������������������� 64 3.4 Waqf ������������������������������������������������������������������������������������������������������������������������������������������������� 68 3.5 Lessons Learned ������������������������������������������������������������������������������������������������������������������������������� 73 Special Focus: Islamic Climate Fintech and Digital Asset����������������������������������������������������������������������������74 CHAPTER 4 Key Actions for Islamic Climate Finance Development ���������������������������������������������������������������������������������� 80 Appendix 1: Islamic Sustainable Finance Dataset���������������������������������������������������������������������������������������������85 References ���������������������������������������������������������������������������������������������������������������������������������������������������������� 86 8 Islamic Finance and Climate Agenda List of Figures FIGURE 1.1 Four Factor Decomposition of CO2 Emission in OIC, 2000-2021 19 FIGURE 1.2 Five-year Real GDP (2000=100) (Left) and CO2 Emission per Capita (Right), 2000-2021 19 FIGURE 1.3 Composition of GHG Emissions by Sector (Percentage) in 2021 20 FIGURE 1.4 Vulnerability (Lower Scores are Better) and Readiness (Higher Scores are Better) to Climate Change in 2022 21 FIGURE 1.5 Share of Natural Capital in Total Wealth (Percentage), 1998-2018 22 FIGURE 1.6 Impacts of Low-Emission Development Pathways on GDP by 2030 Compared with the Reference Scenario, by Country and Income Class 23 FIGURE 1.7 Conceptual Framework 24 FIGURE 2.1 Composition of Global Climate Finance and Global Cross-Border Climate Inflows in 2022 28 FIGURE 2.2 Global Size of Sustainable Finance Market (Left) and Market Share of Sustainable and Islamic Issuances in the OIC (Right), 2017-2024 31 FIGURE 2.3 Sustainable Sukuk Issuances (Left) and Market Share of Sustainable Sukuk Issuances (Right) in Select OIC Countries, 2017-2024 32 FIGURE 2.4 Composition of Sustainable Sukuk by Shariah Contracts, 2017-2024 32 FIGURE 2.5 Composition of Sustainable Bond and Sukuk Classification by Total Amount Issued (Left) and Number of Unique Issuers (Right) in OIC, 2017-2024 33 FIGURE 2.6 Total Sustainable Syndicated Loans and Islamic Financing in Select OIC Countries (Left) and Sector Allocation (Right), 2017-2024 33 FIGURE 2.7 Total Amount of PE and VC Funding to Clean and Climate Technology and Market Share (Left) and Primary Industry Sector Composition (Right) in Select OIC Countries, 2017-2024 34 FIGURE 2.8 Issuer Composition of Total Sustainable Finance in the OIC (Left) and Issuer Composition of Sustainable Syndicated Loans and Financing in Select OIC Countries (Right), 2017-2024 35 FIGURE 2.9 Issuer Composition of Sustainable Bonds and Sukuk (Top) and Number of Unique Issuers (Bottom) in Select OIC Countries, 2017-2024 35 FIGURE 2.10 Suggested Initiatives to Mobilize Global Islamic Climate Finance 38 FIGURE 2.11 Lives and Livelihoods Fund Model 39 FIGURE 2.12 Barriers to Enhanced Islamic Climate Finance 40 FIGURE 2.13 Islamic Climate Finance Market Growth Opportunities (Based on Alignment with Climate Goals and Ease of Implementation) 41 FIGURE 2.14 Overall Progress of SBFN-OIC Member Countries 42 FIGURE 2.15 Sustainable Finance Ecosystem Development Across the OIC 42 FIGURE 2.16 Respondents’ Demographic – Location (Left), Firm Size (Middle), and Job Designation (Right) 45 FIGURE 2.17 Institutional Approach to Implementing Sustainability and Climate Agenda 46 Islamic Finance and Climate Agenda 9 FIGURE 2.18 Institutional Understanding of Sustainable Islamic Finance 46 FIGURE 2.19 Three Main Priorities for Financial Regulators 47 FIGURE 2.20 Top Three Primary Contributors to Scope 3 Emissions and Top Three Sectors with the Most Significant Opportunity for Decarbonization 47 FIGURE 2.21 Five Main Challenges in Financing Decarbonization 48 FIGURE 2.22 Five Priorities to Address Challenges 48 FIGURE 2.23 Global GHG Emissions in the Food System (Left) and Cosmetics and Personal Care (Right) 51 FIGURE 2.24 ESG Adoption Priority (Left) and Motivation for Adoption (Right) 52 FIGURE 2.25 ESG Adoption Practices by Halal Companies 53 FIGURE 2.26 Challenges in Adopting ESG Practices 53 FIGURE 3.1 IsDB Green Sukuk Model 58 FIGURE 3.2 Musharaka Sukuk with Blended Finance Model 60 FIGURE 3.3 Amazon Reforestation-Linked Outcome Bond Transaction Structure 61 FIGURE 3.4 DRIVE Takaful Operational Model 65 FIGURE 3.5 Waqf ETF structure on Bursa Malaysia 69 FIGURE 3.6 Yayasan Wakaf Hutan Bogor Model 70 FIGURE 3.7 Waqf Forest Stakeholders 71 FIGURE 3.8 Waqf Forest-Carbon Trading Mechanism Model – Voluntary (B2B) (Left) and Mandatory (Carbon Exchange) (Right) 72 FIGURE 3.9 Five Main Areas of Development by Islamic Fintech 77 FIGURE B 2.1 Application of Islamic Finance Principles for Climate Objectives 30 FIGURE B 2.2 VBI Islamic Green Financing Amounts in 2022-2023 (RM million) 44 FIGURE B 3.1 Virtual Fundraising and Investment Hub under RAMZ 76 10 Islamic Finance and Climate Agenda List of Tables TABLE 2.1 Estimated Investment Needs for Climate Action of Selected OIC Countries 27 TABLE 2.2 Top 20 Islamic Banks Globally and Sustainability Practices 45 TABLE 2.3 Strategic Roadmaps of the Halal Industry in Select Countries 50 TABLE 2.4 Net Zero Target of Select Halal Corporations in Indonesia and Malaysia 52 TABLE 3.1 Types of Climate Finance Instruments, Project Suitability and Ease of Implementation 57 TABLE 3.2 Climate Fintech Examples 75 List of Boxes BOX 2.1 The Nexus Between Islamic Finance Principles and Climate Finance 29 BOX 2.2 Advancing Islamic Climate Finance Through Value-Based Intermediation (VBI) Initiative in Malaysia 44 BOX 2.3 Climate Finance by Islamic Banks in the MENA Region 49 BOX 2.4 Greening Halal Businesses Pilot Program in Malaysia 54 BOX 3.1 Knowledge Partnerships to Build Climate Resilience via Takaful 67 BOX 3.2 Utilization of Islamic Social Finance Instruments for Climate Action 73 BOX 3.3 Labuan Financial Services Authority (LFSA) – Leading the Development of Shariah-Compliant Digital Asset Ecosystem for Sustainability 76 BOX 3.4 Insights from Climate Fintech Players 78 Islamic Finance and Climate Agenda 11 Glossary Principles of Islamic Finance Prohibition of interest (Riba) The premium (interest) that must be paid by the borrower to the lender, along with the principal amount, as a condition for the loan or for an extension, is forbidden. (i) Riba al-Fadl: Riba in hand-to-hand or barter exchange. (ii) Riba al-Nasi’ah: Riba in money-to-money exchange provided the exchange is delayed or deferred, and an additional charge is associated with such deferment. Prohibition of speculative Uncertainty in contractual terms and conditions is forbidden. However, risk-taking is behavior (Gharar) allowed when all the terms and conditions are clear and known to all parties. Ban on financing certain Financing of industries deemed unlawful by Shariah such as liquor, pork, and economic sectors gambling is forbidden. The profit- and loss-sharing Parties to a financial transaction must share in the risks and rewards attached to it. principle The asset-backing principle Each financial transaction must refer to Shariah-compliant tangible assets (e.g., real estate) and/or intangible assets like usufruct (e.g., leasehold rights) or services (e.g., toll road concessions). Takaful (Islamic Insurance) Takaful is a joint guarantee arrangement in which a group of participants agree to support one another jointly for losses arising from identified risks. Under this arrangement, participants commit a sum of money to a common fund that will be used mutually to assist the members against a specified type of loss or damage. Retakaful A form of Islamic reinsurance that operates on the Takaful model. Kafalah A contract of guarantee is used to provide assurance as to performance or liabilities. Wakala (Agency) A contract whereby someone appoints another to act on his/her behalf for a fee. Murabaha Trade with a markup or a cost-plus sale. The purchase of an asset is financed for a profit margin, with the asset purchased on behalf of client and resold at a pre- determined price. Payment could be in lump sum or in installments, and ownership of the asset remains with bank until full payments are made. Commodity Murabaha or A murabaḥah transaction based on the purchase of a commodity from a seller or a Tawarruq broker and its resale to the customer on the basis of deferred murabaḥah, followed by the sale of the commodity by the customer for a spot price to a third party for the purpose of obtaining liquidity, provided that there are no links between the two contracts. Ijarah A contract made to lease the usufruct of a specified asset for an agreed period against a specified rental. It could be preceded by a unilateral binding promise from one of the contracting parties. An ijarah contract is binding on both contracting parties. Musharaka Equity participation contract. Different parties contribute capital, and profits are shared according to a pre-determined ratio, not necessarily in relation to contributions, but losses are shared in proportion to capital contributions. The equity partners share and control how the investment is managed, and each partner is liable for the actions of the others. Mudaraba Trustee financing contract. One party contributes capital while the other contributes effort or expertise. Profits are shared according to a predetermined ratio, and the investor is not guaranteed a return and bears any financial loss. Sukuk (Islamic bonds) Sukuk are 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. 12 Islamic Finance and Climate Agenda Awqaf or Waqf (Endowment) Assets that are donated, bequeathed, or purchased to be held in perpetual trust for general or specific charitable causes that are socially beneficial. Zakat An obligatory financial contribution disbursed to specified recipients that is prescribed by the Shariah for those who possess a minimum amount of wealth that is maintained in their possession for one lunar year. Definitions used in this report Sustainable finance Practices by financial institutions and other financial sector participants that reduce and manage ESG risks resulting from or affecting financial sector activities, including climate change risks, and that encourage the flow of capital to assets, projects, sectors, and businesses that have environmental and social benefits, including climate change mitigation and adaptation. Climate finance Financing that supports the transition to a climate-resilient economy by enabling mitigation actions to reduce and contain greenhouse gas emissions and adaptation actions that promote the climate resilience of infrastructure as well as social and economic assets. International Islamic finance In this report, this refers to institutions such as the Accounting and Auditing standard-setting bodies Organization for Islamic Financial Institutions (AAOIFI), the General Council for Islamic Banks and Financial Institutions (CIBAFI) and the Islamic Financial Services Board (IFSB). Islamic sustainable finance Shariah-compliant sustainable finance. Islamic climate finance Shariah-compliant climate finance. Conventional finance Refers to financing which are not Shariah-compliant. Islamic Finance and Climate Agenda 13 Acronyms Accounting and Auditing Organization IsDB Islamic Development Bank AAOIFI for Islamic Financial Institutions LFSA Labuan Financial Services Authority ADB Asian Development Bank LIC Low-Income Countries AE Advanced Economies LMIC Lower-Middle Income Countries ASEAN Association of Southeast Asian Nations LSEG London Stock Exchange Group BNM Bank Negara Malaysia Land Use, Land Use Change and LULUCF CAGR Compound Annual Growth Rate Forestry CBI Climate Bond Initiative MDB Multilateral Development Bank World Bank Country Climate and MENA Middle East and North Africa CCDR Development Reports MIC Middle-Income Countries General Council for Islamic Banks and CIBAFI MRV Monitor, Verify, and Report Financial Institutions ND-GAIN Notre Dame Global Adaptation Initiative CO2 Carbon dioxide NGO Non-Governmental Organization COP Conference of the Parties OIC Organization of Islamic Cooperation CPI Climate Policy Initiative PE Private Equity DFI Development Financial Institution PPP` Public-Private Partnership Emerging Markets and Developing EMDE Economies PV Present Value ESG Environment, Social, and Governance Refinitiv Refinitiv-LSEG Database Fintech Financial Technology Sustainable Banking and Finance SBFN Network F&B Food and Beverage SC Securities Commission Malaysia FOLU Food and Land Use SDG Sustainable Development Goals GCC Gulf Cooperation Council Statistical, Economic and Social GDP Gross Domestic Product SESRIC Research and Training Center for Islamic GHB Greening Halal Business Countries GHG Greenhouse Gas SME Small Medium Enterprise HIC High-Income Countries SSA Sub-Saharan Africa ICMA International Capital Market Association UAE United Arab Emirates IFC International Finance Corporation UMIC Upper-Middle Income Countries IFSB Islamic Financial Services Board UNDP United Nations Development Program Independent High-Level Expert Group United Nations Environment Program IHLEG UNEP FI on Climate Finance Finance Initiative ILO International Labour Organization VC Venture Capital IMF International Monetary Fund WBG World Bank Group 14 Islamic Finance and Climate Agenda Executive Summary Islamic Finance and Climate Action Climate change presents a major global challenge with Islamic finance offers a compelling ethical foundation profound effects on economic growth, especially in to support this climate action. Rooted in principles highly exposed and poorly prepared regions. The World of justice, responsibility, and stewardship, Islamic Bank has estimated that a pessimistic climate scenario finance promotes financial models that align economic could reduce a country’s gross domestic product activity with societal and environmental well-being. (GDP) by over 15 percent by 2050 (World Bank Group, This alignment integrates environmental, social, and 2024a). The 57 member countries of the Organization governance (ESG) considerations into Islamic financing of Islamic Cooperation (OIC) are particularly vulnerable and investments. Hence, Islamic financial institutions due to their high exposure and low adaptive capacity are uniquely positioned to mobilize investments in to climate change. On average, the OIC countries climate-resilient infrastructure, low-carbon energy, have greater vulnerability and lower readiness to and sustainable sector development, while upholding climate change than non-OIC countries. The Islamic fiduciary responsibility and ethical stewardship. Development Bank (IsDB), whose 57 member countries are basically those of the OIC, further classifies 33 OIC As such, integrating Islamic finance with climate action countries as fragile or conflict-affected (IsDB, 2025). offers a significant opportunity to promote sustainable development within Shariah principles. The global Islamic The OIC is enhancing efforts to meet climate and finance industry is valued at nearly US$4 trillion worldwide development goals. 54 OIC member countries have (IFSB, 2025) and shows growing interest in sustainable ratified the Paris Agreement, and 35 have committed and climate finance. This has motivated the World Bank to achieving net-zero targets (SESRIC, 2023). Low- and the IsDB to produce this report. The report analyzes carbon strategies require significant investment, the role of Islamic finance in the sustainable and climate averaging 1.4 percent of GDP (World Bank Group, finance market, incorporating insights from surveys 2022b). However, for low-income countries (LICs), it conducted with Islamic finance professionals and halal can exceed five percent, necessitating support from industry enterprises and interviews with policymakers and high-income countries (HICs) through concessional private sector participants. The objective is to identify finance and grants. The World Bank estimated1 that opportunities and address challenges to enhance the over US$1 trillion is needed by 2050 for climate action development of the Islamic sustainable finance market in the OIC, requiring the mobilization of public and in general, focusing on climate finance, which includes private sector funding. funding for climate mitigation, climate adaptation, and resilience building. Progress So Far The report estimates that the amount of sustainable This growth slightly exceeds global sustainable bond financing raised in the OIC has increased from US$17.8 issuances, which rose from US$215.1 billion in 2017 to billion in 2017 to US$82.3 billion in 2024, reflecting a US$913.2 billion in 2024, with a CAGR of 22.9 percent. compound annual growth rate (CAGR) of 24.4 percent. This suggests alignment with the global trend. Between 1 Based on available estimates for some OIC countries from World Bank CCDRs, see Table 2.1 in this report. Islamic Finance and Climate Agenda 15 Executive Summary 2017 and 2024, the OIC raised a total of US$336.9 billion market. The Islamic Financial Services Board (IFSB), in sustainable financing, accounting for only 0.1 percent the General Council for Islamic Banks and Financial of overall global sustainable financing. Of this amount, Institutions (CIBAFI), and the Accounting and Auditing Islamic issuances made up 16 percent (US$53.9 billion), Organization for Islamic Financial Institutions (AAOIFI) representing 4.6 percent of all Islamic financing within have made significant progress in developing prudential the same timeframe. This higher share compared to the guidance and governance standards, and facilitating conventional markets indicates the relevance of Islamic capacity building, as well as leading policy discourse with finance for climate finance. other international standard-setting bodies to ensure alignment with global best practices. Nevertheless, the sustainable finance market within the OIC is still in its developmental phase. From 2017 to Generally, developing a climate finance ecosystem in 2024, only 19 countries issued sustainable bonds, while the OIC, whether conventional or Islamic, faces common five issued sustainable sukuk. The issuance of sustainable challenges. OIC countries face significant obstacles in sukuk increased from US$464 million in 2017 to US$9 building effective climate finance ecosystems, especially billion in 2024, representing a CAGR of 52.7 percent. in Islamic finance, due to institutional weaknesses, Malaysia has emerged as a leader in this market through fragmented policies, especially in the real sector that green sukuk issuances. Despite this progress, only one- are not well-aligned with the financial sector, and limited third of sustainable sukuk issuances were classified as market capacity. These challenges are compounded green, in contrast to nearly two-thirds of sustainable by underdeveloped financial sectors, high barriers to bonds. This suggests that Islamic finance instruments are accessing international funds, and a lack of specialized employed for broader sustainable objectives, indicating products for climate projects. To unlock the potential of potential opportunities to enhance climate finance. Islamic climate finance and bridge the climate funding gap, targeted reforms are needed such as regulatory Islamic bank financing demonstrates considerable improvements, capacity building, and fostering growth potential within the Islamic sustainable finance innovation in financial products. Strengthening these market. This report estimates that only 8.2 percent of areas will enable sustainable development and help sustainable syndicated loans raised between 2017 and meet climate goals across the OIC region. 2024 were Shariah-compliant. With Islamic banking assets estimated at US$2.8 trillion (IFSB, 2025), this In conclusion, the development of sustainable finance segment represents a significant opportunity for further markets among OIC member countries underscores the development, and considerable efforts are being OIC’s commitment towards climate action. Malaysia made in various regions to increase this segment’s and Indonesia in Southeast Asia, Saudi Arabia, and the penetration. Islamic bank financing is vital for channeling United Arab Emirates in the Gulf Cooperation Council capital towards green investments, particularly for (GCC) are taking commendable strides in issuing green small and medium enterprises (SMEs). Enhancing the and sustainable sukuk. The emergence of novel Islamic OIC’s private equity (PE) ecosystem also offers further finance instruments, such as green and sustainability- climate funding opportunities, primarily to support new linked sukuk, has been instrumental in advancing Islamic technologies and innovations. Between 2017 and 2024, climate finance. To further enhance the efficacy of these only three percent (632) of companies seeking funds endeavors, it remains imperative to continue nurturing through PE for clean and climate technology originated the growth of the Islamic financial sector, thereby from the OIC, representing merely 0.46 percent (US$2 facilitating access to essential funds for climate and billion) globally. broader sustainability projects. The potential for Islamic finance to support the climate agenda and tackle climate Additionally, Islamic finance standard-setting bodies change is noteworthy, and promoting ongoing growth have committed to developing the critical enablers to and innovation in this area will be key to achieving the support the development of the Islamic climate finance OIC collective sustainability goals. Call to Action The Islamic finance sector stands at a pivotal moment. three strategic priorities, drawing upon insights from It is uniquely positioned to drive meaningful progress stakeholder engagements and lessons learned from the on global climate goals through values-based, inclusive case studies reviewed in the report. financial solutions. To realize this potential, policymakers, regulators, multilateral development banks (MDBs), and First, advancing the Islamic finance market for other development partners must act decisively across climate action by mainstreaming climate-aligned 16 Islamic Finance and Climate Agenda Executive Summary sukuk, Shariah-compliant bank financing and financial industry’s ESG performance and crucially, the impact protection through Takaful (Islamic insurance). This from Islamic finance supported climate mitigation and is crucial for directing capital towards climate-positive adaption strategies. Additionally, considering the nascent infrastructure, such as renewable energy and sustainable development of the takaful market, Islamic finance transport, and building resilience to climate change. This standard-setting bodies and MDBs should continue to report in Chapter 3 gives examples of innovative product advance the policy discourse, leveraging the UNDP-IsDB structures that utilized either Islamic and conventional and other partners’ led Global Takaful Alliance to connect finance for climate mitigation and adaption strategies. with other global disaster risk insurance platforms. Policymakers should spearhead initiatives to create strong issuance pipelines, with support from targeted Third, enhance the development of innovative Islamic incentives and technical assistance from development climate finance products. To expand the existing Islamic partners. Governments can develop their sukuk markets climate finance products and services, several action by exploring sovereign issuances to establish market plans can be explored. This includes establishing Islamic benchmarks, demonstrating a strong commitment blended finance funds to facilitate the mobilization to sustainable finance, and guiding private sector of public and private capital and financial innovation participation. MDBs play a crucial role in this vision, platforms, such as regulatory sandboxes, that can help providing Shariah-compliant credit enhancements pilot innovative solutions before scaling up. In addition, and co-financing options to reduce financial risks, thus innovation utilizing Islamic social finance instruments making them more appealing to diverse investors. such as zakat (almsgiving), waqf (endowment), and qard (interest-free loan) should be further explored to Second, accelerate capacity building and technical offer financial protection to vulnerable segments of exchanges among OIC member countries. Training the population in the OIC. This will require strategic programs for financial regulators are vital to developing alignment with national climate strategies, establishing a comprehensive Islamic climate finance ecosystem. clear governance and reporting frameworks to ensure Collaboration among Islamic finance standard-setting the transparent, effective deployment of funds for bodies, advanced Islamic finance regulators, and MDBs climate action to intended beneficiaries. can support the creation of a dedicated online knowledge resource for Islamic climate finance. This can promote Now is the time for bold, collaborative leadership to cross-regional knowledge exchanges, consistent elevate Islamic finance as a catalyst for sustainable, implementation of globally harmonized standards, and climate-resilient growth. improved technical capabilities. On the same platform, centralized dashboards can be developed to monitor The following table summarizes the key action plans Islamic climate finance progress and the Islamic finance proposed by this report. Recommendation Stakeholder 1. Mainstreaming and Deepening Islamic Climate Finance Instruments (i) Developing a strong climate project pipeline Governments, Islamic finance regulators, private sector players (ii) Introducing well-designed incentives for utilizing Governments, Islamic finance regulators Islamic finance (iii) Technical collaboration with MDBs Governments, Islamic finance regulators, MDBs 2. Accelerate Capacity Building and Technical Exchanges (i) Developing a dedicated knowledge resource to Islamic finance standard-setting bodies, Islamic finance expand access to critical training regulators, MDBs (ii) Enhancing Islamic climate finance data Islamic finance standard-setting bodies, Islamic finance infrastructure regulators, Islamic financial institutions, MDBs (iii) Strategic focus on both climate adaptation and Islamic finance standard-setting bodies, Islamic finance mitigation strategies regulators, Islamic financial institutions, MDBs 3. Enhance Islamic Climate Finance Products (i) Establishing innovative Islamic climate finance Governments, Islamic finance regulators, private sector products, including blended finance players, MDBs (ii) Establishing financial innovation platforms Governments, Islamic finance regulators, private sector players, MDBs (iii) Enhancing utilization of Islamic social finance Zakat and waqf governing bodies, Islamic finance regulators, instruments Islamic financial institutions, NGOs Islamic Finance and Climate Agenda 17 CHAPTER 1 – Introduction CHAPTER 1 Introduction 18 Islamic Finance and Climate Agenda CHAPTER 1 – Introduction Over the past two decades, higher population and and 2020 (Figure 1.2). As of the end of 2021, 16 OIC economic growth rates in the OIC2 have contributed to member countries recorded CO2 emissions per capita increased greenhouse gas (GHG) emissions. Between above the world average, including countries such as 2000 and 2021, carbon dioxide (CO2) emissions from Malaysia, Saudi Arabia, and the United Arab Emirates fossil energy in the OIC increased by 97.8 percent, driven (UAE). In terms of sectoral composition, about half of the by a 50.9 percent rise in population and a 15.3 percent GHG emissions produced in these countries were linked increase in GDP per capita (Figure 1.1). GDP expansion to electricity and land use, land use change, and forestry and the average per capita CO2 emission in the OIC (LULUCF) (Figure 1.3). have been higher than the world average between 2000 FIGURE 1.1 Four Factor Decomposition of CO2 Emission in OIC, 2000-2021 120 Change from 2000 level (%) 100 80 60 40 20 0 -20 -40 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 CO2 Emission GDP per capita Carbon Intensity (CO2 Emission/Energy) Population Energy Intensity (Energy/GDP) Source: EDGAR, World Bank, Global Carbon Budget (2024); U.S. Energy Information Administration (2023); Energy Institute - Statistical Review of World Energy (2024) – with central processing by Our World in Data FIGURE 1.2 Five-year Real GDP (2000=100) (Left) and CO2 Emission per Capita (Right), 2000-2021 25 6% 20 5% tCO2e per capita 4% 15 3% 10 2% 5 1% 0% 0 2000-2005 2005-2010 2010-2015 2015-2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 World OIC Countries Indonesia Malaysia World OIC LIC MIC HIC Saudi Arabia Türkiye United Arab Emirates Source: Author’s calculation based on data from the national accounts Source: Climate Watch Data database of the World Bank 2 The OIC has 57 member countries, representing over 1.7 billion people and is the second largest inter-governmental organization worldwide. All OIC member countries are eligible member countries of the IsDB. Islamic Finance and Climate Agenda 19 CHAPTER 1 – Introduction FIGURE 1.3 Composition of GHG Emissions by Sector (Percentage) in 2021 100% 90% 24% 27% 80% 54% 37% 31% 70% 18% 15% 60% 18% 14% 50% 29% 40% 9% 31% 37% 38% 30% 1% 18% 20% 11% 10% 3% 1% 28% 10% 9% 10% 12% 16% 0% Indonesia Malaysia Saudi Arabia Turkey United Arab Emirates Manufacturing Agriculture Electricity Transportation Others Source: Climate Watch Data The OIC is one of the more vulnerable groups of countries OIC on average was estimated to have a vulnerability globally due to their high exposure and low adaptive score of 0.46 and readiness of 0.36, while the world’s capacity to climate change. According to modeling average levels of vulnerability and readiness were 0.43, results, some of the highest temperature increases respectively (Figure 1.4). This suggests that OIC countries are estimated to occur in arid and semi-arid regions, are more vulnerable and underprepared for the effects particularly in Sub-Saharan Africa (SSA), the Middle East of climate change than many other global regions. At the and North Africa (MENA), and Central Asia, where many individual country level, 32 countries, that is more than OIC countries are located (IPCC, 2014a), exposing them half of the OIC, were estimated to be more vulnerable to significant physical risks. According to the Notre Dame than the world average, and 75 percent had readiness Global Adaptation Initiative (ND-GAIN)3 Index 2022, the levels below the world average. 3 ND-GAIN index provides a comprehensive overview of how well countries are prepared to face the multifaceted challenges posed by a changing climate. The ND-GAIN index defines vulnerability as the “propensity or predisposition of human societies to be negatively impacted by climate hazards.” It considers three dimensions: exposure, sensitivity, and adaptive capacity. The ND-GAIN index also measures a country’s readiness to adapt to climate change, which is defined as its ability to leverage investments into adaptation actions. It considers three main components: economic readiness, governance readiness, and social readiness. (Chen et al., 2015) 20 Islamic Finance and Climate Agenda CHAPTER 1 – Introduction FIGURE 1.4 Vulnerability (Lower Scores are Better) and Readiness (Higher Scores are Better) to Climate Change in 2022 0.7 0.65 Highly TCD Highly Vulnerable, Vulnerable, NER Ready to Adapt Less Ready to GNB 0.6 Adapt SDN SOM MLISLE AFG MRT BEN MDV 0.55 BGD COM GIN SEN GMB Vulnerability YEM UGA BFA 0.5 PAKDJI TGO CMR CIV MOZ OIC NGA 0.45 SYR GAB GUY World BHR IRQ LBY SUR IDN OMN AZE SAU 0.4 LBN BRN EGY ALB ARE TKM TUN TJK DZA IRN JOR MAR KWT MYS TUR 0.35 UZB QAT Less Vulnerable, Less Vulnerable, Less Ready to Adapt KGZ Ready to Adapt KAZ 0.3 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Readiness Source: Author’s calculation based on ND-GAIN OIC countries, on average, are also more dependent 27.7 percent, indicating a shift in economic composition on natural resources for wealth creation than the (Figure 1.5). According to the OIC Environment Report global average, which exposes them to transition risk, 2023, environmental challenges like land degradation, particularly related to energy transition. Between 1998 biodiversity loss, air pollution, and water insecurity and 2018, the economic value of natural capital in OIC threaten the population’s well-being in the OIC, countries nearly doubled to US$21.9 trillion, though necessitating immediate and effective management its share of total wealth declined from 31.6 percent to strategies (SESRIC, 2023).4 4 In the period between 2010 and 2020, the global rate of deforestation was estimated at 0.12 percent forest area loss per year, down from 0.13 percent per year in 2000-2010. The deforestation rate in OIC was 0.27 percent per year during 2000-2010 and significantly rose to 0.44 percent per year from 2010-2020. Water stress has risen in the OIC from 25.7 percent to 33.5 percent, compared to globally, which increased from 16.4 percent in 2000 to 16.7 percent in 2020 (SESRIC, 2023). Islamic Finance and Climate Agenda 21 CHAPTER 1 – Introduction FIGURE 1.5 Share of Natural Capital in Total Wealth (Percentage), 1998-2018 50 39.3 38.1 36.3 40 34.1 31.6 27.7 30 20 12.7 13.0 13.3 13.3 11.2 7.7 10 6.1 7.2 8.3 7.9 6.2 2.7 2.6 5.8 2.0 2.0 2.2 2.1 0 1998 2002 2006 2010 2014 2018 OIC Developed Countries World Non-OIC Developing Countries Source: SESRIC, 2023 However, climate change impacts and development hazards, which are increasing with climate change, such challenges vary significantly among OIC countries. as flooding, rising sea levels, heat waves, droughts, and The World Bank Group’s Country Climate and ocean warming. The CCDRs estimated that the impact Development Report (CCDR) is a key diagnostic tool of a pessimistic climate scenario on reducing the GDP that comprehensively analyzes climate change impacts of the OIC member countries could be as much as 11 to help inform the development of climate action percent. Still, well-designed policies and adequate strategies. Until the end of 2024, the World Bank has financing could help countries reduce emissions, all published CCDRs for 72 countries, including 29 in the while continuing to promote economic growth (World OIC, highlighting nuanced vulnerabilities. The CCDRs Bank, 2022b) (Figure 1.6). Similarly, joint quantitative assist policymakers in identifying and prioritizing actions modeling studies conducted by the International Labor that simultaneously reduce GHG emissions, enhance Organization (ILO), the IsDB, and other partners show resilience to climate impacts, and promote sustainable significant socioeconomic opportunities for growth at economic growth. both regional and country levels. For example, a 2023 study found that the MENA region could create 10 million The CCDRs of OIC member countries help illustrate new jobs and accelerate GDP to 7.2 percent and increase the diverse and complex climate challenges and employment by 5.3 percent in less than three decades, development needs facing the respective countries. through strong industrial and climate development The CCDRs covered 5 LIC, 16 LMIC, and 8 UMIC in the policies (ILO & IsDB, 2023). OIC. These countries are vulnerable to many natural 22 Islamic Finance and Climate Agenda CHAPTER 1 – Introduction FIGURE 1.6 Impacts of Low-Emission Development Pathways on GDP by 2030 Compared with the Reference Scenario, by Country and Income Class GDP per capita ($) GDP Low-income Niger 600 1.1 Burkina Faso 850 -0.5 Mali 860 1.7 Lower-middle income Tajikistan 1440 -1.1 Pakistan 1500 1.2 Mauritania 2150 0.1 Bangladesh 2860 -2.3 Morocco 3700 0.2 Tunisia 3770 1.0 Egypt, Arab Rep. 3900 -0.1 Lebanon 4410 0.6 Upper-middle income Indonesia 4870 1.0 Iraq 5600 1.0 Azerbaijan 6680 -0.1 Albania 7570 -0.1 Kazakhstan 10940 1.1 Türkiye 11650 2.0 -3 -2 -1 0 1 2 3 4 Impacts from Climate Change Policy (%) Source: World Bank (2024a) Climate change poses significant risks to people, GHG emissions while promoting economic growth. By causing long-term, irreversible, and intergenerational adopting such measures, vulnerable regions can better harm (World Bank, 2024a). The most vulnerable navigate the dual challenges of economic expansion and populations are often disproportionately affected climate change, ensuring a more sustainable and resilient as vulnerability factors, such as economic exclusion future. Although there are varying estimates of financial and food insecurity, frequently intersect with climate needs for climate change mitigation and adaptation for exposure. The IsDB’s 2025 Resilience Report highlight emerging markets and developing economies (EMDE), the increasing intersection between climate change, the consensus is that trillions of dollars are needed conflict, and resiliency (IsDB, 2025). Furthermore, climate annually (Chapagain et al., 2020). change can induce people to migrate as an adaptation strategy. These migrants often have a reduced capacity The intensifying climate crisis necessitates the to prepare for and respond to climate effects in their new urgent realignment of the financial sector to support locations. The Bangladesh CCDR estimated that about environmentally sustainable and socially responsible 2.5 percent of the population has been displaced by investment practices. However, mobilizing capital natural hazards, and by 2050, around 27 percent of all for sustainability and climate action faces challenges, South Asian climate migrants will come from Bangladesh. including market failures and financial frictions that Delivering climate and development goals and the result in underinvestment. These issues stem from required economic transformation entails large-scale externalities and mispricing of sustainability benefits, investments, technological breakthroughs, and the costs, and risks. To address this, financial systems widespread adoption of technologies and products must tackle two interconnected challenges: managing geared toward resilience to climate change and greater climate and environmental risks to the financial sector sustainability (World Bank & IFS, 2022). This includes and developing opportunities to mobilize capital for investing in sustainable infrastructure, enhancing adaptive sustainable investments (Figure 1.7) (World Bank & IFS, capacities, and implementing policies that reduce 2022). This report focuses on the latter. Islamic Finance and Climate Agenda 23 CHAPTER 1 – Introduction FIGURE 1.7 Conceptual Framework Financing Sustainability Opportunities Financing Sustainable Investments Risks Managing Physical Demand (Private Sector) and Transition Risks Project Timeline, Scalability Tech Adoption Basic R&D Radical Innovation Low High Risk Risk Financial Frictions, Distortions Policies Supply (Financial Sector) Debt Equity Financing Financing Enabling Environment Business Environment, Financial Infrastructure Source: World Bank & IFS, p.32 (2022) Integrating Islamic finance and sustainability represents the Islamic sustainable and climate finance market, a significant opportunity to foster sustainable presenting important insights into its current dynamics. development while adhering to Islamic principles. The report includes findings from surveys conducted The Islamic finance industry, valued at approximately with Islamic finance professionals and halal industry US$4 trillion globally (IFSB, 2025), has demonstrated enterprises and interviews with key stakeholders, increased interest in sustainable and climate finance including policymakers and private sector participants. initiatives. Islamic finance principles prohibit dealings It aims to identify opportunities and challenges that can involving interest, speculative transactions, and unethical advance the development of the Islamic sustainable activities. These principles foster a financial model based finance market in general and Islamic climate finance in on risk-sharing, asset-backing, and ethical accountability, particular, which includes funding for climate mitigation, which closely align with the foundational goals of adaptation, and resilience. sustainability and climate finance. This report estimates that the amount of sustainable financing, comprising This report focuses on those opportunities by presenting debt instruments and private equity, raised in the OIC case studies of different climate financing instruments has grown from US$17.8 billion in 2017 to US$82.3 billion and distilling lessons learned to unlock further Islamic in 2024, equivalent to a compound annual growth rate financing for climate action. The remaining chapters (CAGR) of 24.4 percent.5 However, this still represents of this report are organized as follows: Chapter 2 a small fraction of the global Islamic finance assets, summarizes current state of Islamic climate finance indicating a significant opportunity for the Islamic finance globally and presents insights from survey results and industry to facilitate financial intermediation to serve the focus group discussions with key stakeholders, Chapter broader sustainability and climate agenda. 3 illustrates different case studies of financial instruments for financing the climate agenda, and Chapter 4 The growing interest in Islamic sustainable and climate concludes with recommendations to address existing finance has prompted the World Bank and the IsDB challenges and harness the opportunities available to the to collaborate on producing this report. It analyzes Islamic finance industry. 5 See Chapter 2 of this report for details of the estimates. 24 Islamic Finance and Climate Agenda CHAPTER 2 Islamic Finance and Climate Nexus 26 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus 2.1 Development of Islamic Climate Finance The OIC is increasing efforts to deliver on climate and substantial investment, averaging an estimated amount development goals. All OIC member countries have equivalent to 1.4 percent of GDP. However, for LIC, the endorsed the 2015 Paris Agreement, with all but three necessary investment can exceed five percent of GDP, having ratified or acceded to it. As of 2023, 35 OIC highlighting the need for increased support from HIC, member countries have committed to achieving the net- including concessional finance and grants (World Bank, zero target in various stages (SESRIC, 2023), and many 2022b). The CCDRs estimated that more than US$1 trillion are updating their Nationally Determined Contributions in investment is needed by 2050 for climate action in the (NDCs) in accordance with the Paris Agreement “ratchet” OIC (Table 2.1). This substantial investment will require mechanism. Implementing low-carbon strategies requires the mobilization of public and private sector funds. TABLE 2.1 Estimated Investment Needs for Climate Action of Selected OIC Countries Coastal areas Urban cities Agriculture Industries Transport Country (Year of report) Estimated investment cost Energy National Net Zero Target Waste Water Bangladesh (2022/LMIC) 2060    US$38 billion by 2030 Jordan (2022/LMIC) INA      US$9.5 billion by 2030 Morocco (2022/LMIC) 2050   US$78 billion by 2050 (PV terms) Pakistan (2022/LMIC) 2050     US$348 billion by 2030 Tunisia (2023/LMIC) 2050     US$54 billion by 2050 Indonesia (2023/UMIC) 2060      US$311 billion by 2040 Maldives (2024/UMIC) 2030    US$1.8-4 billion Iraq (2022/UMIC) INA     US$233 billion by 2040 Türkiye (2022/UMIC) 2053     US$165 billion by 2040 (PV terms) Source: CCDRs and Net Zero Tracker https://zerotracker.net/ Note: INA- Information not available Available global estimates of funding for sustainable (World Bank, 2024b, Figure 2.1). Most climate finance and climate activities show an increasing trend, now was channeled toward China and advanced economies hovering around US$2 trillion annually, but they are (AE). Public climate finance (bilateral and multilateral, far from adequate to meet the estimated investment attributable to AE) accounted for nearly 86 percent needs. The World Bank estimated that the size of global (approximately US$52.5 billion) of the total global climate climate finance was US$1.4 trillion in 2022. It noted a finance inflows to EMDE (excluding China) in 20226 (Figure significant financing gap in the EMDE with more limited 2.1). More recently, the Climate Policy Initiative (CPI) 2025 domestic and private sector financing for climate goals Global Landscape of Climate Finance report (CPI, 2025) 6 According to the OECD, in 2022, AE provided and mobilized a total of US$ 115.9 billion in climate finance for EMDE, exceeding the annual US$ 100 billion goal for the first time (OECD, 2024). The US$ 100 billion pledge was made at the 15th Conference of Parties (COP15) of the UNFCCC in Copenhagen in 2009. Islamic Finance and Climate Agenda 27 CHAPTER 2 – Islamic Finance and Climate Nexus estimated that global climate finance hit an all-time high global climate adaptation finance reached US$65 billion of US$1.9 trillion in 2023, and 2024 figures will likely in 2023. Whilst climate-aligned development finance for exceed US$2 trillion. The report estimated that the global EMDEs increased almost threefold between 2018 and climate mitigation finance more than doubled between 2023, more catalytic capital is required to scale climate 2018 and 2023 (US$757 billion to US$1.78 trillion), and flows across all regions further.7 FIGURE 2.1 Composition of Global Climate Finance and Global Cross-Border Climate Inflows in 2022 $1,415 bn $212 bn 3 4 41 36 Private sources 14% 42 61 86% Public sources 14 Global climate finance Global climate finance inflows EMDES (ex China) China AEs Unknown Source: World Bank (2024b) The Independent High Level Expert Group on Climate Due to the significant climate financing gap, Islamic Finance (IHLEG) estimated that domestic resources sustainable and climate finance has gained significant accounted for about 70 percent of climate finance and attention in recent years. The fundamental principles are expected to finance US$1.4 trillion per year of the of Islamic finance which promotes risk sharing, fair total investment needed by 2030 (IHLEG, 2023). The distribution of wealth, avoidance of harm, and equal report emphasized the critical role of the private sector opportunities for all, is well aligned with the Paris in mobilizing the necessary finance for climate action Agreement, the Sustainable Development Goals (SDGs), and calls for creating enabling environments that attract and the 2015 Islamic Declaration on Global Climate private investments, including policy actions to deepen Change8 (Hiller et al. 2023). As of end 2024, the global domestic financial and capital markets. Accelerating size of Islamic financial assets was estimated to be US$3.9 financial sector development is key to unlocking funds trillion, comprising US$2.78 trillion Islamic banking assets toward climate mitigation, adaptation, and broader (71.6 percent), US$904.1 billion sukuk outstanding (23.3 sustainability efforts. percent), US$143.6 billion Islamic funds (3.7 percent), and US$54.32 billion takaful contributions (1.4 percent) (IFSB, 2025). More than half (53.1 percent) of Islamic assets 7 In 2018 and 2019, OIC countries received an average of US$23.9 billion in climate funds annually (SESRIC, 2023). 8 The 2015 Islamic Declaration on Global Climate Change, announced in Istanbul, Türkiye, at the International Islamic Climate Change Symposium, was a faith-based call to action from Islamic leaders and scholars urging a global effort to combat climate change. 28 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus reside in the Gulf Cooperation Council (GCC)9 and 21.9 as green sukuk, has been emphasized as imperative for percent in Southeast Asia.10 The size of Islamic financial supporting climate mitigation and adaptation initiatives assets is expected to increase to an estimated US$6.7 (Schmillen et al., 2018). The World Bank also highlighted trillion by 2027 (ICD & LSEG, 2023). The mobilization of the potential of Islamic finance to support the green Islamic financing through innovative instruments, such agenda and address climate change (Kamil et al., 2019). 9 GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). 10 Brunei, Indonesia, and Malaysia. BOX 2.1 The Nexus Between Islamic Finance Principles and Climate Finance Vulnerability to climate shocks among OIC countries 2. Preservation of Wealth (Hifz al-Mal) and calls for an Islamic economics and finance jurisprudential Sustainable Investments pivot toward the principle of public interest (maslahah). Climate-related economic and financial risks will Grounded in Islamic legal theory (uṣūl al-fiqh), maslahah adversely impact current wealth and future wealth empowers decision makers to pursue interventions generating abilities (e.g. loss of wealth due to property that protect society and the environment. This damage, loss of future agriculture production due to supports targeted investments such as in ecosystem environmental damage and climate change). Hence, restoration, flood-resilient infrastructure, and climate- integrating climate-related financial risk considerations adaptive agriculture essential in regions grappling with in financing and investment decision making is critical to desertification and rising temperatures.11 preserving wealth. Objectives of Islamic law (Maqasid al-Shariah) provides a 3. Preservation of Lineage (Hifz al-Nasl) and foundational ethical framework that aligns closely with the Intergenerational Climate Justice principles of climate finance. The Maqasid emphasizes Protecting progeny translates into a duty to safeguard five key objectives: the preservation of religion (din), life the planet for future generations. In the Quran, (nafs), intellect (‘aql), lineage (nasl), and wealth (mal). humankind is appointed as a steward (khalifah) on earth, These objectives correspond to core sustainability and entrusted to act for “the greatest good of all species, environmental stewardship principles, making Islamic individuals, and generations”. Hence, investing in a finance a natural fit for addressing climate challenges. livable environment for future generations, is required by Islamic law to prevent harm to those who will inherit 1. Preservation of Life (Hifz al-Nafs) and the earth and to avoid “transgressing the balance” of Environmental Protection creation. Islamic climate finance can be viewed through Protecting human life extends to safeguarding the the lens of intergenerational equity that aims to ensure environment, as a degraded ecosystem threatens environmental legacy honors the rights of future livelihoods, food security, and health. Hence, financing generations. and investing in climate action, such as investing in renewable energy and nature-based solutions, are imperative to protect human life. 11 https://www.unepfi.org/wordpress/wp-content/uploads/2021/01/Sustainable-Arab-Finance-Report-Jan-2021.pdf Islamic Finance and Climate Agenda 29 CHAPTER 2 – Islamic Finance and Climate Nexus 4. Preservation of Intellect (Hifz al-‘Aql) and Climate which resonates with the concept of climate equity that Innovation aims to ensure vulnerable populations receive adequate Islamic jurisprudence promotes intellectual pursuits, support. Islamic social finance mechanisms such as waqf using human ingenuity to serve the public good and (endowments), zakat (almsgiving) qard (interest-free benefit the whole of humankind. The imminent threat of loans) can help communities adapt to climate-related climate change on people and planet requires collective risks without incurring significant financial burdens. efforts to raise awareness among the communities As with conventional finance, traditional Islamic finance and develop sustainable technologies and solutions applications must innovate to effectively support to address these threats. Hence, investing in climate financing and investment for climate action, thus creating research and development (R&D) and supporting a new class of financial instruments, referred to as “Islamic community-based climate awareness programs is climate finance”. The diagram below showcases how the integral to preserving intellect. application of Islamic finance principles has evolved to 5. Promotion of Social Justice and Climate Equity support climate objectives. Islamic finance principles advocate for social justice, FIGURE B 2.1 Application of Islamic Finance Principles for Climate Objectives Islamic finance Traditional application Climate application principles Prevention of harm and Limitation or prohibition on Limitation on financing of or avoidance of unethical financing of or investing in the investing in high-GHG activities tobacco and arms industries intensity industries Islamic financial products with Introduce new Islamic Promoting risk-sharing profit-sharing or profit-and- blended finance products to mechanisms loss-sharing features e.g., house finance climate mitigation financing, corporate financing and adaptation Utilization of waqf Introduce green and forest Promoting fair distribution investment funds to invest in waqf to invest in climate of wealth education and health sectors initiatives Takaful (Islamic insurance) for Introduce climate takaful for death benefit protection, Promoting social-financial climate disaster protection property damage protection, solidarity and derisking of climate medical coverage and investments business protection Source: Authors’ illustration References: World Bank & Islamic Development Bank. 2016. Islamic Finance: A Catalyst for Shared Prosperity? Securities Commission Malaysia. (2023). Principles-based Maqasid Al-Shariah Guidance, Islamic Capital Market, Malaysia. 30 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus This report estimates that the amount of sustainable 4.6 percent of all Islamic financing (sustainable and not) financing12 raised in the OIC has grown from US$17.8 raised within the same timeframe. This higher share billion in 2017 to US$82.3 billion in 2024, at a compared to the conventional markets reinforces the compound annual growth rate (CAGR) of 24.4 percent narrative of Islamic finance as a natural fit for climate (Figure 2.2). This growth slightly surpasses global finance.13 Islamic issuances represent 35 percent of the sustainable bond issuances, which grew from US$215.1 total sustainable bond and sukuk issuances14 (US$34.6 billion in 2017 to US$913.2 billion in 2024, at a CAGR of billion)15, and 8.2 percent of the sustainable syndicated 22.9 percent. This indicates alignment with the global loans raised (US$19.3 billion) in the same period (Figure trend. Between 2017 and 2024, the OIC raised a total of 2.2). However, this represents a small fraction of the US$336.9 billion in sustainable financing, accounting for global Islamic finance assets estimated at US$3.9 trillion 0.1 percent of overall global sustainable financing during and is still far from the funding required to meet the the period. Of this amount, Islamic sustainable issuances OIC’s climate financing needs. constituted 16 percent (US$53.9 billion), representing FIGURE 2.2 Global Size of Sustainable Finance Market (Left) and Market Share of Sustainable and Islamic Issuances in the OIC (Right), 2017-2024 90,000 90,000 40.00% 40.00% 306 349 306 35.0% 35.0% 80,000 80,000 349 35.00% 35.00% 70,000 70,000 30.00% Amount Raised, US$ Millions 30.00% Amount Raised, US$ Millions 60,000 60,000 368 368 25.00% 25.00% 50,353 50,353 55,153 55,153 50,000 50,000 367 367 20.00% 20.00% 40,000 40,000 43,510 43,510 15.00% 15.00% 30,000 30,000 33,500 20 33,500 20 10.00% 10.00% 8.2% 20,000 20,000 8.2% 229 229 78 78 29,261 4.91% 23,974 23,974 29,261 26,808 26,808 4.91% 10,000 9,648352 9,648 5.00% 5.00% 10,000 16,070 16,070 352 16,218 3,726 3,726 16,218 11,857 11,857 1,532 5,288 5,288 5,882 5,882 0.03% 0.03% 0.04% NA 0.04% NA 1,532 - 2,062 2,062 0.00% - 0.00% 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 Bonds/Sukuk Bonds/Sukuk Syndicated Syndicated Loans Loans Equity Private Equity Private Sustainable Bonds/Sukuk Sustainable Bonds/Sukuk Sustainable Syndicated LoansSyndicated Sustainable Loans Private Private for Equity Issuances Equity Issuances Green and for Green and Share of Sustainable Issuances Share of Islamic Issuances Share of Sustainable Issuances Share of Islamic Issuances Climate Climate Tech (VC/PE Tech (VC/PE only) only) Source: CBI, Refinitiv, Pitchbook, and the authors’ calculation The sustainable finance market development in the OIC UAE (Figure 2.3). Total sustainable sukuk issuances is still at a nascent stage. Between 2017 and 2024, 19 in Malaysia during the period made up 80.4 percent countries have issued a sustainable bond, and only five of all sustainable bond and sukuk issuances, followed countries have issued a sustainable sukuk16 (Figure 2.3). by Saudi Arabia and Indonesia. In terms of underlying Sustainable sukuk issuances grew from US$464 million Shariah contracts used to issue the sustainable sukuk, in 2017 to US$9 billion in 2024 (CAGR: 52.7 percent). 37 percent utilized hybrid contracts, and 27 percent In 2017, a Malaysian corporation issued the world’s first utilized Wakala bil istithmar (agency contract). However, green sukuk, amounting to US$59 million, to finance there is significant variation across countries. In a large-scale solar power plant. In 2018, Indonesia Malaysia, hybrid and Murabaha (cost plus) contracts issued the world’s first sovereign green sukuk, totaling each represent 40 percent of the sustainable sukuk US$1.25 billion. Since then, Malaysia has become one issued, whilst in Indonesia 72 percent of sustainable of the largest green and sustainability sukuk issuers, sukuk was issued under Musharaka (equity-based), and with a total of 47 issuances amounting to US$13.4 billion in other countries, Wakala bil istithmar (33 percent) was between 2017 and 2024, followed by Saudi Arabia and, preferred (Figure 2.4). 12 Comprising debt instruments, private equity (PE), and venture capital (VC). 13 This report provides a descriptive analysis of the data and does not explore the empirical analysis of the determinants of climate finance issuances in the OIC. 14 This includes sustainability-linked issuances. 15 Based on Refinitiv dataset, total amount of sustainable sukuk issued from 2017-2024 amounted to US$55.2 billion. 16 Based on Refinitiv dataset, Bangladesh, Nigeria and Türkiye have also issued sustainable sukuk. Islamic Finance and Climate Agenda 31 CHAPTER 2 – Islamic Finance and Climate Nexus FIGURE 2.3 Sustainable Sukuk Issuances (Left) and Market Share of Sustainable Sukuk Issuances (Right) in Select OIC Countries, 2017-2024 10,000 25,000 9,000 500 27.6% 47.3% 8,000 20,000 1,750 Amount Raised, US$ Millions Amount Issued, US$ Millions 80.4% 5,800 0.0% 7,000 750 38.2% 6,000 15,000 9,301 1,500 5,000 3,600 1,500 5,566 4,000 10,000 13,446 800 1,500 1,000 16,833 1,200 600 182 15,201 3,000 750 1,300 10,373 2,000 1,102 5,000 9,004 2,619 3,001 2,953 2,950 1,000 750 1,135 1,250 3,281 464 669 550 - - 240 Malaysia Indonesia Saudi Arabia United Arab Türkiye 2017 2018 2019 2020 2021 2022 2023 2024 Emirates Malaysia Indonesia Saudi Arabia UAE Kuwait Sustainable Bonds Sustainable Sukuk Market Share of Sustainable Sukuk Source: CBI and the Authors’ calculation FIGURE 2.4 Composition of Sustainable Sukuk by Shariah Contracts, 2017-2024 4% 100% 4% 1% 1% 11% 100% 11% 80% 80% 37% 37% 60% 60% 40% 40% 27% 27% 20% 20% 0% 0% 8% Malaysia Malaysia Indonesia Indonesia Other Countries Other Countries 8% 12% 12% Hybrid Ijarah Murabaha Hybrid Ijarah Murabaha Hybrid Hybrid Ijarah Ijarah Murabaha Murabaha istithmar Wakala bil Mudaraba Wakala bil istithmar Mudaraba Musharaka Musharaka Wakala bil istithmar Wakala bil istithmar Mudaraba Mudaraba Musharaka Musharaka Other ContractsOther Contracts Other Other Source: Refinitiv Regarding classification, only a third of sustainable been generally oversubscribed, indicating strong private sukuk issuances in the OIC were labeled as green sector demand for thematically aligned issuances. Within compared to nearly two-thirds of sustainable bond the OIC, a substantial share of green sukuk (58 percent) issuances, indicating that Islamic finance instruments was directed toward the energy sector. This trend not are used for a wider set of sustainable objectives, not only underscores the potential for future growth but also mainly climate. Between 2017 and 2024, US$10.9 billion presents opportunities to expand the range of sukuk green sukuk issuances were raised by 17 issuers compared offerings by tapping into a more diverse project pipeline to US$37.3 billion green bond issuance raised by 57 and creating more innovative structures. issuers (Figure 2.5). These sukuk issuances to date have 32 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus FIGURE 2.5 Composition of Sustainable Bond and Sukuk Classification by Total Amount Issued (Left) and Number of Unique Issuers (Right) in OIC, 2017-2024 40,000 60 57 37,313 35,000 50 44 30,000 Amount Issued, US$ Millions Number of Unique Issuers 40 25,000 23,713 35 21,782 20,000 30 15,000 20 17 10,927 10,000 10 5,000 - 0 CBI Green Bond CBI Social and Sustainability Bond CBI Green Bond CBI Social and Sustainability Bond Sustainable Bonds Sustainable Sukuk Sustainable Bonds Sustainable Sukuk Source: CBI and the authors’ calculation From a lending or financing perspective, this report percent of the UAE’s. 44.2 percent of the syndicated estimates that only 8.2 percent of sustainable loans (and financing) (US$103.6 billion) were raised by syndicated loans raised between 2017 and 2024 the transportation and utilities sector, and 36.2 percent were Shariah-compliant. Saudi Arabia and the UAE (US$84.9 billion) by the finance, insurance, and real estate raised more than half of this Islamic financing (Figure sector. With Islamic banking assets estimated at US$2.2 2.6). Regarding respective market share, this represents trillion, this segment represents a significant opportunity 16.3 percent of Saudi Arabia’s market share of overall for further development. sustainable syndicate loans (and financing) and 6.9 FIGURE 2.6 Total Sustainable Syndicated Loans and Islamic Financing in Select OIC Countries (Left) and Sector Allocation (Right), 2017-2024 70,000 Amount Raised, US$ Millions 63,765 0 20,000 40,000 60,000 80,000 100,000 120,000 60,000 Amount Raised, US$ Millions Transportation, Comm's, Electric, Gas, &.. 103,558 50,000 48,202 Finance, Insurance, & Real Estate 84,946 Manufacturing 17,422 40,000 37,026 Mining 9,095 30,000 Public Administration 7,906 24,277 Construction 4,160 20,000 Services 3,580 10,000 7,862 6,628 Retail Trade 2,782 2,566 794 165 99 Agri, Forestry, & Fishing 508 - Malaysia Indonesia Saudi Arabia UAE Türkiye Wholesale Trade 300 Sustainable Syndicated Loans Sustainable Syndicated Financing Financial Corporates Govt/Public Sector Non-Financial Corporates Source: Refinitiv and the authors’ calculation Islamic Finance and Climate Agenda 33 CHAPTER 2 – Islamic Finance and Climate Nexus Developing the OIC’s private equity (PE) and venture PE and VC are essential sources of climate funding capital (VC) ecosystem also presents additional climate due to their unique ability to finance innovation and financing opportunities. Only three percent (632) of the scale emerging technologies. VC is particularly critical in companies that raised funding through PE and VC for supporting early-stage climate tech startups in sectors clean and climate technology in 2017-2024 were from like renewable energy and sustainable agriculture by the OIC, with a 0.46 percent (US$2 billion) share of providing the capital needed to develop innovative the total amount invested (Figure 2.7).17 At the country solutions. In Southeast Asia, firms such as Malaysia’s level, the UAE leads in the amount invested in clean and Petronas and Thailand’s PTT are actively investing climate technology from the total size of its PE and VC through VC in distributed solar, battery optimization, market, totaling US$619.2 million in 2017-2024, but this and carbon markets. These investments support only represents 3.6 percent market share (Figure 2.7). regional decarbonization efforts and foster cross- Regarding primary industry sector composition, the border collaboration and innovation. Hence, promoting funding raised at the country level is diverse. In Indonesia the development of the Shariah-compliant PE and VC and Saudi Arabia, the energy industry raised the highest ecosystem, especially in the more advanced Islamic amount of funding; in Türkiye, it was consumer products finance jurisdictions such as Malaysia and the GCC can and services; in the UAE, it was the materials and facilitate further climate funding. resources industry (Figure 2.7). FIGURE 2.7 Total Amount of PE and VC Funding to Clean and Climate Technology and Market Share (Left) and Primary Industry Sector Composition (Right) in Select OIC Countries, 2017-2024 700.0 4.0% 100% 15.3 619.2 0.1 1.6 14.6 3.6% 90% 1.4 600.0 3.5% 0.1 80% 388.1 3.0% 159.8 43.2 500.0 70% 54.8 US$ Millions 2.5% 60% 11.5 0.1 400.0 369.1 50% 16.2 2.0% 1.8% 0.9 300.0 1.7% 40% 1.5% 7.4 39.4 1.3% 30% 139.1 0.0 49.8 200.0 75.1 1.0% 1.4 134 20% 23.5 94.6 39.4 100.0 0.5% 0.5% 10% 4.1 54.7 76.9 20.0 8.1 10.1 0% - 0.0% Malaysia Indonesia Saudi Arabia UAE Türkiye Malaysia Indonesia Saudi Arabia UAE Türkiye Business Products and Services (B2B) Consumer Products and Services (B2C) Energy Financial Services Healthcare Information Technology Amount Raised (LHS) Market Share (RHS) Materials and Resources Source: Pitchbook From an issuer profile, 48 percent of the total financial corporations dominate the issuances in Türkiye. sustainable finance raised in the OIC from 2017 to Government presence in the sustainable bonds and 2024 was issued by non-financial corporations (Figure sukuk market is significant in Indonesia, Saudi Arabia, 2.8). There is a marked difference between sustainable and the UAE, and less significant in Malaysia and Türkiye bonds and sukuk issuances, which are predominantly (Figure 2.9). In terms of unique issuers, Malaysia has had (55 percent) issued by the government. In comparison, 47 unique corporate issuers since 2017, the highest in the a substantial amount (60 percent) of sustainable OIC, followed by Türkiye with 22. Compared to the total syndicated loans and financing were issued by non- number of corporations participating in their respective financial corporations. Regarding sustainable syndicated capital markets, the relatively small number of unique loans, while non-financial corporations dominate the corporate issuers suggests substantial potential for issuances in Indonesia, Saudi Arabia, and the UAE, further development. 17 For the purpose of this report, PE and VC for clean and climate technology are deemed to be Shariah-compliant assets. However, the report did not verify if the PE and VC arrangements themselves were labeled as Shariah-compliant investments. 34 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus FIGURE 2.8 Issuer Composition of Total Sustainable Finance in the OIC (Left) and Issuer Composition of Sustainable Syndicated Loans and Financing in Select OIC Countries (Right), 2017-2024 180.0 100% 2.1% 2.1 5.5% 160.0 90% 13.9% 14.8% Amount Raised, US$ Billion 26.6% 140.0 80% 48.5% 120.0 70% 60% 82.0% 100.0 141.9 50% 80.0 84.1% 85.2% 84.9 40% 73.4% 60.0 9.1 30% 40.0 20% 51.5% 54.5 20.0 10% 18.0 26.4 12.4% - 0% Non-Financial Financial Government Malaysia Indonesia Saudi Arabia UAE Türkiye Corporate Corporate Bonds/Sukuk Syndicated Loans Private Equity Non-Financial Corporate Financial Corporate Government FIGURE 2.9 Issuer Composition of Sustainable Bonds and Sukuk (Top) and Number of Unique Issuers (Bottom) in Select OIC Countries, 2017-2024 100% 90% 100% 22.6% 80% 90% 36.6% 37.5% 43.9% 22.6% 50.5% 70% 80% 36.6% 62.5% 60.3% 37.5% 43.9% 50.5% 60% 70% 84.3% 62.5% 60.3% 15.9% 50% 60% 7.6% 96.7% 15.9% 84.3% 60.2% 7.6% 96.7% 35.9% 40% 50% 60.2% 35.9% 40% 30% 36.9% 30% 47.5% 48.5% 29.4% 36.9% 20% 39.7% 47.5% 48.5% 6.9% 29.4% 26.6% 20% 10% 17.2% 39.7% 8.1% 12.6% 10% 8.8% 6.9% 3.3% 26.6% 0% 17.2% 12.6% 8.8% 3.3% 8.1% 0% Malaysia Malaysia Indonesia Indonesia Saudi Saudi UAE UAE Türkiye (All) Malaysia (Sukuk) Malaysia (All) Indonesia (Sukuk) Indonesia Arabia Saudi Arabia Saudi (All) UAE (Sukuk) UAE (All) Türkiye (All) (Sukuk) (All) (Sukuk) (All) Arabia (Sukuk) Arabia (All) (Sukuk) (All) (All) (Sukuk) Non-Financial Corporate Financial Corporate Government Non-Financial Corporate Financial Corporate Government 25 25 23 23 Financial Corporate Government Non-Financial Corporate Financial Corporate Government Non-Financial Corporate Issuers 20 Issuers 20 Unique 16 Unique 16 15 15 Number Number ofof 10 9 10 9 7 7 7 7 7 7 6 6 5 4 4 4 4 5 4 3 3 4 4 4 3 2 2 3 2 2 3 2 2 2 3 2 2 2 2 2 1 2 1 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 Green Green Sustainability Sustainability Green Green Sustainability Sustainability Green Green Sustainability Sustainability Green Green Sustainability Sustainability Green Green Sustainability Sustainability Malaysia Malaysia Indonesia Indonesia Saudi Saudi Arabia Arabia UAE UAE Türkiye Türkiye Islamic Finance and Climate Agenda 35 CHAPTER 2 – Islamic Finance and Climate Nexus The development of the sustainable finance market in bank financing has played a vital role in advancing Islamic OIC countries highlights significant opportunities for climate finance. To enhance the effectiveness of these growth. Malaysia and Indonesia in Southeast Asia, Saudi efforts, it is essential to continue fostering the growth of Arabia, and the UAE in the GCC are taking commendable the financial sector, which will help unlock crucial funds strides in issuing green and sustainable sukuk. The for climate and broader sustainability endeavors. introduction of green and sustainability-linked sukuk and 2.2 Climate-aligned Development Finance Climate-aligned development finance is pivotal in carbon and climate-resilient projects in OIC countries. advancing climate finance within the OIC and Islamic MDBs play a crucial convening role through various finance markets. Development finance is essential for initiatives, bringing together governments, Islamic several reasons, including mobilizing resources, sharing financial institutions, and private sector actors to co- knowledge and expertise, and fostering innovation. invest in scalable climate solutions. Additionally, MDBs Recognizing that financial sector development varies provide technical assistance and capacity building, significantly within the OIC, it is essential to adopt a helping local institutions manage and deploy climate tailored approach that addresses the unique needs of finance effectively. This collaborative approach fills each country according to its level of financial market financing gaps and ensures that projects uphold climate development. For context, based on the IMF Financial integrity and Islamic finance standards. By expanding Development Index 2020, 35 OIC countries had an index their Islamic finance portfolios and fostering innovation score of 0.3 or lower, indicating a low level of financial in Shariah-compliant climate instruments, MDBs are development, and only four OIC countries, which essential to unlocking the potential of Islamic finance to included Malaysia and Türkiye, had an index score higher meet the climate finance needs of OIC member states. than 0.5, indicating a high level of financial development. Moreover, global collaboration enhances financial inclusion by integrating Islamic finance principles, MDBs play a vital role in supporting the development reaching underserved populations, and ensuring climate of Islamic climate finance in the OIC. MDBs have finance benefits all segments of society. Key initiatives increasingly recognized the potential of Islamic finance by MDBs to support the development of Islamic climate tools, such as green sukuk and takaful, to fund low- finance are highlighted below: 36 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus IsDB The IsDB’s Climate Change Policy (2019)18 and its 5-Year Climate Action Plan (2020-2025) have set an ambitious climate finance target of 35 percent of total commitments by volume by 2025. The IsDB successfully achieved this target by 2023 and, since then, has continued supporting green, climate, and sustainable projects in its member countries. To further its sustainability agenda, the IsDB established its Sustainable Finance Framework in November 2019. This framework serves as the foundation for issuing green, social, and sustainability sukuk, aligning with the globally accepted Green, Social, and Sustainability Bond Principles set by the International Capital Market Association (ICMA). The framework received a strong “Medium-Green Shading” rating from an external rating agency, comparable to other prominent development finance institutions. This framework has enabled the IsDB to achieve several landmark issuances, including the first-ever AAA-rated green and sustainability sukuks in the global capital markets in 2019 and 2020, which raised €1 billion and US$1.5 billion, respectively. In 2021, the IsDB issued the largest sustainability sukuk worth US$2.5 billion, solidifying the IsDB’s role in mobilizing Shariah-compliant funding for sustainable and green recovery efforts. In 2024, ICMA, IsDB, and LSEG published new guidance on the issuance of green, social, and sustainability sukuk. This collaborative effort, announced at COP28, aims to provide practical information and promote standardized best practices, further developing the sustainable sukuk market. In the same year, the IsDB, in partnership with UNDP, announced the Global Takaful Alliance, a public-private partnership to enhance the financial resilience of Muslim communities  to rising risks, including climate change, land degradation, drought, and environmental challenges, through takaful. The Alliance aims to build takaful markets both domestically and internationally to build the financial resilience of vulnerable communities. The IsDB has also collaborated with UNEPFI and UNDP to produce analytics and knowledge products that advocate for policymakers, regulators, and Islamic financial institutions to build a resilient and proactive Islamic finance sector in the face of climate change (UNEPFI and IsDB, 2023; UNDP and IsDB, 2023; UNDP and IsDB, 2024). Most recently in July 2025, Standard & Poor’s (S&P) has reviewed and upgraded its rating for IsDB’s Sustainable Finance Framework. S&P, in its Second Party Opinion (SPO), confirmed the framework is fully aligned with the most recent versions of the Green Bond Principles (2025), Social Bond Principles (2025), and Sustainability Bond Guidelines (2021) from the ICMA. World Bank The World Bank was instrumental in providing technical assistance to Malaysian financial regulators, which resulted in the issuance of the world’s first green sukuk in 2017. Since then, the World Bank has actively supported Malaysian financial regulators in developing their Islamic sustainable finance markets through capacity-building programs and knowledge exchanges with other Islamic finance markets. Leveraging Malaysia’s experience, the World Bank produced a joint report with the Securities Commission Malaysia on green sukuk development, which provides insights into structuring and operationalizing Islamic climate finance (Kamil et al., 2019). In 2022, the World Bank supported several African countries under the De-Risking, Inclusion and Value Enhancement of Pastoral Economies in the Horn of Africa Project (DRIVE), which utilized insurance and takaful. The project aims to enhance pastoralists’ access to financial products for drought risk mitigation, including them in value chains, and facilitate livestock trading in the Horn of Africa. International Finance Corporation (IFC) In October 2024, the IFC announced a US$240 million Islamic Equity Bridge Loan (EBL) financing for ACWA Power to support the development of Uzbekistan’s renewable energy sector (IFC, 2024a). Furthermore, the IFC has planned to provide an Islamic credit line of US$44.6 million to a Senegalese bank, empowering small and medium enterprises to adopt low-carbon business models (Ecofin Agency, 2025). 18 https://www.isdb.org/sites/default/files/media/documents/2022-10/IsDB%20Climate%20Change%20Policy%20%28Final%29.pdf Islamic Finance and Climate Agenda 37 CHAPTER 2 – Islamic Finance and Climate Nexus Asian Development Bank (ADB) ADB, in collaboration with IsDB, published a report that outlines a roadmap for scaling Islamic finance to build cli- mate-resilient infrastructure, emphasizing the development of green banking and capital markets and Islamic social finance (ADB, 2022). In 2024, the ADB approved a US$500 million policy-based loan to Pakistan, supporting climate finance mobilization from public and private sources, including issuing a domestic green sukuk. United Nations Development Program (UNDP) The UNDP, in collaboration with the IsDB Group, has published a report exploring takaful’s role in building climate resilience, highlighting opportunities and recommendations for its implementation (UNDP & IsDB, 2023; UNDP & IsDB, 2024). In 2024, the UNDP Indonesia prepared an Introductory Study on the Islamic Blended Finance (IBF) model, examining the potential of IBF in answering the gap in climate change-responsive financing for farmers who are vulnerable to being affected by climate change at the community level (UNDP, 2024). United Nations Environment Program Finance Initiative (UNEP FI) UNEP FI, in collaboration with the IsDB and the General Council for Islamic Banks and Financial Institutions (CIBA- FI), published a 2023 report on mobilizing Islamic banking for climate action (UNEPFI and IsDB, 2023). The report outlines the current state of climate action in Islamic finance, presents the Islamic foundations for environmental stewardship, and offers a clear roadmap with actionable recommendations for Islamic banks and regulators to build a resilient and climate-responsive sector. Beyond MDBs, several international Islamic finance institutions and the AAOIFI Governance Standard on standard-setting bodies have collaborated to establish Shariah Decision-Making Process in 2024. a roadmap for developing a global standard for Islamic sustainable finance. In 2023, the Islamic Financial Services Based on the survey of Islamic finance professionals, 20 Board (IFSB), the General Council for Islamic Banks and the majority agree that MDBs and international Islamic Financial Institutions (CIBAFI), and the Accounting and finance standard-setting bodies play a critical role in Auditing Organization for Islamic Financial Institutions developing the global Islamic climate finance market (AAOIFI) jointly issued a roadmap outlining their plan and and facilitating cross-border collaborations. According targets for developing and publishing prudential and to the survey responses, the three primary suggestions governance standards, financial accounting standards, to support the mobilization of global Islamic climate disclosure guidelines, market development initiatives, finance include establishing an international investment and capacity building and certification programs from or financing fund, fostering collaborations for product 2022 to 2027.19 Significant progress has been achieved, innovation, and forming strategic partnerships to notably the publication of the CIBAFI Greenhouse accelerate technical knowledge and technology transfer Gas Emission Measurement Tool for Islamic financial (Figure 2.10). FIGURE 2.10 Suggested Initiatives to Mobilize Global Islamic Climate Finance Establish global investment/financing fund 53% Create strategic partnerships for product innovation 48% Create strategic partnerships to accelerate technical knowledge and technology transfer 36% Establish a specific development fund to support the training of critical talent in climate risk assessment 34% Create strategic partnerships with the global private sector to support decarbonization in the halal industry 26% Create strategic partnerships to increase cross-border transactions 24% Develop a global database of investible projects 16% Establish a specific development fund to support the training of critical talent in climate risk assessment 16% 0% 10% 20% 30% 40% 50% 60% 19 https://www.cibafi.org/images/FI213-IILM_IFIO_Declaration_Layout_Draft6_v1%202.pdf 20 This finding is part of the broader survey results discussed in section 2.3 below. 38 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus Establishing a global investment fund could mobilize in 2016 as a US$2.5 billion development initiative. resources from Islamic financial institutions and Funding was provided by a global coalition including the investors to support climate finance projects. Such Abu Dhabi Fund for Development, the Gates Foundation, a fund may finance energy transition and clean the IsDB, the Islamic Solidarity Fund for Development, transportation initiatives within the OIC, sharing risks the King Salman Humanitarian Aid and Relief Centre, and leveraging collective financial strength for impactful and the Qatar Fund for Development. The fund utilizes climate action. The fund can reduce financial barriers and attract investments from the public and private sectors a unique model to blend IsDB concessional finance with by pooling resources. MDBs can facilitate dialogue and philanthropic grants (Figure 2.11) to lift the poorest out of cooperation among stakeholders and create platforms poverty across 33 IsDB member countries by addressing for joint ventures that co-finance climate projects. nine SDGs and providing them with accessible and Additionally, MDBs can contribute to blended finance, sustainable funding to support the essential building encompassing concessional financing and facilitating the blocks of prosperity, such as primary healthcare, issuance of innovative Islamic climate finance instruments. productive agriculture, and social infrastructure. The One such example is the Lives and Livelihoods Fund second tranche of the fund, totaling US$2 billion, is also which is a fund for the Muslim world that was launched mobilized with the aim of enhancing climate resilience. FIGURE 2.11 Lives and Livelihoods Fund Model The Lives and Livelihoods Fund Islamic Donors Development Bank ($0.5 billion ($2.0 billion grant contributions) ordinary, market-based*, lending capital) Health Agriculture Basic infrastructure projects projects projects * Including soft loans when required. Source: IsDB Encouraging collaborations between the public marine economy, including sustainable fisheries and and private sectors could potentially enhance the coastal conservation, which are vital for biodiversity and development of innovative Islamic climate financial climate resilience. instruments. There is a notable recognition and demand Forming strategic partnerships can link experts for green sukuk, particularly within the renewable energy from various fields with Islamic finance institutions, sector. However, there remains an opportunity to fill enabling the sharing of critical know-how and the gap in the availability of Islamic finance solutions for advanced technologies essential for climate projects. other climate mitigation and adaptation activities. This This collaborative approach can significantly enhance includes sustainable manufacturing, energy-efficient the effectiveness of initiatives, particularly in EMDEs green building initiatives, and waste management. characterized by underdeveloped green finance Furthermore, there is a pressing need for nature-based ecosystems. MDBs are vital in providing technical solutions and investments in thematic areas such as the support to policymakers and regulators in the OIC Islamic Finance and Climate Agenda 39 CHAPTER 2 – Islamic Finance and Climate Nexus to facilitate capacity building on climate financing market confidence. Without such collaboration, efforts among public and private sector players. For instance, risk being fragmented and insufficient to meet the urgent partnering with renewable energy firms or research climate needs of OIC countries. institutions can provide access to cutting-edge solutions and expertise that Islamic financial institutions might lack There may be scope for dedicated vertical climate internally. Such platforms can facilitate the exchange funds to consider Islamic climate finance windows. The of best practices and promote policy harmonization. potential for Islamic finance to support climate goals could MDBs have enabled the development of standardized be enhanced via creation of windows in conventional frameworks, such as green sukuk and Islamic ESG funds, vertical funds. For example, the IsDB was accredited by that align Shariah principles with climate objectives, the Green Climate Fund (GCF) in 2024 and is preparing a thereby attracting ethical investors and strengthening program for potential GCF finance support. 2.3 Domestic Islamic Climate Finance Development A 2022 study by the ADB and IsDB identified demand- human resources. Demand-side barriers included a lack and supply-side barriers that have limited Islamic of pipeline of mature climate finance opportunities, climate finance compared to the broader Islamic market pricing of capital market Islamic climate finance finance market. According to the study, supply-side products, reduced public spending on climate finance, barriers include fragmented governance frameworks, and a lack of awareness of investment gaps in climate low awareness of climate risks, the absence of an resilience, climate risks, and disaster management Islamic finance carbon offsetting framework, a common (Figure 2.12). taxonomy, and the low availability and capability of FIGURE 2.12 Barriers to Enhanced Islamic Climate Finance Supply-side • Fragmented governance frameworks • Low awareness of climate risks • Absence of Islamic finance carbon offsetting framework • Absence of common taxonomy • Low availability and capability of human resources Demand-side • Lack of pipeline of mature climate-finance opportunities • Market pricing of capital market Islamic climate finance products • Reduced public spending on climate finance due to global disruptions • Lack of awareness of investment gaps in climate resilience, climate risks, and disaster management Source: Hiller et al. 2023, adapted from ADB & IsDB (2022) 40 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus Significant opportunities exist across several Islamic green sukuk issuances are currently growing due to their finance modalities to enhance Islamic climate finance. strong alignment with climate goals and relative ease of ADB & IsDB (2022) outlined Islamic finance modalities implementation, other modalities with strong climate from the capital market, banking, social finance, and potential, such as takaful for climate resilience, green project finance sectors, which hold strong potential to waqf, and green Islamic lines of finance, may require support climate finance (Figure 2.13). Whilst international technical, regulatory, and market support for growth. FIGURE 2.13 Islamic Climate Finance Market Growth Opportunities (Based on Alignment with Climate Goals and Ease of Implementation) Alignment with climate change goals Climate Regional green International impact Green infrastructure green sukuk Climate sukuk Islamic lines funds supported issuances takaful Paris-aligned of finance awqaf by Multilateral programs Development investments Banks Domestic Green Islamic Zakat-funded green or financial climate resilience sustainable technology programs sukuk (fintech) issuances Blended finance Green community-driven International Islamic development sustainable sukuk Ease of microfinance programs issuances implementation Principles for Key Responsible Banking/ ESG-themed Capital markets ESG-aligned Islamic investment Islamic banking funds Banking Social finance Project finance Note: Opportunities presented in the upper-right segment represent the most aligned and readily actionable. Source: Hiller et al. 2023, adapted from ADB & IsDB (2022) Mobilization of domestic finance, including crowding-in capacity building. Participation in global sustainable finance from the domestic private sector, will be critical finance initiatives such as the Sustainable Banking and in driving local climate action. In many cases, domestic Finance Network (SBFN) provides members with access finance will be a primary funding source, leveraging to best practices, peer learning, and technical guidance the implementation of national climate strategies and for developing a robust sustainable finance ecosystem, actions. For OIC countries without such frameworks, which can accelerate the growth of the sustainable there is a critical need for technical assistance with finance market in their respective countries. For example, policy guidance, development of sustainable finance SBFN has supported the development of sustainable frameworks at national or sub-national levels, and finance markets of 15 SBFN-OIC member countries other forms of technical assistance, such as training and (Figure 2.14). Islamic Finance and Climate Agenda 41 CHAPTER 2 – Islamic Finance and Climate Nexus FIGURE 2.14 Overall Progress of SBFN-OIC Member Countries Maturing Implementation Consolidating • Indonesia Advancing Preparation • Bangladesh Developing • Egypt • Azerbaijan • Morocco Formulating • Iraq • Nigeria • Kyrgyz Republic • Jordan • Türkiye • Maldives • Kazakhstan • Tajikistan • Pakistan • Tunisia Source: IFC (2024b) Financial regulators in the OIC have been instrumental is less developed. For example, under Bank Negara in driving the strategic direction of sustainable Malaysia’s Value-Based Intermediation (VBI) initiative, finance market development, but only a few have the VBI Financing and Investment Impact Assessment developed Islamic finance-specific strategies. This Framework (VBIAF) was published to facilitate the includes designing strategic roadmaps, introducing implementation of an ESG-based risk management key policies and regulations such as taxonomies, system for assessing the financing and investment developing supportive ecosystems, information and activities of Islamic financial institutions. In Indonesia, reporting systems, and capacity building initiatives the National Islamic Economic Masterplan 2019–2024, (Figure 2.15). Islamic finance-specific strategies may be published by Komite Nasional Ekonomi dan Keuangan necessary to address the challenges in the respective Syariah (KNEKS) embedded strategies for Islamic finance markets, especially when the Islamic finance market development and sustainability. FIGURE 2.15 Sustainable Finance Ecosystem Development Across the OIC Policy tools Description Examples in the OIC Strategy and 1. Develop a green finance roadmap • Sustainable Finance Frameworks or Coordination for the financial sector. Roadmaps have been published by Azerbaijan, Bangladesh, Egypt, Indonesia, 2. Develop a national climate finance Jordan, Kazakhstan, Malaysia, Morocco, strategy. Nigeria, Oman, Qatar and the UAE. 3. Create a national platform or • Malaysian financial regulators established a taskforce on green finance. Joint Committee on Climate Change as a regulator-financial industry platform. Build Skills and 4. Participation in green finance-related • OIC financial regulators are members Capacity international networks. of the Network of Central Banks and Supervisors for Greening the Financial 5. Support financial institutions’ System (NGFS) and SBN. commitments to align with the Paris agreement. • Capacity building programs on climate finance for Islamic financial industry conducted by AAOIFI, CIBAFI, IsDB, IFSB and World Bank Group. 42 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus Financial 6. Conduct climate-related and • International Islamic finance standard Regulation and environmental risk assessment. setters have published several guidance, Central Bank including: Activities 7. Incorporate climate-related and environmental risk into supervisory • CIBAFI Sustainability Guide for Islamic practice. Financial Institutions 8. Issuing supervisory guidance on • CIBAFI Greenhouse Gas climate-related and environmental Measurement Tool for Islamic financial risk. Financial Institutions 9. Exploring greening of central banks’ • IFSB Guidance Note on Climate- activities. Related Financial Risks for Institutions Offering Islamic Financial Services (Banking Segment) • IsDB Sustainable Finance Framework • Malaysian financial regulators and Islamic financial institutions collaborated to publish VBIAF Guidance and VBIAF Sectoral Guides. Increasing 10. Develop and implement climate- • Growing number of OIC financial Transparency related and environmental disclosure regulators have adopted and will be and reporting standards. implementing IFRS Sustainability Reporting Standards. 11. Develop and adopt a national green taxonomy. • Malaysian financial regulators published a Climate Data Catalogue. Greening 12. Greening a national development • A Malaysian development bank has Financial bank or other domestic public established a Climate Finance Innovation Institutions finance institution. Lab. 13. Create a national green finance entity or green bank. Green Financial 14. Stimulate corporate green bond • Several OIC countries such as Indonesia, Tools and issuance. Malaysia and Pakistan have published a Instruments Green or Sustainable Sukuk Framework. 15. Issue green sovereign bonds. • ICMA in collaboration with IsDB and LSEG 16. Promote use and development of published Guidance on Green, Social, and blended finance products for green Sustainability Sukuk. finance purposes. • The Malaysian central bank has established 17. Stimulate origination of green loans a Low Carbon Transition Facility. or sustainability-linked loan products. • UNDP and IsDB have established a Global Takaful Alliance for climate resilience. Source: Author’s illustration, adapted from World Bank’s Toolkits for Policymakers to Green the Financial System Islamic Finance and Climate Agenda 43 CHAPTER 2 – Islamic Finance and Climate Nexus BOX 2.2 Advancing Islamic Climate Finance Through Value-Based Intermediation (VBI) Initiative in Malaysia VBI Community of Practitioners, or “CoP,” is a ten VBIAF Sectoral Guides, including renewable collaborative platform for industry players to advance energy, construction and infrastructure, manufacturing, industry-wide implementation of the VBI initiative agriculture, and waste management.21 Between 2020 strategically. In 2017, the CoP was officially established and 2023, the implementation of the VBIAF Sectoral with an initial membership of nine Islamic banks and has Guides has helped to channel more than RM49.5 billion now expanded to 18 Islamic banks and development (approximately US$11 billion) in Islamic financing to green financial institutions (DFIs). In collaboration with Bank projects via more than 223,000 financing accounts across Negara Malaysia and technical assistance provided by the 18 CoP members (Figure B 2.2). the World Bank, the CoP has developed and published FIGURE B 2.2 VBI Islamic Green Financing Amounts in 2022-2023 (RM million) 7,985 8,007 4,908 RM Million 4,075 3,524 3,495 2,888 2,675 2,458 1,241 492 422 241 6 1 - Renewable Energy Green Building Clean/Green Transportation Transition Financing Subsidised Green Schemes Terrestinal and Aquatic Biodiversity Conservation Others Sustainable Water and Waste water Management 2022 2023 Source: VBI Progress Report 202322 21 https://staging.aibim.com/value-based-intermediation 22 https://aibim.com/value-based-intermediation/VBI-Report-2023.pdf The commitment and capacity of Islamic financial strategies. Approximately half of these Islamic banks institutions are critical to the advancement of Islamic have issued sustainable sukuk, highlighting the promising sustainable and climate finance offerings in the OIC. potential for further development. They also play a vital A notable commitment to the climate agenda is evident role in facilitating sukuk issuances for corporations. among the top 20 Islamic banks (Table 2.2), with 13 Consequently, their efforts are essential for promoting Islamic banks setting net-zero targets either at the the growth of the Islamic sustainable and climate finance entity level or in alignment with their respective national market within their respective jurisdictions. 44 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus TABLE 2.2 Top 20 Islamic Banks Globally (2024) and Sustainability Practices Assets Sustainable Net Zero Sustainable Bank Country (US$ Million) Report Target Sukuk 1 Al Rajhi Bank Saudi Arabia 215,504 Yes 2060 Yes 2 Kuwait Finance House Kuwait 123,682 Yes 2060 Yes 3 Dubai Islamic Bank UAE 85,563 Yes 2060 Yes 4 Alinma Bank Saudi Arabia 63,127 Yes 2050 No 5 Maybank Islamic Malaysia 62,502 Yes 2050 Yes 6 Abu Dhabi Islamic Bank UAE 52,496 Yes 2050 Yes 7 Qatar Islamic Bank Qatar 51,959 Yes 2050 Yes 8 Masraf Al Rayan Qatar 45,104 Yes  n.a No 9 Ahli United Bank Bahrain 41,900 Yes 2050 No 10 Bank Albilad Saudi Arabia 38,164 Yes  n.a No 11 CIMB Islamic Bank Malaysia 34,805 Yes 2050 Yes 12 Bank AlJazira Saudi Arabia 34,549 Yes  n.a No 13 Dukhan Bank Qatar 31,429 No  n.a No 14 Boubyan Bank Kuwait 27,349 Yes  n.a No 15 Bank Rakyat Malaysia 25,873 Yes 2050 Yes 16 Al Baraka Group Bahrain 25,205 Yes  n.a No 17 Emirates Islamic Bank UAE 23,906 Yes 2050 Yes 18 RHB Islamic Bank Malaysia 23,471 Yes 2050 No 19 Kuveyt Türk Katilim Bankasi Türkiye 23,396 Yes  n.a Yes 20 Bank Syariah Indonesia Indonesia 22,942 Yes 2060 Yes Source: TABInsights 23 compilation based on author's desktop research from banks' websites. To enhance the insights gathered from the analytics in A total of 68 responses were collected, predominantly the prior section, a survey was conducted to explore from Malaysia and Indonesia.24 Approximately half of the motivating factors, opportunities, and challenges the respondents were employed within the banking in advancing Islamic sustainable and climate finance industry, while the remaining participants were equally solutions within the OIC. An online survey was divided among the takaful industry, private sector, and disseminated to professionals in the field of Islamic finance other related financial services. Additional demographic via their associations and individual email addresses. information is presented in Figure 2.16. FIGURE 2.16 Respondents’ Demographic – Location (Left), Firm Size (Middle), and Job Designation (Right) 2% 2% 6% 2% 6% 6% 6% 18% 22% 6% 6% 18% 22% 6% 6% 18% 51% 22% 6% 8% 51% 42 8% 51% 42% 8% 42% 10% 23% 10% 23% 36% 10% 23% 36% 36% 70% 70% 70% Less than US$250 million Less than US$250 million Senior management (C-suite/Hea Between US$250 million and US$5 Less than US$250 million billion Senior management (C-suite/Head of Department) Between US$250 million and US$5 billion Senior management (C-suite/Head of Department) Middle management Between US$5 billion Between US$250 million and US$5 billion and US$50 billion Between US$5 billion and US$50 billion Middle management SEA AFR SAR Between US$5 billion Between and US$50US$50 billion and US$100 billion Middle management Others (Executive) billion SEA AFR SAR Between US$50 billion and US$100 billion Others (Executive) SEA AFR MENASAR Between US$50 billionMore than US$100 and US$100 billionbillion Others (Executive) ECA More than US$100 billion MENA ECA More than US$100 billion MENA ECA 23 https://tabinsights.com/ab100/largest-islamic-banks 24 Figures 2.10, 2.16 to 2.22 and 3.9 are derived from this survey. Islamic Finance and Climate Agenda 45 CHAPTER 2 – Islamic Finance and Climate Nexus The Islamic finance industry has made noticeable 2.17). Half of these respondents reported that their strides in integrating sustainability, with most institutions have implemented internal policies and institutions having established strategic plans and procedures to guide business operations. The majority internal policies. All respondents from the Islamic noted an alignment between sustainability objectives banking and takaful sectors (70 percent of respondents) and Maqasid al-Shariah, which motivates their actions indicated their institutions have either adopted a broad (Figure 2.18). sustainability strategy or a net-zero action plan (Figure FIGURE 2.17 Institutional Approach to Implementing Sustainability and Climate Agenda My institution has a broad Sustainability or SDG-related Strategic Plan (which does not have a specific GHG emissions target). 40% My institution has a Net Zero Action Plan/ Low Carbon or related Strategic Plan 40% focusing on lowering GHG emissions. My institution has internal procedures on broad sustainability/SDG to guide business operations. 46% My institution has a dedicated department and staff responsible for broad sustainability/SDG strategy. 48% My institution has a dedicated department and staff responsible for technical climate/net zero/low carbon strategy. 24% My institution has internal procedures on technical climate/net zero/low carbon to guide business operations. 22% My institution does not currently have any sustainability/climate strategies. 9% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% FIGURE 2.18 Institutional Understanding of Sustainable Islamic Finance 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% My institution endeavors to align all its financial activities with Maqasid Shariah to ensure social justice, economic 48% prosperity, and environmental sustainability. My institution considers sustainability objectives as additionality to generate positive social and environmental 28% impact while maintaining Shariah compliance. My institution endeavors to integrate sustainability objectives in relevant financial activities guided by Islamic 23% principles. The Islamic finance industry acknowledges the pivotal appropriate projects for financing. About the information role of financial regulators in fostering sustainable environment, 60 percent of respondents reported that and climate finance markets. Looking ahead, they their institutions collect their GHG emissions data and advocate that regulators maintain a focus on developing identify green assets within their current balance sheets. regulations to support Islamic climate finance and devise Most respondents identified the energy, utilities, and incentive strategies for financing low-carbon initiatives manufacturing sectors as the primary contributors to their (Figure 2.19). Furthermore, establishing information Scope 3 GHG emissions, thereby presenting significant systems, such as taxonomies and reporting requirements, opportunities for decarbonization (Figure 2.20). is crucial to assist Islamic finance institutions in identifying 46 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus FIGURE 2.19 Three Main Priorities for Financial Regulators Establish rules and regulations critical for Shariah-compliant financing, such as Shariah pronouncements and product guidelines. 64% Provide relevant incentives for financing/investing in decarbonization activities, such as tax exemptions. 60% Develop information ecosystems such as taxonomies, disclosure and reporting requirements, and project databases. 46% Facilitate partnerships and collaborations between IFI and other stakeholders (both public and private sector). 45% Organize capacity building and training. 34% Establish special funds to support the financing of decarbonization activities. 30% 0% 10% 20% 30% 40% 50% 60% 70% FIGURE 2.20 Top Three Primary Contributors to Scope 3 Emissions and Top Three Sectors with the Most Significant Opportunity for Decarbonization Energy and utilities 60% 83% Commercial/Industry/Manufacturing 52% 47% Transportation 43% 48% Construction and infrastructure 41% 24% Agriculture 33% 45% Real estate 28% 14% 21% Waste management 34% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Contributor Opportunity As noted in the previous section, there is considerable Consequently, they strongly recommend prioritizing variation in the development of the Islamic sustainable efforts to enhance policy frameworks, financial finance market across the OIC. Although respondents innovation, and the information ecosystem. Respondents concur that there is demand for such products, the overwhelmingly advocate for government authorities availability of green financing products is limited to and real-sector regulators to focus on developing sector- financing renewable energy, electric vehicles, and green level decarbonization policies and standards (Figure buildings. There are ongoing challenges to accelerate 2.22). This emphasizes the need for comprehensive real the overall sustainable finance market within their sector roadmaps to pinpoint priority areas and evaluate jurisdictions, further complicated by the respective the financing gap, enabling financial sector participants development stages of Islamic finance markets in to concentrate their efforts effectively and reduce policy these jurisdictions. Respondents highlight that the uncertainty that could hinder investments. Moreover, to primary obstacles impeding the utilization of Islamic address the Islamic finance industry’s financing capacity, finance include investor and borrower awareness gaps respondents endorse the creation of special funds and insufficient policies and regulations regarding and sandboxes to pilot innovative financing schemes decarbonization activities (Figure 2.21). Consequently, that can be expanded upon validating their viability. this leads to limited business strategies by private Regulators should also undertake further initiatives to sector entities and reduced investment opportunities, facilitate climate-aligned disclosures and GHG emissions exacerbating the issue. accounting and reporting, which are critical for evaluating the climate risk associated with private sector entities. Islamic Finance and Climate Agenda 47 CHAPTER 2 – Islamic Finance and Climate Nexus FIGURE 2.21 Five Main Challenges in Financing Decarbonization 0% 10% 20% 30% 40% 50% 60% Lack of awareness among investors/borrowers 59% Lack of policies and regulations on decarbonization activities 55% Lack of suitable Islamic finance products 47% Limited investment opportunities 45% Limited business strategy towards decarbonization activities 43% Concerns about the impact on profitability, financial soundness 43% Lack of technical expertise for risk assessment and performance monitoring 43% FIGURE 2.22 Five Priorities to Address Challenges 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Develop sector-level decarbonization policies and standards issued by relevant government authorities/industry regulators 82% Establish special funds/grants to support market development 65% Implement climate-aligned disclosure and reporting standards 61% Develop and implement carbon measurement and reporting frameworks 61% Develop public-private partnerships to implement pilot financing schemes 57% Provide appropriate financial (dis)incentives such as taxes and subsidies 55% Increasing capacity building for senior 47% management and technical staff Develop a database of pipeline projects 29% Develop a taxonomy that is aligned with 29% national policies and global standards In conclusion, experts in Islamic finance acknowledge coordinated action among Islamic finance regulators, the advancements achieved by the sector. Nevertheless, financial institutions, and private sector participants further efforts are needed to grow the Islamic sustainable to improve ecosystem enablers that support better and climate finance offerings. This necessitates information and financial innovation. 48 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus BOX 2.3 Climate Finance by Islamic Banks in the MENA Region In 2023, the report, “Mobilizing Islamic Banking for to address climate issues, rooted in the foundational Climate Action,” examined the integration of climate- values of Islamic finance and Maqasid al-Shariah. related practices within Islamic banking in the MENA There is a growing consensus that Maqasid offers region. It guides Islamic banks to mainstream climate a framework for environmental responsibility, action in their operations and offers recommendations linking to global SDGs. The Islamic Declaration to public authorities to support these efforts. The report on Global Climate Change further calls on nations is a collaborative outcome of a program to “Promote and financial institutions to reduce their carbon Climate Finance within the Islamic Banking Sector footprint, invest in renewable energy, and adopt in the MENA Region,” involving the United Nations sustainable business models. Environment Program Finance Initiative (UNEP FI), IsDB, and the General Council for Islamic Banks and Financial • Climate-related Islamic Banking Practices: An Institutions (CIBAFI). It primarily targets Islamic banks increasing number of Islamic banks in the MENA and Islamic windows of conventional banks in the MENA region are integrating sustainability and ESG into region, as well as other Islamic financial institutions, their operations, though with varying scope and regulators, and anyone interested in the nexus of Islamic depth. Some are adopting global reporting and finance and climate resilience. disclosure practices and international frameworks. CIBAFI’s annual surveys indicate a gradual increase Key aspects of the report include: in concern for climate change among Islamic banks, although it remains a lower priority than other risks. • ESG and Climate-aligned Islamic Finance: There is increasing interest in sustainable finance products, • The Mainstreaming Approach: The report particularly green sukuk. Institutions like IsDB proposes a five-pillar approach to guide Islamic have developed Sustainable Finance Frameworks banks in mainstreaming climate change into their to issue green or sustainability sukuk for climate- businesses: aligned projects, including renewable energy, clean transportation, and pollution prevention. o Climate leadership o Strategic climate management • Climate-related Financial Risks and Regulation: Climate change poses direct physical and financial o Climate-related operational integration risks to banks, which they need to manage. o Performance measurement and International standard-setters like the Basel accountability Committee on Banking Supervision (BCBS) and o Collaboration and exchange on climate the Islamic Financial Services Board (IFSB) are resilience developing principles and guidance for managing these risks. Regulatory authorities in the MENA • Recommendations for Public Authorities: The region, such as Jordan, Morocco, Egypt, and the report also provides guidance for regulatory and UAE, are also focused on promoting sustainable other public authorities to support these efforts. finance through strategies, frameworks, and This includes developing clear climate policy disclosure requirements. frameworks, requiring disclosures and stress testing, providing guidance for banks to align with • Islamic Principles and Climate Action: The report policies, encouraging alignment with international emphasizes the moral imperatives for Islamic banks frameworks, and facilitating knowledge sharing. A key avenue for the holistic advancement of climate Islamic lines of finance have the potential to mobilize finance lies in strengthening and modernizing domestic new financial flows and enhance financial inclusion. By green Islamic finance ecosystems. When Islamic finance improving the quality, relevance, and accessibility of is integrated into broader domestic financial sector Islamic financial products and services, countries can reforms, it can play a pivotal role in diversifying and align Islamic finance with green economy objectives, strengthening both domestic and international funding supporting climate mitigation efforts and resilience- sources. Instruments such as sukuk, takaful, and generally building initiatives. Islamic Finance and Climate Agenda 49 CHAPTER 2 – Islamic Finance and Climate Nexus Special Focus: Greening the Halal Industry The demand for halal products has grown significantly their market positions. According to the Global Islamic over the past decade, with Muslim consumer spending Economy Indicator (GIEI) 2023, Malaysia maintained its increasing from US$1.6 trillion in 2012 to US$2.4 leading rank, followed by Saudi Arabia and Indonesia. trillion in 2023 (DinarStandard, 2024). Based on Table 2.3 briefly outlines the strategic roadmaps of these average a 5.5% year-on-year growth, this is projected to countries, highlighting their halal plans, core sectors of reach US$3.4 trillion by 2028. Malaysia and Indonesia focus, and general strategies for strengthening their halal have established themselves as key players in the global ecosystems. halal industry, drawing on their strengths to enhance TABLE 2.3 Strategic Roadmaps of the Halal Industry in Select Countries Country Halal Initiatives Core Sectors General Strategies Indonesia 1. Indonesia Islamic Economic • Cosmetics and personal care • Innovation Masterplan 2019-2024 • Fashion • Market access 2. Indonesia Islamic Banking • Food and beverages • Regulation Development Roadmap • Media and recreation • Talent 3. Masterplan Industri Halal • Pharmaceuticals Indonesia 2023-2029 • Tourism Malaysia 1. Halal Industry Master Plan • Cosmetics and personal care • Innovation 2030 • Food and beverages • Market access 2. NIMP 2030 Sectoral Plan – • Pharmaceuticals • Regulation Halal Industry • Talent Philippines 1. Philippine Halal Industry • Cosmetics and personal care • Market access Development Strategic Plan • Food and beverages • Talent 2023-2028 • Pharmaceuticals • Tourism Saudi Arabia 1. Saudi Vision 2030 • Cosmetics and personal care • Regulatory 2. Saudi Halal Center • Food and beverages • Market access • Pharmaceuticals • Talent • Tourism • Innovation Türkiye 1. Twelfth Development Plan • Cosmetics and personal care • Innovation (2024-2028) • Fashion • Market access • Food and beverages • Talent • Pharmaceuticals • Tourism United Arab 1. Dubai Islamic Economy • Cosmetics and personal care • Market access Emirates Development Centre (DIEDC) • Food and beverages 2017-2021 • Pharmaceuticals 2. UAE Halal System by Public Investment Fund The halal industry, which spans sectors such as food approximately 30 percent of total emissions (Ritchie, 2021) and beverages (F&B), transportation, fashion, tourism, (Figure 2.23). Although not distinctly measured, halal pharmaceuticals, cosmetics, personal care, and media food production faces similar environmental challenges, and recreation, contributes to global GHG emissions including unsustainable agricultural practices, excessive through various resource-intensive practices. The F&B water consumption, and energy-intensive processing sector is one of the most significant contributors to and manufacturing. The fashion industry, including halal GHG emissions globally, estimated to be responsible for fashion, is estimated to account for approximately eight 50 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus Shown is the comparison of two leading estimates of global greenhouse gas emissions from the food system. Most studies estimate that food and agriculture is responsible for 25% to 35% of global greenhouse gas emissions. Waste Post-retail 1.6 billion tonnes CO2e 2.1 billion tonnes of carbon-dioxide Cooking: 0.5 billion tonnes equivalents (CO2e) percent of global emissions, primarily driven by textile percent of global Does not include emissions, driven by energy-intensive Retail: 0.7 billion tonnes Packaging: 1.0 billion tonnes post-retail emissions Supply chain production, waste generation, and transportation (UNEP, manufacturing processes, Retail: 0.4 billion tonnes Transport: 0.8 billionuse, chemical Food tonnes processing: 0.6 billion tonnes 3.1 billion complex and tCO e 2 Packaging: 0.6 billion tonnes Supply chain 2023). Halal tourism, which is gaining momentum, has its billion tCO e chains 2.4supply 2 (Dehipawala Transport: 0.8 billion tonnes Food processing: 0.6 billion tonnes et al., 2023). The cosmetics GHG emissions linked to travel and accommodation. The and personal care sector contribute approximately This is emissions two global tourism sector contributes about 8.8 percent of percent of global emissions, largely due 7.1 billion tonnes CO e to Agricultural production from agriculture, 2 raw aquaculture material and capture fisheries in global GHG emissions (Sun et al., 2024). Pharmaceuticals, extraction, energy Agricultural productionused in product manufacturing, both studies and 8 billion tonnes CO e 2 another growing segment of the halal industry, is packaging waste (Figure 2.23). Crippa et al. (2021) estimated to be responsible for around four to five estimate higher land use emissions since it allocates all deforestation Land use to agriculture. 5.7 billion tonnes CO2e Poore and Nemecek Land use (2018) assign only 60% 3.2 billion tonnes CO2e of deforestation to agriculture for food. FIGURE 2.23 Poore and Nemecek (2018) 13.6 billion tonnes CO e from food Crippa et al. (2021) 17.9 billion tonnes CO e from food* 2 That's 26% of global GHG emissions That's 34% of global GHG Global GHG Emissions in the Food System (Left) and Cosmetics and Personal Care emissions (Right) (Increases to 33% with non-food agricultural products) (some non-food agricultural products included) Shown is the comparison of two leading estimates of global greenhouse gas emissions from the food system. Most studies estimate that food and agriculture is responsible for 25% to 35% of global greenhouse gas emissions. Transportation and distribution Manufacturing Waste Post-retail End-of-life treatment 5% 1% 1.6 billion tonnes CO2e 2.1 billion tonnes of carbon-dioxide of products (disposal) Cooking: 0.5 billion tonnes equivalents (CO2e) 5% Retail: 0.7 billion tonnes Does not include Packaging: 1.0 billion tonnes post-retail emissions Supply chain Transport: 0.8 billion tonnes 3.1 billion tCO2e Retail: 0.4 billion tonnes Packaging: 0.6 billion tonnes Food processing: 0.6 billion tonnes Supply chain 2.4 billion tCO2e Transport: 0.8 billion tonnes Food processing: 0.6 billion tonnes Consumer use This is emissions of products Agricultural production from agriculture, (indirect) 7.1 billion tonnes CO2e aquaculture and 59% capture fisheries in both studies Agricultural production Sourcing of 8 billion tonnes CO2e raw materials 30% Crippa et al. (2021) estimate higher land use emissions since it allocates all deforestation Land use to agriculture. 5.7 billion tonnes CO2e Poore and Nemecek Land use (2018) assign only 60% 3.2 billion tonnes CO2e of deforestation to agriculture for food. Poore and Nemecek (2018) Crippa et al. (2021) 13.6 billion tonnes CO2e from food 17.9 billion tonnes CO e from food* That's 26% of global GHG emissions That's 34% of global GHG (Increases to 33% with non-food agricultural emissions (some non-food agricultural products) products included) Source: Our World in Data Source: Carbon Trust, 2023 Transportation and distribution Manufacturing data treatment WhileEnd-of-life on the5%halal industry’s1%environmental Despite increasing global sustainability efforts, the of products (disposal) impact5% is not distinctly quantified, its GHG emissions halal industry’s adoption of these practices remains footprint reflects broader trends across related sectors. limited, highlighting the need for further development These industries face common challenges, including high in sustainable practices. Upon examining the countries’ resource consumption, waste generation, and significant halal strategic roadmaps, it is evident that the integration GHG emissions. By integrating climate-smart practices of sustainability practices is generally discussed in broad into halal certification and supply chains, the industry can Consumer terms. use The primary focus is on enhancing and expanding of products foster sustainability while maintaining consumer trust. (indirect) halal certification among uncertified halal businesses, 59% Sustainable halal farming, energy-efficient processing, especially SMEs. Consequently, sustainability initiatives Sourcing of and eco-friendly packaging are emerging trends that are predominantly adhered to by large corporations raw materials 30% the halal industry with climate goals. In regions can align that may be subject to regulatory requirements, such vulnerable to climate impacts, such as Southeast Asia as sustainability reporting for publicly listed companies. and the Middle East, embedding resilience into halal- Several large halal corporations have also committed to driven economic development offers a path toward net-zero targets (Table 2.4). food security, sustainable livelihoods, and ethical consumption. Islamic Finance and Climate Agenda 51 CHAPTER 2 – Islamic Finance and Climate Nexus TABLE 2.4 Net Zero Target of Select Halal Corporations in Indonesia and Malaysia Country Corporation Sector Net Zero Target Malaysia Duopharma Biotech Berhad Pharmaceutical Net Zero 2050 Indonesia PT Paragon Technology and Innovation Personal goods Net Zero 2050 Malaysia FGV Holdings Berhad Agribusiness and food Net Zero 2050 Malaysia Pharmaniaga Berhad Pharmaceutical Net Zero 2050 Malaysia IOI Corporation Berhad Agribusiness Net Zero 2040 Insights from Halal Companies in Malaysia and Indonesia An online survey was distributed via email to halal vision of policymakers in Malaysia and Indonesia, who companies in Malaysia and Indonesia. A small sample are enacting policies to leverage the transformative of 46 responses from Malaysia and 45 responses from power of green initiatives. Most respondents indicated Indonesia was received.25 The respondent companies that the adoption of ESG standards is a high priority comprise 33 percent large corporations, 45 percent (45 percent) or medium priority (43 percent), aligning SMEs, and 22 percent microenterprises, involved in with the aspirations of policymakers (Figure 2.24). Large the manufacturing (34 percent), retail (20 percent), corporations are motivated by increasing pressures from and services (13 percent) sectors. About a third of the stringent local and global regulations, while evolving respondents are involved in the export business. consumer preferences and demands from supply chain buyers further reinforce their commitment to Survey respondents demonstrated significant ESG standards (Figure 2.24). Additionally, respondents awareness (83 percent) and substantial enthusiasm (94 recognize that incorporating ESG practices not only percent) for adopting green practices and integrating aligns with ethical considerations but also provides ESG standards. This trend highlights the strategic considerable cost-saving benefits. FIGURE 2.24 ESG Adoption Priority (Left) and Motivation for Adoption (Right) 0% 5% 20% 0% 15% 5% 10% 10% 25% 15% 20% 30% 25% 35% 40% 45%35% 40% 45% 30% 0% 5% 10% 0% 15% 5% 20% 10% 30% 25% 15% 20% 25% 30% Increasing Increasing pressure and from domestic and pressure from domestic 28% Top priority - Should-adopt Top priority Should adopt export markets' laws/ regulations 28% in the next 12 months 45% 45% export markets' laws/ regulations in the next 12 months Shifting preferences or purchase Shifting preferences or purchase behavior of domestic consumers 26% 26% Medium priority - Adopt in behavior of domestic consumers Medium priority - Adopt in 43% the next two to five years 43% Increasing pressure from buyers/ the next two to five years Increasing multinationals companies we supply pressure to from buyers/ 23% Low priority - Should multinationals companies we supply to 23% Low consider only in the term - Should priority long 13% To achieve cost efficiencies 21% consider only in the long term 13% To achieve cost efficiencies 21% Increasing pressure from investors or shareholders 17% Increasing pressure from investors or shareholders 17% Increasing pressure from NGOS or activist groups 15% Increasing pressure from NGOS 15% Tax benefits or or activist groups 11% government incentives Tax benefits or 11% government incentives While the survey respondents exhibited a basic survey found limited and inconsistent uptake among understanding of ESG principles, their commitment to businesses, with less than 20 percent obtaining relevant integrating these practices into daily operations remains certifications such as those for energy and environmental moderate. The findings revealed a fragmented approach management (Figure 2.25). This gap is further reflected to sustainability, with most companies recognizing the in the adoption of sustainability reporting standards. importance of ESG but lacking structured strategies for Furthermore, only 21 percent of respondents indicated implementation. In both Malaysia and Indonesia, the securing financing for ESG practices, including solar 25 Figures 2.24 to 2.26 are derived from this survey. 52 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus installation, clean water management, and sustainable frequently citing a lack of access to green financing waste management. These statistics underscore options, with only 21 percent of respondents citing the critical need for heightened efforts and robust having access to green financing (Figure 2.26). frameworks aimed at encouraging and ensuring the Additionally, many companies report insufficient widespread integration of ESG standards. Without such technical expertise about ESG standards and how to measures, there is a significant risk of falling behind in implement them. This is supported by the evidence global sustainability efforts, potentially undermining the that less than 20 percent of respondents’ businesses ethical and economic aspirations of the halal industry in have acquired energy or environmental management these regions. certification or implemented sustainability disclosures. Despite their awareness, several significant barriers These challenges highlight the urgent need for targeted continue to impede the comprehensive adoption interventions, including capacity-building programs of green practices. Limited financial resources have and Shariah-compliant financial instruments tailored to emerged as a critical constraint, with businesses support green initiatives within the halal industry. FIGURE 2.25 FIGURE 2.26 ESG Adoption Practices by Halal Companies Challenges in Adopting ESG Practices 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% Lack of financial resources and/ Energy Management or access to finance 49% Certifications 13% 87% Lack of knowledge about the ESG guidelines and policy 38% Environmental Management Certifications 19% 81% Lack of technical expertise to implement adoption of new standards 28% Sustainability disclosure 9% 91% Lack of information and/ or data 23% Currently prioritizing survival of business amidst uncertainty 17% Access to finance 21% 79% Unclear rules and regulations 17% pertaining to ESG standards Yes No Lack of scale or size 11% Insights from Halal Development Authorities For the purposes of this report, a series of structured effective cross-agency cooperation. In Malaysia and interviews with halal development authorities in Malaysia, Indonesia, where the halal industry has experienced Indonesia, and the Philippines were conducted. These significant growth, authorities are carefully considering interviews aimed to understand the strategic and the establishment of clear sustainability objectives for policy direction related to sustainable practices in the the sector. Malaysian authorities are currently reviewing halal industry in the respective countries. Additionally, relevant standards and policies to incorporate ESG they explored the intersection with Islamic finance elements comprehensively. Similarly, the Indonesian development in their jurisdiction, focusing on how government is developing policy recommendations Shariah-compliant financial instruments can support aimed at integrating low-carbon production methods green initiatives in the halal industry. The insights and sustainable practices within the sector. Additionally, presented challenges and opportunities in promoting efforts are being made to create indicators that sustainability standards and integrating ESG practices accurately measure carbon emissions and assess the in the halal industry, highlighting the role of regulatory overall sustainability of the halal industry in Indonesia. frameworks and financial support mechanisms. This proactive approach underscores the vital role of sustainability in guiding the future of halal development. Halal development authorities in Malaysia, Indonesia, and the Philippines acknowledge the importance of fully Increasing awareness and understanding of integrating sustainability into the strategic roadmaps sustainable practices, particularly among SMEs, is for their halal industries. The challenge primarily arises important for progress. Although initiatives to raise from the segmented approach to climate strategy awareness are ongoing, additional capacity building across different ministries. Despite this, halal authorities is needed to enable the adoption of green practices. remain committed to advancing sustainability through SMEs face challenges in adopting sustainable practices Islamic Finance and Climate Agenda 53 CHAPTER 2 – Islamic Finance and Climate Nexus due to the costs of halal certification and implementing international Islamic banking institutions to enter the sustainable solutions. It is important to address these Philippine market. In Indonesia and Malaysia, zakat and significant barriers for full adoption. In Indonesia, waqf serve as financial support to SMEs in the halal programs such as free halal certification and training for industry, assisting them in obtaining halal certification halal advisors support SMEs. Expanding these initiatives and adopting sustainable practices. Strengthening the to include ESG practices and making them more connections between Islamic finance, halal businesses, accessible could help address SMEs’ challenges. In the and green initiatives is crucial for achieving growth and Philippines, the government promotes programs and advancing climate action agendas. Collaboration among projects that address food security to ensure sustainable halal authorities, financial institutions, and other related production and supply. agencies is essential. A notable opportunity in Malaysia, Indonesia, and the In conclusion, the integration of sustainability into the Philippines is the development of a systematic data halal industry is a crucial step towards achieving long- collection process on the environmental impact and term climate goals. Despite challenges such as limited sustainable practices of the halal industry. This absence financial resources and insufficient technical expertise, of comprehensive data and monitoring frameworks segmented climate strategies, and the lack of systematic poses a challenge in assessing the sector’s alignment data collection, halal authorities are committed with national climate goals and sustainability targets. to advancing sustainability through cross-agency Implementing effective monitoring is essential to measure cooperation and targeted interventions. Capacity- the success of sustainability initiatives and ensure they building programs and Islamic financing schemes tailored provide tangible environmental benefits. Addressing to support green initiatives are essential for overcoming this gap is necessary to track progress, identify areas these challenges. Efforts to raise awareness and support for improvement, and make informed policy decisions SMEs in adopting sustainable practices are ongoing and that support the halal industry’s contribution to global require a multi-stakeholder approach. Collaboration sustainability efforts. among halal authorities, financial institutions, and related agencies will be key to driving growth and advancing Halal authorities acknowledge the integration of climate action agendas within the halal sector. Without Islamic finance as a significant enhancement to such measures, the halal industry risks falling behind in sustainability within the halal sector. In the Philippines, global sustainability efforts, potentially undermining its Islamic finance options remain limited, urging for more ethical and economic aspirations. BOX 2.4 Greening Halal Businesses Pilot Program in Malaysia The Greening Halal Businesses (GHB) Pilot Program green business practices. To address these challenges, launched in 2025, is an initiative developed through the GHB Pilot Program provides: the collaboration between the Government of Malaysia, Bank Negara Malaysia, IsDB Center of Excellence in Kuala • Targeted capacity building, offering training on ESG principles, GHG emissions accounting, and green Lumpur, and the World Bank Group Inclusive Growth and business practices. Sustainable Finance Hub in Malaysia. The pilot program aims to support Malaysian halal SMEs, particularly those • Access to GHG emissions measurement tools to involved in global supply chains and export markets, in help SMEs measure and report their GHG emissions. greening their business operations. This is aligned with • Facilitated access to tailored Islamic green increasing demand from global regulators and Malaysian financing solutions, enabling SMEs to invest in green trading partners to comply with ESG requirements for technologies and practices. global trade and investment. The ongoing pilot program may offer insights into effective The Malaysian halal SMEs are keen to enhance their methods to support SMEs in adopting green business knowledge, technical capability, and access to affordable practices, with the potential for these approaches to be green financing, which hinders their capacity to adopt expanded within Malaysia and applied in other countries. 54 Islamic Finance and Climate Agenda CHAPTER 2 – Islamic Finance and Climate Nexus Islamic Finance and Climate Agenda 55 CHAPTER 3 Islamic Climate Finance in Practice 56 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice This chapter highlights different financial instruments need for risk mitigation, the scale and type of climate utilized in climate finance. The examples are drawn impact, and the availability of public or private capital. from both Islamic and conventional climate finance For example, grants and concessional finance are ideal markets, providing insights that can be replicated across for projects with limited financial returns or high social the OIC. The lessons learned in instrument design benefits, while commercial debt and equity suit bankable, may be beneficial and applicable in developing novel revenue-generating projects. Guarantees and blended Islamic financial solutions to support climate mitigation, finance are used to de-risk investments and mobilize adaptation, and resilience. private capital. The choice of instrument is determined by project characteristics, financial sustainability, risk-return Climate finance instruments include grants, concessional profiles, and alignment with policy and investor priorities. finance, commercial debt, equity, guarantees, thematic Table 3.1 depicts the different types of climate finance bonds, and blended finance models. Their suitability for instruments against their suitability to finance various financing climate projects depends on several factors, projects, and ease of implementation in the context of such as the project’s revenue-generating potential, the raising a Shariah-compliant climate finance instrument. creditworthiness of the project owner, the risk profile and TABLE 3.1 Types of Climate Finance Instruments, Project Suitability and Ease of Implementation Climate- Renewable Energy Sustainable Smart Climate Tech Community Coastal Ease of Financial Instrument Energy Efficiency Transport Agriculture Water Forestry (Startups) Resilience Adaptation Implementation Grants / Concessional Finance Moderate Green / Climate Sukuk High Carbon Markets / Credits Moderate Blended Finance Moderate PPP Moderate Guarantees / Takaful Low Equity / VC Investment Low Sovereign Climate Finance Moderate Microfinance / Small-scale Home Local level Local level Community waqf retrofits Moderate High suitability Emerging use Not typically used or suitable Source: Authors’ illustration 26 3.1 Sukuk Expanding the scope and scale of sukuk will be critical to infrastructure. This report examines opportunities for address the increasing demand for climate finance. These developing thematic sukuk and financing, beyond financing models can attract private capital for targeted the domain of clean and renewable energy sukuk and objectives, such as renewable energy, and sustainable financing, which have been extensively documented.27 26 Adapted from Cities Climate Finance Leadership Alliance, https://citiesclimatefinance.org/financial-instruments and NAP Global Network, https://napglobalnetwork. org/innovative-financing/?category=results-based-financing#categories 27 World Bank (2019). Islamic Finance and Climate Agenda 57 CHAPTER 3 – Islamic Climate Finance in Practice 3.1.1 IsDB Debut Green Sukuk 2019 The IsDB issued its inaugural green sukuk in November guarantor/obligor, the sukuk was structured as a senior, 2019. The €1 billion, 5-year (maturing December 2024) unsecured trust which achieved an AAA rating. Figure 3.1 fixed-rate sukuk was a landmark transaction. Issued by summarizes the key structural features of the IsDB green IDB Trust Services Limited with the IsDB acting as the sukuk model. FIGURE 3.1 IsDB Green Sukuk Model IsDB (As Seller of a Portfolio of Assets Comprising Financing Assets and Equity Investments – The “Portfolio”) As Wakeel, Manages As Obligor, the Portfolio As Guarantor Purchase the Portfolio at Maturity IsDB Guarantee covering Issue Proceeds Periodic Distributions Issuer/Trustee Periodic Distribution IsDB Trust Services Redemption Amount Amount at Maturity Periodic Distributions Issue Proceeds Amount and Redemption Amount Tenor: 5 years EUR 1,000,000,000 0.037%, p.a. Certificate holders (Investors) ESG-focused Shariah-Compliant Impact Investor Institutional Investor Investor Impact Objectives Reduced Greenhouse Increased Renewable Enhanced Energy Gas Emissions Energy Capacity Efficiency Improved Access to Clean Sustainable Resource Water and Sanitation Management Source: IsDB IsDB’s green sukuk attracted ESG-focused institutional The IsDB’s green sukuk issuance had multiple investors, impact investors as well as Shariah- significant impacts, showcasing the power of compliant investors. The proceeds from the sukuk were Islamic finance to address climate change. The explicitly earmarked for financing new or existing eligible financing raised substantial capital for green projects green projects of IsDB member countries. The eligible in developing markets, directly supporting the projects were guided by IsDB’s Sustainable Finance implementation of climate action and sustainable Framework, which focuses on renewable energy projects, development initiatives. In terms of climate finance, clean transportation initiatives, energy efficiency IsDB exceeded its target of a 35% climate finance improvements, pollution prevention and control share of total financial commitments by 2025, with measure, environmentally sustainable management of 37% already achieved. In 2023 alone, IsDB approved natural living resources and land use, sustainable water 13 transport projects totaling US$1.2 billion, with the and wastewater management projects. aim of developing sustainable, reliable, cost-effective, 58 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice and resilient transportation systems to accelerate This transparency is essential for attracting both socioeconomic activities, growth, and poverty conventional and Islamic investors. reduction in MCs. Furthermore, as part of efforts under • Collaboration and partnerships: Collaboration with the Small-Scale Renewable Energy Applications in Rural other MDBs, development agencies, and investors Areas program, the IsDB approved US$200 million for is essential for scaling up green finance initiatives the establishment of a new 400kV Jasra subsystem in and maximizing their impact. Mauritania. • Capacity building: Investing in capacity building The IsDB Sukuk issuance also catalyzed the growth and technical assistance is important for supporting of the global green sukuk market, demonstrating the the development of green projects and promoting viability and attractiveness of this asset class for both the growth of the green sukuk market in developing international issuers and investors, encouraging other countries. This ensures that recipient countries have institutions to explore similar issuances. This contributes the expertise to develop and implement sustainable to building a robust ecosystem for green finance within projects. the Islamic finance framework. The issuance helped raise awareness about the importance of green finance and To support future issuances, IsDB updated its the role of Islamic finance in promoting sustainability, Sustainable Finance Framework in 2025. The revised highlighting the alignment of Shariah principles with Framework is aligned with leading external standards, environmental stewardship. The issuance provided including the ICMA Green Bond Principles (2025), several valuable lessons: Social Bond Principles (2025), and Sustainability Bond Guidelines (2021). It also incorporates key internal • Standardization and transparency: Adherence to updates such as alignment with the Paris Agreement international green bond standards and robust and just transition principles, in addition to adherence impact reporting are crucial for ensuring investor to Sharia principles. Under this enhanced framework, the confidence and the credibility of green sukuk. Bank is preparing to issue a labelled Sukuk later in 2025. 3.1.2 Blue Bond in Indonesia In 2023, the Government of Indonesia issued a blue its business model and access to finance. By introducing bond, also called a Samurai Bond, in the Japanese debt this innovative financing instrument, Indonesia has capital market, raising approximately US$310 million. diversified its funding sources and attracted private This issuance, the world’s first publicly offered sovereign capital to support sustainable marine and coastal blue bond aligned with ICMA principles, involved multiple projects. This approach not only addresses the substantial key stakeholders. The proceeds are allocated under SDG financing gap but also positions the country as a Indonesia’s Sustainable Development Goals (SDGs) pioneer in thematic bond markets, thereby enhancing Government Securities Framework, specifically funding investor confidence and broadening the investor base. projects to enhance disaster management and risk Improving enabling conditions is crucial to complement reduction for coastal communities, protect and restore and amplify the impact of such financing solutions. biodiversity and ecosystems in coastal and marine areas, Indonesia’s adoption of an Integrated National Financing and prevent ocean pollution through waste management Framework exemplifies this strategy, aligning diverse in coastal and small island regions. The Blue Bond financing flows with national SDG priorities (Bappenas, funded 31 projects across 34 provinces in Indonesia, 2022). The framework facilitates coordinated policy benefiting coastal communities and marine ecosystems reforms, strengthens institutional capacities, and fosters by preventing disasters, rehabilitating mangrove forests an environment conducive to sustainable investments. By and coral reefs, establishing new conservation areas, enhancing transparency, establishing robust regulatory managing biodiversity, and creating waste management frameworks, and promoting stakeholder collaboration, facilities (Ministry of Finance, 2024). Indonesia creates a supportive ecosystem that not only The issuance of the bond has significantly influenced attracts but also effectively utilizes financial resources for the nation’s financial landscape, particularly regarding sustainable development. Islamic Finance and Climate Agenda 59 CHAPTER 3 – Islamic Climate Finance in Practice However, significant challenges remain, particularly potentially be structured using Musharaka as an in ensuring effective governance and maintaining underlying contract on a blended financing model, investor confidence by demonstrating measurable where private investors, concessional funders, and environmental impacts. Given the novelty of the government jointly contribute capital and share blue bonds, the market lacks established pricing profits and risks in a blue economy project (Figure 3.2). benchmarks and a track record for project In this model, private investors contribute capital as implementation, necessitating robust monitoring and equity partners, while concessional funders provide reporting frameworks to assure stakeholders of fund subsidized capital to reduce investment risks. A special utilization effectiveness. Furthermore, the success of purpose vehicle (SPV) is created to pool and manage the bond depends on the long-term sustainability and these investments. The Musharaka sukuk is issued to implementation capacity of funded projects, requiring raise equity-based funding, which is then allocated to strong institutional oversight and risk management. approved blue economy projects. Project operators Despite these challenges, Indonesia’s Blue Bond oversee the implementation, ensuring adherence to issuance represents a pioneering step in climate- sustainability objectives. Revenues are distributed among aligned sovereign financing, setting a precedent for investors based on pre-agreed profit-sharing ratios, other nations seeking to leverage capital markets for with losses shared proportionally according to equity marine conservation and climate resilience initiatives. contributions. At maturity, capital can be reinvested into new sustainable projects, allowing investors the option Indonesia’s novel experience provides useful insights to exit or continue reinvesting in future sukuk issuances. into the development of blue sukuk. Blue sukuk could FIGURE 3.2 Musharaka Sukuk with Blended Finance Model Issuer: Government/ Corporation Blended Finance Development Investors (sukuk Holders) Special Purpose Project Vehicle (SPV) Equity manager Operator(s) Concessional Funders: Private/MDBs/ i-Philanthropy Funds Shariah Blue Economy Sukuk Rating Supervisory Project(s) Agencies Board Source: Author’s illustration 60 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice 3.1.3 Amazon Reforestation-Linked Outcome Bond The World Bank’s Outcome Bonds represent a pioneering the bond proceeds directly funds reforestation activities, approach to sustainable finance, aligning investor executed by Brazilian firm Mombak, while companies returns with measurable social and environmental like Microsoft commit to purchasing the resulting CRUs. impact. These instruments shift the paradigm to a results- Outcome bonds can help governments and development driven model, where additional returns are contingent institutions attract private capital without bearing on the successful delivery of specified outcomes. One immediate costs, while investors support climate and of the most notable examples is the 2024 Amazon social goals with potential financial returns. Additionally, Reforestation-Linked Outcome Bond, which raised these bonds enforce accountability and transparency, as US$225 million. It ties investor returns to the generation third-party verification ensures the integrity of reported of Carbon Removal Units (CRUs) through large-scale outcomes. native tree reforestation in Brazil’s Amazon. A portion of FIGURE 3.3 Amazon Reforestation-Linked Outcome Bond Transaction Structure Source: World Bank (2024) Sukuk can effectively adapt outcome-based bond Returns are derived from revenues generated by the structures through Shariah-compliant contracts that underlying assets or pre-agreed outcome payers such align well with the principles of impact investing. For as governments or donors. Outcome-based financing example, Sukuk Wakalah could be structured where can be enhanced by blending waqf and other Islamic proceeds are directed to development projects, with philanthropic funds. returns contingent on outcomes verified by third parties. Islamic Finance and Climate Agenda 61 CHAPTER 3 – Islamic Climate Finance in Practice 3.2 Islamic Bank Financing Islamic bank financing or financing lines is crucial for assets. Islamic banks can support corporates and MSMEs bridging the climate finance gap, particularly since 70 engaged in climate-resilient activities through dedicated percent of Islamic financial assets are Islamic banking climate-focused financing lines. 3.2.1 Economic Empowerment Fund for Uzbekistan (EEFU) The Economic Empowerment Fund for Uzbekistan The EEFU is a strategic alliance between the (EEFU), established in 2021, is Uzbekistan’s first Government of Uzbekistan, the IsDB, and a consortium impact investment fund, aiming to foster sustainable of private sector investors from the Kingdom of Saudi and climate-resilient economic growth. It provides Arabia. The Government of Uzbekistan contributed 35 tailored financing options to Micro, Small, and percent (US$35 million) of the initial capital, the IsDB Medium Enterprises (MSMEs), social enterprises, and contributed 20 percent (US$20 million), and Saudi private cooperatives, empowering them while minimizing sector investors contributed the remaining 45 percent environmental impact. The EEFU supports businesses (US$45 million). This PPP brings together financial that prioritize social and environmental responsibility, resources, expertise, and a shared vision for sustainable including those adopting climate-friendly technologies, economic growth. The EEFU can potentially demonstrate aligning with Uzbekistan’s SDGs. the efficacy of PPPs in addressing development challenges, particularly climate change, and the pivotal role of impact The EEFU deploys several financial instruments. A investing in emerging markets. Key replicable factors Line of Finance (LoF) provides pre-approved credit include strong governance arrangement, a well-defined lines for working capital, inventory management, or investment strategy aligned with SDGs, diverse funding short-term investments, including those related to sources, and robust monitoring and evaluation. energy efficiency or renewable energy. Direct financing options include Murabaha, an Islamic finance instrument The EEFU is projected to create over 102,000 direct for asset acquisition or procurement with transparent jobs, focusing on youth and women, particularly in profit margins, ensuring alignment with Islamic finance sectors with high potential for climate action like principles that emphasize environmental stewardship renewable energy and sustainable agriculture. It aims and social responsibility. The EEFU also offers equity to support over 35,000 MSMEs, social enterprises, and participation as Musharaka, taking stakes in promising cooperatives, promoting social inclusion and poverty businesses committed to environmental sustainability reduction, including businesses engaged in climate- and climate action, providing capital and access to the resilient activities. The fund also fosters innovation EEFU’s international network. This blend of financial and entrepreneurship, supporting the development of instruments ensures efficient capital allocation to support climate-related technologies and solutions. EEFU plans job creation, social entrepreneurship, and environmental to expand its fund size to US$500 million, prioritizing sustainability. investments in climate-aligned projects. Summary of Economic Empowerment Fund for Uzbekistan (EEFU) Aspect Details Initial Capital US$ 100 million (target: US$ 500 million) Founders IsDB and Government of Uzbekistan Funding Contribution - Government of Uzbekistan: 35% - IsDB: 20% - Saudi private sector investors: 45% Target Beneficiaries 34,000 MSMEs, social entrepreneurs, and cooperatives ≥50% will be women and youth-led enterprises Fund Goals - Poverty alleviation - Job creation (100,000+ new jobs) - Economic empowerment of women and youth Financing Channels - Credit lines - Murabaha finance (Islamic finance) - Equity participation Non-Financial Support - Technical assistance - Management training - Market access guidance - Partnership facilitation 62 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice 3.2.2 SME Green Financing SMEs are pivotal in driving economic growth and risks and limited technical expertise. MDBs like the advancing the climate agenda. Both the World Bank World Bank and IsDB have recognized this gap and are and the IsDB have initiated programs to facilitate green implementing targeted programs to support SMEs in financing for SMEs. SMEs often face challenges in adopting sustainable practices. Below are examples of accessing finance for green projects due to perceived relevant projects. Green Industry Project in Türkiye The Türkiye Green Industry Project is a World Bank initiative aimed at supporting the government of Türkiye in achieving several key objectives related to climate action and industrial efficiency. The project is designed to address market failures and constraints that hinder the private sector’s response to climate challenges. Recognizing that SMEs often face challenges in accessing finance for sustainable initiatives, the project allocates US$250 million to the Small and Medium Enterprises Development Organization of Türkiye (KOSGEB) to support SMEs in improving resource efficiency and reducing carbon emissions. An additional US$175 million is directed to the Scientific and Technological Research Council of Türkiye (TÜBİTAK) to foster green innovation among Turkish enterprises, research institutions, and universities. By facilitating access to finance and technical support, the project aims to reduce emissions of particulate matter by 40 percent and nitrogen oxides by 30 percent from beneficiary manufacturers, contributing to an annual reduction of 220,000 metric tons of GHG emissions. This initiative aligns with Türkiye’s commitment to achieving net-zero carbon emissions by 2053 and supports SMEs in adapting to global environmen- tal standards, thereby enhancing their competitiveness in international markets. Greening Value Chain Program in Malaysia Bank Negara Malaysia (BNM) launched the Greening Value Chain (GVC) Programme in 2022 to assist Malaysian SMEs in transitioning towards sustainable and low-carbon operations. The program offers SMEs access to technical training on measuring and reporting GHG emissions, enabling SMEs to understand and mitigate their environmental impact. Through BNM’s Low Carbon Transition Facility, SMEs can apply for affordable financing options to fund their investments in sustainable practices and technologies. The GVC Program fosters collaboration between SMEs and larger corporations, known as anchor companies, within the supply chain. These partnerships facilitate knowledge transfer, resource sharing, and the implementation of best practices in sustainability. Since its inception, the GVC Programme has engaged over 650 SMEs, providing them with the necessary tools and knowledge to embark on their sustainability journey. Approximately a third of these SMEs actively measure and report their GHG emissions, marking a significant step towards transparency and accountability in environmental performance. Exploring Green Islamic Microfinance Micro, small, and medium enterprises (MSMEs) are typically important sources of production, innovation, and en- terprise. However, MSMEs often face challenges, including a lack of access to capital and resources and increasing climate shock events. The concept of Green Islamic Microfinance may be a potential option for MSMEs supporting Shariah-compliant, low-carbon, and/or climate resilient activities to attract early- and middle-stage finance (IsDB, 2024). Access to such microfinance could provide opportunities for urban and rural communities in both urban and rural settings across many OIC countries, particularly where traditional financing institution services do not extend. The women’s empowerment benefits often associated with microfinance may also be realized. At a macro level, building community resilience to climate change and supporting low-carbon solutions may also help achieve nation- al climate change goals. Islamic Finance and Climate Agenda 63 CHAPTER 3 – Islamic Climate Finance in Practice 3.3 Takaful Insurance and takaful function are risk transfer making it suitable for smallholder farmers. Countries like mechanisms and financial instruments that can Bangladesh and Indonesia have tested weather-based encourage climate-resilient investments. In a climate index insurance schemes that can be adapted to the context, insurance and takaful serve three climate finance takaful model. Parametric insurance provides payouts roles: mitigating risk with protection against climate when specific environmental conditions are met, such events, supporting post-disaster recovery with rapid as wind speed or earthquake magnitude. These models payouts, and incentivizing resilient investments through are cost-effective and offer rapid disbursement. National premiums or contributions for sustainable practices. governments could establish sovereign takaful pools For example, crop protection secures farmers against to insure against large-scale climate events. A Shariah- weather extremes, disaster risk financing offers automatic compliant version of regional initiatives like the African payouts based on climate triggers, and protection linked Risk Capacity (ARC) could provide emergency funds for to green infrastructure schemes can encourage flood- climate disasters across Muslim-majority nations. Green resistant homes and climate-smart agriculture. insurance integrates climate sustainability into products such as renewable energy insurance which covers risks Several conventional insurance tools used for climate specific to wind, solar, hydro, and biomass energy finance can be converted into takaful formats. Index- production, and usage-based auto insurance that offers based insurance pays out based on a predetermined lower premiums to drivers with lower mileage or more climate index, such as rainfall or temperature thresholds, fuel-efficient driving behavior. 3.3.1 Parametric Takaful in the DRIVE project 28 The Horn of Africa De-Risking, Inclusion and Value contributions from the government and pastoralists Enhancement of Pastoral Economies (DRIVE) project, are first split between a wakalah fee and a tabarru’. It initiated by the World Bank, is a regional sovereign subsequently shows how the risks are pooled in the disaster insurance initiative. It provides parametric general takaful fund and how, after claims are paid, insurance and takaful coverage to East African countries surpluses may be refunded to pastoralists, subject to – Djibouti, Ethiopia, Kenya, and Somalia – to safeguard an actuarial assessment that the remaining balance in against agricultural losses due to drought. The project the fund is adequate to cover future risk. The general facilitates rapid payouts based on drought triggers, takaful fund makes a contribution to a retakaful fund such as rainfall deficits, enabling governments to to manage the risk of the general takaful fund being finance emergency food security programs and social inadequate in covering all the members’ losses. A protection schemes. Key features include risk pooling portion of the general takaful fund is used to invest among multiple countries to reduce premium costs, in Shariah-compliant investments, which increases the involvement of private reinsurers to share financial risks, total amount of funds available to cover members’ and connections to adaptive social protection systems losses. If the total available in the general takaful fund for efficient aid distribution. is not enough to cover the losses, the takaful operator and retakaful operator pay an interest-free loan (qard) The takaful and retakaful scheme is based on a hybrid to the respective funds. Wakalah and Mudarabah model (Figure 3.4). Total 28 This section has been extracted from a World Bank Technical Note authored by Qhelile et al. (2025). 64 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice FIGURE 3.4 DRIVE Takaful Operational Model Total Contributions RETROTAKAFUL CONTRIBUTION Government: 90% Pastoralists: 10% Retrotakaful Fund 10% WAKALAH TABARRU' 90% RECOVERIES | SURPLUS* QARD Takaful QARD Operator General REPAYMENT OF QARD Retakaful General CONTRIBUTION Retakaful Operator REPAYMENT OF UP TO 50% Takaful Fund QARD MANAGES Fund OF PROFIT AT LEAST 50% OF PROFIT Wakalah fee x% Investments FINANCES RECOVERIES SURPLUS* Continuous process Claims PAYOUT Ifapplicable Cancellations Pastoralist *Only after outstanding Reserve Participants Qard has been paid back NET SURPLUS * Source: Qhelile et al. (2025) The much smaller takaful and retakaful risk fund promote underwriters’ risk retention to support long- means that the loss-absorbing capacity is still very term market growth, with collaborative frameworks limited compared to that of reinsurance. Due to this, being essential. Strong regulatory support fosters trust Shariah has provided some temporary dispensation to and attracts private investment, as seen in Kenya’s use conventional reinsurance. Given the nascent nature agricultural insurance programs and Somalia’s takaful of the takaful operators in Somalia, their takaful funds are regulations under DRIVE. Additionally, leveraging donor not being used to cover the losses. Instead, the losses programs with strategic foresight can align short-term are being paid from the retakaful funds of participating and long-term market development goals. retakaful operators through ZEP-Re. In time, it is expected that local takaful operators will keep some of Specific lessons for takaful include the necessity the contributions and pay some of the losses from the of people-centric solutions that align with Shariah domestic takaful funds. This temporary arrangement has compliance, as vulnerable populations prefer values- been considered Shariah-compliant on an exemption based financial products. Crowding-in retakaful capacity, basis by the ZEP-Re Shariah advisor. This exemption is on supported by both regulatory efforts and market growth the retro insurance arrangement as takaful operators are strategies, is crucial. However, takaful products may be ceding to a Shariah-approved retakaful window of ZEP-Re. costlier due to profit-sharing, limited retakaful options, and governance requirements. Sustainable growth Lessons learned from the DRIVE project emphasize requires a robust Islamic banking and capital market the importance of incentivizing distribution channels, system to invest contributions effectively, necessitating encouraging risk retention, and ensuring strong cross-sector collaboration between regulators. Finally, regulatory support. Effective last-mile distribution parametric takaful presents challenges such as ensuring through partnerships with financial institutions can regulatory recognition, addressing mis-selling and address demand-side barriers and attract international basis risk, and engaging Shariah leaders for long-term reinsurance and retakaful operators. Regulators should acceptance. Islamic Finance and Climate Agenda 65 CHAPTER 3 – Islamic Climate Finance in Practice 3.3.2 Parametric Takaful in Pakistan and Malaysia Parametric Takaful products are also being piloted provided farmers with seamless digital access to takaful in Pakistan and Malaysia. In Pakistan, Salaam Takaful solutions, and the collaboration with the Pakistan Poverty Limited has introduced Crop Parametric Takaful solutions Alleviation Fund (PPAF) has extended weather-risk for smallholders, while in Malaysia, Agro Captive Takaful coverage to vulnerable farming communities in Sindh Limited’s Paddy Crop Takaful Scheme is the first crop and Balochistan. In addition to financial protection, takaful scheme offered in the country. Salaam Takaful provides a suite of services to support its farmers, including remote farm health monitoring and In Pakistan, the parametric takaful model introduced analysis, crop advisory to help farmers make informed in 2022 is designed to provide rapid and transparent decisions, weather index tracking for real-time data, and support to vulnerable communities, allowing farmers to free access to doctor consultation through the Salaam recover from disasters without relying on government App, available to farmers and their households. declarations or time-consuming manual assessments.29 The farmer-friendly features of this coverage include: In Malaysia, the Paddy Crop Takaful Scheme, introduced in 2024, offers an alternative to the government Paddy • Mid-season payouts: Farmers can receive funds Disaster Relief Fund.30 The takaful scheme has the added when they need them most. benefits of: • No government calamity declaration: Payouts are • Larger quantum of compensation provided triggered by pre-agreed weather parameters, not (RM3,000/hectare, no limit of hectarage) official decrees. • Claims on damages cover three stages of cultivation • Individual risk assessment: Coverage is tailored to instead of two the specific needs of each farm. • No financial commitment required in the initial • Elimination of manual loss evaluations: Payments stages, due to full government subsidy are made automatically based on data, ensuring a transparent and swift process. • Claims will be paid within 14 days of Technical Committee approval • Protection against a wide range of climate risks: Drought, excess rainfall, flood, heat, wind, locust As of March 2025, RM16.2 million (approximately attack, extended coverage US$4 million) in compensation had been approved for 6,319 affected farmers, underscoring the scheme’s In 2024, Salaam Takaful expanded its reach through responsiveness to climate-related events.31 key partnerships. The collaboration with JazzCash 29 https://www.salaamtakaful.com/corporateproduct/salamcrop 30 https://www.agrobank.com.my/product/skim-takaful-tanaman-padi/ 31 https://www.utusanborneo.com.my/2025/05/13/agrobank-lancar-skim-takaful-tanaman-padi-perluas-perlindungan-kewangan-kepada-pesawah-di 66 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice BOX 3.1 Knowledge Partnerships to Build Climate Resilience via Takaful The United Nations Development Program Insurance market growth include limited awareness, cultural and Risk Finance Facility (IRFF), the IsDB and IsDB misconceptions, inadequate regulatory frameworks, Institute (IsDBI) have together helped to enhance and operational inefficiencies. The report recommends knowledge on takaful, with the goal of supporting concerted action by policymakers, industry associations, market development and increasing access and takaful operators, and MDBs to support takaful coverage for communities increasingly exposed to development through financial inclusion strategies, climate- and non-climate shock events. Takaful offers a product innovation, digital transformation, international solution as a Shariah-compliant mutual insurance based collaboration, and capacity-building. on risk sharing and mutual aid. Takaful payouts help low- income families, farmers, and small businesses recover In parallel, UNDP, IsDB and IsDBI have fostered faster after climate disasters. The global takaful market, discussions on Takaful via blogs32 and forums such while small, has grown significantly in Muslim-majority as COPs33 . During the United Nations Convention to countries, helping to expand access to affordable risk Combat Desertification (UNCCD) COP16 in Riyadh, Saudi protection, financial products, and services. Arabia, in December 202434 the Global Takaful Alliance was announced. The Global Takaful Alliance is being In 2023, a first report, “Insuring a Sustainable Future: led by the UNDP with early support from the Islamic Building Climate Resilience Through Takaful – Part 1: Development Bank, Arab Gulf Fund for Development, Key Findings and Recommendations” (UNDP, IsDB & the Kuwait Finance House and the Mohammed Bin IsDBI, 2023) was published. The first report highlights Rashid Al Maktoum Global Initiatives. the increasing vulnerability of Muslim communities to climate change and proposes takaful, a Shariah- compliant mutual insurance, as a viable solution for Global Takaful Alliance – Mobilizing Collective building climate resilience. The report highlights that Strength for Financial Resilience climate change is causing extreme weather and rising sea In response to weak financial resilience across many levels, leading to significant economic and human costs, Muslim countries and communities on the frontlines of and that over 100 million people could fall into poverty growing risk, the Global Takaful Alliance is a bold public- by 2030, with Muslim-majority developing nations being private initiative. It aims to harness national, regional, particularly vulnerable. OIC member countries have seen and global expertise to build financial resilience for a fourfold increase in climate-related disasters over the communities globally. past 50 years, with little insurance coverage. The Alliance brings together public and private actors The report includes case studies of successful takaful – national, regional, and global – across development, initiatives for climate resilience from various countries, research, and philanthropy to pool resources including Pakistan (crop insurance for farmers, parametric and capabilities within OIC countries and Muslim Takaful for wheat farmers), Kenya (Index-Based Livestock communities. Through three core implementation pillars, Takaful for pastoralists), and Sudan (climate risk finance it aims to: project for farmers and pastoralists). These cases demonstrate takaful’s potential to provide efficient • Strengthen the enabling environment for Takaful payouts and build resilience through customized, solutions Shariah-compliant solutions. • Build national capacity among Takaful providers • Scale financial solutions across key sectors including In 2024, a second report, “Building Climate Resilience health, agriculture, housing, education, and small through Takaful – Part 2: Developing Takaful Market business Systems” (UNDP, IsDB & IsDBI, 2024) was published. The second report builds directly on the first and highlights By convening top talent, research, and innovation on the growing takaful market, which reached US$30 billion a global platform, the Alliance will promote best prac- in contributions by 2022, but has limited penetration tices and shape the global agenda. Its impact will be compared to conventional insurance. The report notes far-reaching: reducing the burden on families, farmers, that the takaful market is expanding, particularly in the and businesses; minimizing the need for emergency aid; South-East Asia and MENA regions, but remains small accelerating recovery and reconstruction; and unlocking compared to traditional insurance. Limitations to further growth by removing risk and uncertainty. 32 Kellett, J., Hiller, B. & Najeeb, S.F., May 2024, The Takaful Solution: Bridging the Climate Protection Gap, https://irff.undp.org/blog/takaful-solution-bridging- climate-protection-gap. 33 Climate Change COPs and Desertification COP. 34 https://irff.undp.org/events/global-takaful-alliance-vision-deliver-financial-resilience. Islamic Finance and Climate Agenda 67 CHAPTER 3 – Islamic Climate Finance in Practice 3.4 Waqf In Islamic finance markets, waqf instruments have an asset-backed model, where sukuk is issued using evolved beyond the traditional concept of endowing existing waqf assets (e.g., land or buildings) as the immovable assets like land or buildings. Today, various underlying structure, or revenue-linked, where types of waqf instruments are used to address modern returns from sukuk-financed projects are partially or socio-economic needs. entirely endowed as waqf to fund social programs. • Cash Waqf: Unlike traditional waqfs that are Green waqf initiatives can play a vital role in mobilizing restricted to immovable property, cash waqf offers Islamic philanthropic funds towards environmental flexibility and scalability in addressing modern socio- sustainability efforts. By endowing land for economic challenges. The cash waqf model has been conservation, supporting renewable energy projects, effectively used to fund microfinance institutions, and funding environmental education, green waqf education scholarships, and healthcare subsidies. ensures long-term impact beyond temporary aid models (Obaidullah, 2019). Additionally, it supports biodiversity, • Corporate Waqf: In the corporate waqf model, strengthens community resilience to climate change, a company (or its founders) creates a waqf by and generates green jobs, contributing to environmental allocating part of its shares, assets, or profits for and socioeconomic stability. Currently, there are several charitable purposes. The waqf is managed by a waqf notable sustainable waqf initiatives in the OIC, such as: trustee (Mutawalli ), often through a foundation or waqf institution, and the returns are used for various • Sustainability Waqf by Yayasan Waqaf Malaysia social programs. An example is Johor Corporation helps provide funding for affordable housing, (JCorp) in Malaysia, which pioneered the corporate education, and renewable energy projects. waqf model by endowing a portion of its equity into a waqf fund managed by Waqaf An-Nur • Green Waqf Project by Badan Amil Zakat Nasional Corporation Berhad. The returns fund healthcare, in Indonesia aims to fund environmental protection education, and poverty alleviation projects. and disaster resilience. • Waqf-linked Sukuk: Waqf-linked Sukuk merges • Awqaf Properties Investment Fund by IsDB sukuk and waqf. This model integrates waqf assets facilitates funding for infrastructure, education, and or revenue streams into the sukuk structure as either healthcare. 3.4.1 Cash Waqf for Sustainable Development in Malaysia Yayasan Waqaf Malaysia (YWM) has actively approximately US$1 million, highlighting the program’s embarked on an innovative approach to address extensive reach and impact. Malaysia’s pressing environmental challenges by In addition to water projects, the institution has been utilizing cash waqf mechanisms to fund sustainable instrumental in promoting renewable energy through infrastructure and community development projects. the Solar Waqf initiative. This program involves One of its notable projects is the Water Waqf program, installing solar panels on mosques, reducing electricity launched in collaboration with the Ministry of Natural costs, and promoting environmental stewardship. For Resources, Environment, and Climate Change (NRECC) instance, the Permatang Tok Mahat Mosque in Penang in December 2020. This initiative focuses on providing has saved approximately US$100 monthly on electricity clean and accessible water to rural and underserved bills after adopting solar energy. The Penang Islamic communities by constructing wells and restoring water Religious Council aims to expand this initiative to 200 infrastructure. By the end of 2024, YWM had implemented mosques, demonstrating the scalability and community 83 water waqf projects across Malaysia with allocations of benefits of integrating renewable energy with religious 68 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice infrastructure.35 The institution’s efforts also extend to growth while contributing to sectors such as education, sustainable agriculture. It received RM3 million (US$0.8 healthcare, and environmental preservation. Half million) under the 2022 Malaysian Budget to develop a of the income derived from the ETF is allocated to 10-acre waqf land in Putrajaya to cultivate agricultural these sectors, exemplifying a dual-impact investment produce. This initiative not only contributes to food approach that aligns financial returns with social and security but also serves as a model for utilizing waqf land environmental objectives. The Eq8 FTSE Malaysia for economic and environmental sustainability. Enhanced Dividend Waqf ETF (EQ8WAQF) has an initial size of up to one billion units. As of May 23, 2025, Furthermore, the institution has collaborated with a the ETF has 1.5 million units in circulation. The fund is financial institution to launch the world’s first waqf- designed to be passively managed and benchmarks featured Exchange-Traded Fund (ETF). This innovative against the FTSE Bursa Malaysia EMAS Shariah Factor financial product allows investors to achieve capital Enhanced Target Dividend Index. FIGURE 3.5 Waqf ETF structure on Bursa Malaysia Source: Bursa Malaysia While the institution’s initiatives have demonstrated challenges requires collaborative efforts among significant potential, several challenges persist. These government agencies, financial institutions, and the include the need for a supportive regulatory framework, broader community to create an enabling environment effective fund management strategies, and increased for the growth and sustainability of green waqf projects public awareness and participation. Addressing these (IKIM, 2022). 35 https://www.tnb.com.my/assets/newsclip/14042023h.pdf Islamic Finance and Climate Agenda 69 CHAPTER 3 – Islamic Climate Finance in Practice 3.4.2 Waqf Forest in Indonesia Indonesia’s FOLU Net Sink 2030 program aims to reduce environmental sustainability. Several waqf forest programs GHG emissions in the forestry sector by emphasizing have been launched, including the Aceh Waqf Forest in deforestation reduction, peatland restoration, and 2012 (Hamdani & Pasummah, 2021; Jannah et al., 2020) sustainable forest management (Ministry of Environment, and the Bogor Waqf Forest in 2018 (Ali & Kassim, 2020) 2023). Beyond governmental policies, NGOs, community- (Figure 3.6), the Sukabumi Waqf Forest in 2018 and the based initiatives, and philanthropic institutions have Mojokerto Waqf Forest (YPM) in 2020. The waqf model also played a crucial role in forest conservation efforts. ensures long-term forest conservation by designating One such initiative is the establishment of waqf forests land as a protected endowment, thereby securing its in Indonesia, which integrate Islamic philanthropy with sustainability and preventing future exploitation. FIGURE 3.6 Yayasan Wakaf Hutan Bogor Model Stakeholders Ecological & Social benefits Waqif/Endowment Nazir/Mutawalli/ Mauquf Alaih Donors Waqf Manager Waqf beneficiary Economics Benefits Source: Ali & Jannah (2024) and Ali & Kassim (2020) The management of waqf forests in Bogor is facilitated primary objectives: ecological and social benefits, as through the participation of waqif (donors), including well as economic benefits. The ecological and social individuals and private sector entities, such as benefits include reforestation, biodiversity enhancement, corporations that allocate funds through Corporate conservation of clean water sources, soil protection, Social Responsibility (CSR) programs or other grant air quality improvement, and carbon sequestration. mechanisms. Waqf assets primarily consist of land Meanwhile, the economic benefits are realized through designated for reforestation and conservation, while various income-generating initiatives, such as honey additional contributions come in the form of seed production, coffee shops, sheep farming, and camping donations and financial support for plant maintenance from zones. However, the economic impact remains limited both individuals and corporate entities. Funding for waqf due to the small-scale nature of these businesses, which forests generally follows two principal models: perpetual primarily serve the local community, indicating the need funding, which includes waqf in the form of tangible for further expansion and development. property and cash waqf, and other Islamic philanthropic instruments such as infak, grants, and sadaqah, which The sustainability of waqf forest management is support operational expenses. highly dependent on the collaborative efforts of various stakeholders (Figure 3.7). Within this ecosystem, six key The assets and funds collected for waqf forests are stakeholder groups play a crucial role: foundations and managed productively by Nazir or Mutawalli, who may NGOs, the government, academicians, the business be individuals or organizations possessing religious, and industry sectors, local communities, and the media. economic, and business competencies. The management Foundations and NGOs contribute through advocacy and process encompasses several stages, including planning, program facilitation, while the government provides policy implementation, supervision, and the optimization of frameworks and regulatory support to ensure the long- forest resources to maximize their benefits. Broadly, term sustainability of waqf forests. Academicians play a the management of waqf forests aims to achieve two vital role in conducting scientific research and fostering 70 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice innovation, whereas the business sector offers financial synergistic collaboration among these stakeholders, resources and technological advancements to enhance waqf forest management can be optimized to ensure forest management. Local communities engage in direct ecological, social, and economic sustainability. This participation and stewardship of waqf forests, while multi-stakeholder approach integrates diverse actors to the media serve as a critical channel for information achieve sustainable and impactful outcomes. dissemination and public awareness. By fostering FIGURE 3.7 Waqf Forest Stakeholders NGOs/Nazir Business /Industry Societies/ Government Waqf Forest Stakeholders Communities Academicians Media Source: Author’s illustration The management of waqf forests in Indonesia presents a significant challenge, as the available funds remain significant potential for advancing environmental insufficient relative to the extensive forest areas requiring sustainability, economic empowerment, and social management. Current funding sources are largely limited welfare (Alam et al., 2024; Ali & Kassim, 2021; Umam et to individual donors and medium-sized corporations, al., 2024). One of the key opportunities lies in the role restricting the scalability of waqf forest initiatives. of waqf forests as a nature-based solution to mitigate Another critical issue is the limited availability of human environmental degradation and climate change (Alam et resources with the necessary expertise in waqf-based al., 2024). Through the implementation of a sustainable forest management, particularly in the areas of business waqf framework, endowed lands can be transformed administration, environmental conservation, and green into productive green areas that function as carbon sinks technology optimization. Moreover, public awareness and biodiversity conservation zones. Moreover, the waqf- of the concept of productive waqf remains relatively based management model has considerable potential to low, while inadequate cross-sector collaboration enhance community livelihoods through forest-based further impedes the expansion and development economic activities, such as ecotourism, honeybee of waqf forests in Indonesia (Alam et al., 2024; Ali & cultivation, and the processing of non-timber forest Kassim, 2021). Addressing these challenges requires products. The active involvement of the business sector, the implementation of more progressive policies and academia, and local communities can further optimize stronger multi-stakeholder support to ensure that waqf the productivity of waqf forests, ensuring that they not forests are managed sustainably and generate long-term only generate ecological benefits but also contribute to environmental and socio-economic benefits. local economic resilience and food security (ibid). Countries with extensive forest areas, such as Malaysia, Despite the numerous opportunities, the management could adapt this model by aligning it with their of waqf forests in Indonesia faces several complex environmental policies and Islamic finance regulations. challenges. One of the primary obstacles lies in the Through proper adaptation, waqf forests can serve as a legal and regulatory framework, which has yet to fully scalable and sustainable approach to addressing global accommodate the optimization of waqf forests as climate challenges while fostering socio-economic productive assets. Additionally, financial constraints pose development. Islamic Finance and Climate Agenda 71 CHAPTER 3 – Islamic Climate Finance in Practice 3.4.3 Waqf Forest Mechanism and Carbon Trading Forest waqf represents a green initiative with significant oxygen, thereby enhancing its ecological contribution to potential in reducing and sequestering carbon environmental stability and sustainability. The existing emissions into the atmosphere. Forest waqf holds the carbon trading framework operates through two primary potential to serve as a provider of high-quality carbon models: the voluntary carbon market and the mandatory commodities, surpassing conventional carbon credit carbon market. To enhance the financial sustainability schemes produced by industrial sectors. This stems from of waqf forests, these initiatives can be integrated into its dual benefits—beyond merely capturing and reducing both market structures through the following proposed carbon emissions, forest waqf actively generates purer model: FIGURE 3.8 Waqf Forest-Carbon Trading Mechanism Model – Voluntary (B2B) (Left) and Mandatory (Carbon Exchange) (Right) Surveyor Surveyor Buyers Waqf Forest Waqf Forest Manager/Nazir Carbon Credit Potential Buyers Carbon Credit Exchange Buyers Manager/Nazir Verifier & Formal Register (Verra/Gold Validator & Buyers Certifier Standard) verifier Source: Author’s illustration The process begins with the Nazir or waqf forest Therefore, securing adequate financial reserves is manager conducting a carbon sequestration essential to cover these operational expenses and ensure assessment with the assistance of certified surveyors. the long-term sustainability of waqf forest participation This survey aims to quantify the amount of carbon in the voluntary carbon market. Given that participants absorbed by the waqf forest, which can be recognized in the mandatory carbon market are predominantly as carbon credits for future trading. Following the initial large corporations, the demand for carbon credits is assessment, the recorded data undergoes verification significantly higher. Consequently, Nazir must expand by formal registry organizations such as Verra or the the scope of waqf forest areas to increase carbon Gold Standard. This verification process ensures the sequestration capacity, ensuring sufficient credit supply accuracy and legitimacy of the carbon credit calculations to meet market demands. This necessitates strategic conducted by surveyors and the Nazir of the Waqf forest. land extension and improved forest management Once the verification is successfully completed, an official practices to enhance the effectiveness of waqf forests carbon credit certificate is issued, allowing Nazir to sell in contributing to carbon trading within the mandatory the carbon credit to potential buyers. These certified market framework. credits can then be sold to domestic and international corporations seeking to offset their carbon footprints. Green waqf holds significant potential to mobilize To participate in the carbon exchange model, there may private capital for climate action. Through structured be additional regulatory compliance requirements and endowments in renewable energy, sustainable agriculture, membership in the carbon exchange. and climate-resilient infrastructure, green waqf can attract contributions from individuals, institutions, and For the voluntary model to function effectively, a strong impact investors. Its perpetual and transparent nature network of trust and cooperation between the Nazir and ensures long-term returns for the environment and potential buyers must be established. Additionally, it is society, making it a powerful tool to bridge the financing important to acknowledge the financial requirements gap in climate adaptation and mitigation efforts in the associated with this process, including costs for surveyors, OIC. verification, registration, and certification issuance. 72 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice BOX 3.2 Utilization of Islamic Social Finance Instruments for Climate Action Beyond waqf, other Islamic social finance instruments resilience projects that may not be commercially viable namely zakat (almsgiving), sadaqah (donation) and qard but are critical for local communities. For example, funding (interest-free loan) have the potential to expand the funding for sustainable irrigation systems in drought-prone areas, pool for climate-aligned projects. or small-scale renewable energy projects for off-grid communities. Zakat: These funds can be directly disbursed to communities affected by climate-induced disasters (e.g., floods and Qard: Interest-free loans can be extended to individuals droughts), providing immediate relief and supporting or small enterprises for climate-friendly initiatives who may recovery efforts. Zakat and sadaqah can also be utilized to struggle to access conventional commercial financing. fund micro-takaful schemes, which offer affordable financial This could include loans for energy-efficient appliances, protection against climate-related losses for vulnerable water-saving technologies, or the adoption of sustainable households, small farmers, and informal sector workers. agricultural practices. These interest-free loans reduce the Sadaqah: These funds can be utilized to provide grants financial burden on beneficiaries and encourage climate- or subsidies for community-level climate adaptation and positive behaviors. 3.5 Lessons Learned The following lessons offer practical insights for scaling Islamic climate finance across OIC countries. 1. Standardization and transparency Adherence to international standards (e.g., ICMA Green Bond Principles) and robust impact reporting, exemplified by IsDB’s green sukuk can enhance investor confidence and attract both Islamic and conventional investors. 2. Strategic collaboration Partnerships among policymakers, MDBs, and investors are essential to scale climate finance and build market Sukuk infrastructure. 3. Capacity Building Technical assistance is critical for project development and market growth, particularly in emerging economies. 4. Product Innovation Thematic sukuk (e.g., blue sukuk, outcome-linked sukuk, sustainability-linked sukuk) can mobilize private capital for targeted climate objectives. 1. Blended finance models Public-private partnerships can effectively mobilize capital for MSMEs and climate-resilient growth. Islamic 2. Instrument Diversity bank A mix of credit lines offered under Murabaha and Musharaka can enable financing allocation to corporates and MSMEs. financing 3. Strategic collaboration Public and private sector collaborations are key to scaling climate action and addressing development challenges. 1. People-centric design Enhances impact, strengthens trust, and drives adoption. It ensures that financial solutions are not only technically sound but also socially meaningful. Takaful 2. Regulatory enablement Strong frameworks and public-private sector collaboration are needed to scale takaful markets. 3. Addressing market challenges Limited size, high costs, and nascent regulation require innovation and capacity building. 1. Stakeholder engagement Effective waqf management depends on collaboration across sectors, including government, NGOs, academia, and local communities. 2. Green waqf initiatives Waqf Expanding the use of traditional waqf to include land endowment for conservation can facilitate nature-based solutions and green job creation. 3. Growth barriers Regulatory support, fund management, and public awareness are essential for scale. Islamic Finance and Climate Agenda 73 CHAPTER 3 – Islamic Climate Finance in Practice Special Focus: Islamic Climate Fintech and Digital Asset Fintech is transforming the financial services industry, transparent, and more inclusive climate finance solutions. reshaping how financial products are delivered, Climate fintech is focused on facilitating the reduction accessed, and utilized globally. Fintech offers flexibility of GHG emissions and decarbonization, such as green compared to traditional financial instruments, such digital banking and payments, green crowdfunding, as speedy processing time, low marginal cost per and environmental and climate data provision (IMF, transaction, and transparency, making it an ideal choice 2024). These innovations have the potential not only for financing projects (Feyen et.al, 2023). As of 2023, to unlock capital in developed markets but also to the global fintech market is valued at US$12.27 trillion36, empower communities and entrepreneurs in developing whereby the Islamic fintech market is valued at US$138 economies who are often excluded from traditional billion37 or 0.01 percent of the global total. finance channels. The climate fintech market currently represents a small fraction of the global fintech market, Fintech and technology are increasingly being estimated at US$2.3 billion as of 2023.38 Advanced recognized as transformative tools to bridge the climate economies largely drive innovation in climate finance, funding gap. Climate fintech innovation is driven by the which remains less accessible to many EMDEs and the demand for adaptation and mitigation efforts to support OIC. Expanding climate fintech innovations to include climate goals. Digital platforms, blockchain, artificial Shariah-compliant financial products can significantly intelligence (AI), mobile banking, and new methods of grow their funding base while reaching a broader range climate-related data verification are enabling faster, more of recipients. Role of Fintech and Technology in Climate Finance Climate fintech solutions, such as digital assets, have be traded on a digital platform known as an exchange, emerged, leveraging advanced technologies to offer more providing a transparent and efficient mechanism for flexible, efficient, and inclusive financial mechanisms. raising funds. Tokenization enables fractional ownership, Digital assets have the potential to facilitate innovative allowing a wider range of investors, including retail forms of climate finance by enabling decentralized investors, to participate in funding decarbonization cooperation among stakeholders and fostering trust initiatives. The nature of blockchain enhances trust through transparent, automated, and standardized by ensuring traceability and accountability, creating a transactions (GSMA, 2023). More recipients, particularly robust foundation for sustainable investments (GSMA, in the EMDEs, can benefit from these advancements 2023). Decentralized digital asset platforms break down by broadening the funding base through digital assets. geographical and financial barriers, enabling direct These solutions often utilize blockchain technology, funding between global investors and local beneficiaries. smart contracts, and tokenization to streamline This cross-border connectivity fosters collaboration processes and reduce barriers to entry. Blockchain and and channels resources to underserved or developing tokenization offer opportunities to connect investors regions, where access to traditional financing is often with beneficiaries efficiently, ensuring capital flows to limited. decarbonization efforts (EBRD, 2024). For example, Project Genesis 2.0, led by BIS Innovation Tokenization offers an innovative way to fund Hub, utilizes digital asset technologies to explore decarbonization projects by creating digital digitized green bonds and associated carbon forwards. representations of tangible or intangible assets, such Specifically, the project employs blockchain technology as carbon credits or renewable energy. These tokens can and smart contracts to digitize and track these 36 Statista 37 Global Islamic Fintech Report 2023/24 38 Climate Fintech Report 2024 74 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice instruments. By tokenizing green bonds and carbon advance climate-resilient development. Moreover, the credits, it integrates digital assets into the financial direct connection between investors and beneficiaries and environmental ecosystems (BIS, 2022). It also reduces intermediaries, lowers transaction costs, and demonstrates the benefit of allowing issuers in countries improves the overall efficiency of capital allocation for with low capability to access low-cost financing for green climate-focused projects. Below are some examples of projects. This platform will empower communities to climate fintech companies (Table 3.2). TABLE 3.2 Climate Fintech Examples Type of technology Example Blockchain and Smart Contracts Toucan Protocol Blockchain technology can improve Launched in 2021, Toucan brings carbon credits on-chain using transparency and trust in climate finance blockchain. This enhances traceability and liquidity in voluntary by recording immutable transactions and carbon markets. Toucan has partnered with Verra and other registries enabling real-time audits. Smart contracts, to tokenize high-quality offset projects. which automatically enforce the terms of agreements, can be used to distribute Carbonplace + South Pole (Global/Latin America) payments based on verified emissions Carbonplace is a global carbon credit transaction network backed reductions or project milestones. by banks like UBS and Standard Chartered. It enables institutions to trade verified carbon credits in real-time with full traceability. South Pole uses this network to manage credits from projects in Latin America and Southeast Asia. Mobile and Digital Banking M-KOPA (Kenya) In developing economies, mobile banking M-KOPA uses mobile money to provide pay-as-you-go solar energy enables financial inclusion, allowing low- solutions to over 1 million homes in East Africa. Customers pay small income households to access microloans, daily fees until the product is fully owned. The model has reduced pay-as-you-go solar energy, and climate reliance on kerosene, improved indoor air quality, and created insurance. employment for over 3,000 agents. Green Fintech Platforms and Trine (Europe/Africa) Crowdfunding Trine enables people to invest in solar energy projects in Sub-Saharan Crowdfunding and peer-to-peer platforms Africa. It combines crowdfunding with due diligence and impact allow small investors to directly finance measurement tools. As of 2023, it has mobilized over €50 million in green infrastructure and clean energy private investments, providing electricity to over 5 million people. projects. These platforms are often supported by digital MRV tools to validate project outcomes. AI and Big Data for Risk Assessment Jupiter Intelligence (USA) AI and big data tools can analyze climate- Jupiter uses AI, machine learning, and big data to model and predict related risks and generate project-level climate-related risks like flooding, extreme heat, wildfires, and forecasts. This helps financial institutions hurricanes. Their platform helps companies and governments make make better lending decisions and insurers decisions based on forward-looking climate risk data. underwrite climate-smart products. Islamic Finance and Climate Agenda 75 CHAPTER 3 – Islamic Climate Finance in Practice BOX 3.3 Labuan Financial Services Authority (LFSA) – Leading the Development of Shariah-Compliant Digital Asset Ecosystem for Sustainability LFSA has established itself as a pioneer in fostering a world’s first Shariah-compliant and ESG-based digital comprehensive Shariah-compliant digital asset eco- asset exchange. This platform facilitates the issuance, system by establishing the Islamic Digital Asset Centre listing and trading of Shariah-compliant and ESG-aligned (IDAC) in 2022. IDAC integrates a digital asset frame- Securities Token Offerings (STO), also referred to as work with Shariah-compliant financial solutions, provid- RAMZ (Figure B 3.1). Leveraging blockchain technology ing a technology-driven platform for attracting diverse and smart contracts, the platform ensures transparency, global investors and stakeholders and promoting eco- traceability, and trust in transactions. Supported by nomic development across the finance and non-finance a robust regulatory framework and comprehensive sectors (Nik Musa, 2023). A key regulation supporting guidelines, it offers a cost-effective, secure, and highly the digital asset framework is the Guidance Note on liquid environment. RAMZ enables risk-sharing fundraising Shariah-compliant Securities Token (RAMZ) Offering that that is globally accessible, particularly for Muslim aims to ensure seamless integration of Islamic finance stakeholders and those seeking ethical investments. This into the digital asset ecosystem. facilitates efficient cross-border transactions, attracting a diverse pool of investors, channeling funds into impactful IDAC is intended to be a catalyst for integrating Shariah- sustainability projects, and driving economic growth, compliant digital assets and sustainable finance. particularly in OIC countries. Consequently, in the same year, IDAC launched the FIGURE B 3.1 Virtual Fundraising and Investment Hub under RAMZ Source: Labuan IBFC (2024) Since its establishment, IDAC has seen significant growth, and fostering international collaborations. These efforts bolstering the market for Shariah-compliant digital aim to position LFSA’s role as a resilient, inclusive, and assets. As of 2024, 18 tokens valued at US$1.05 billion innovative financial hub, capable of leading the digital were listed on RAMZ. Moving forward, LFSA’s initiatives asset ecosystem while supporting sustainable economic focus on enhancing regulatory frameworks, promoting development. ESG-compliant and Shariah-aligned digital products, 76 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice Challenges and Opportunities Integrating Islamic finance into climate fintech and to digital finance, and capacity-building initiatives to digital assets poses several challenges that require effectively integrate fintech innovations into their financial attention to unlock its full potential for climate ecosystems. Furthermore, policymakers and private finance. Firstly, the absence of standardized Shariah- sector stakeholders remain limited in their awareness compliant frameworks for digital assets creates regulatory of how Islamic finance can contribute to climate action, uncertainty and may discourage investors and financial resulting in missed opportunities to align Islamic finance institutions from participating. This challenge is not with broader sustainability objectives. According to our unique to Islamic finance and is also applicable to survey (see Section 2.3), Islamic finance professionals conventional digital assets. Additionally, many EMDEs indicated that Islamic climate fintech could be beneficial in face technical expertise and infrastructure constraints, fostering financial innovations such as financing platforms limiting their capability to adopt advanced fintech and project databases, along with enhancing the solutions (IMF, 2024). This challenge is especially evident information ecosystem by supplying reliable sustainability in many less developed OIC countries, with limited access and climate-related data to aid in risk assessments and to digital infrastructure, regulatory frameworks tailored decision-making processes (Figure 3.9). FIGURE 3.9 Five Main Areas of Development by Islamic Fintech Green investment/ financing platforms 59% Measurement, reporting, and verification (MRV) mechanism 59% Climate risk assessment 59% Valuation/risk rating of investible projects 53% Carbon credit trading platform 51% Carbon accounting and disclosure 47% Database of investible projects 41% Database of green products and services 37% Cross-border investment/ financing platforms 29% Resource-efficient technology solutions 24% Compliance (Domestic and global standards) 20% Regtech (to facilitate enforcement) 16% 0% 10% 20% 30% 40% 50% 60% Despite these challenges, developing Shariah-compliant developers, to secure funding for sustainable projects. climate fintech presents substantial opportunities Fintech platforms further enhance this potential by to scale sustainable financing for decarbonization improving the visibility of investment opportunities and in the OIC. Drawing on the experiences of AEs, the offering investors greater flexibility to directly participate OIC can gain valuable insights to design regulatory in small-scale projects (Schulz & Feist, 2021). frameworks that are both effective and context-specific. These lessons can also support efforts to overcome The integration of Islamic finance into climate fintech challenges in building robust digital infrastructure represents a promising pathway for addressing the and fostering innovative climate fintech and digital dual challenges of climate change and sustainable asset solutions. Moreover, cross-border cooperation is development financing. The success of these approaches critical in enhancing these opportunities, facilitating the depends not only on the technology itself but also on the management of international fintech transactions, and broader ecosystem—policy, infrastructure, education, promoting the adoption of global standards (Vijayagopal and trust. To realize this potential, policymakers, & Viswanathan, 2024). Fintech platforms enable access to financial institutions, and technology providers must global capital markets, empowering many beneficiaries, work together to establish enabling frameworks, build such as small-scale farmers and renewable energy capacity, and increase awareness. Islamic Finance and Climate Agenda 77 CHAPTER 3 – Islamic Climate Finance in Practice BOX 3.4 Insights from Climate Fintech Players For this report, written interviews with three companies What more could be done? were conducted to gain further insights into the • Frameworks and policies: Integrate geospatial opportunities and challenges in climate fintech. technology into certification frameworks and environmental policies to reduce reliance on Pantas Climate Solution (Malaysia) ground-based data collection while improving Pantas offers an AI-powered platform for carbon transparency. management and ESG reporting, enabling enterprises • Affordability: Reduce the cost barriers through and financial institutions to accurately measure, manage, subsidies, grants, or PPPs, and support open-access and report their Scope 1, 2, and 3 emissions. high-resolution datasets. Access to finance • Accessibility: Develop training programs, university Pantas enabled financial institutions to assess businesses’ partnerships, and industry collaborations to build sustainability performance by providing standardized technical expertise and facilitate technology ESG and carbon emissions data, which is critical for transfer. assessing SME compliance with sustainability-linked • Regulatory and financial support: Implement clear financing requirements, including reductions in energy regulations and robust environmental policies and consumption and increased renewable energy usage. create financing mechanisms like Horizon Europe to Pantas was the strategic partner to the Greening Value de-risk investments and accelerate innovation. Chain (GVC) Program, established by BNM in 2023, and, as of 2025, has facilitated the measurement of 236,796 iFarmer (Bangladesh) tons of CO2, providing SMEs with actionable insights to iFarmer bridges Islamic fintech and climate-smart agri- manage their carbon footprint. culture to develop resilience among Bangladesh’s small- holder farmers. What more could be done? • Climate-risk assessments: Enhance climate risk Access to finance assessments to facilitate better climate investment iFarmer introduced the first crowdfunded financing fa- decisions. cility for farmers in Bangladesh, offering both tradition- • Inclusive technology access: Ensure inclusive access, al and Shariah-compliant options based on Mudaraba. particularly to SMEs and rural areas that struggle They partnered with six banks to provide formal finan- with adoption due to cost and infrastructure cial services, helping marginalized farmers access low- constraints. cost banking through a technology-driven approach. This facilitates sustainable business operations and sup- • Regulatory support: Review policies and regulations ports green financing initiatives. iFarmer also facilitates to ensure they keep up with the latest technological climate-smart agricultural inputs and provides farmers progress. with expert advice that significantly contributes  to re- • PPPs: Develop stronger partnerships to accelerate ducing the negative environmental  impact induced by investment and innovation in climate technologies. traditional farming. Farmers who adopted iFarmer’s Fer- tilizer Recommendation System reduced their chemical Space4Good (the Netherlands) fertilizer usage by 36.6 percent and increased their yield Space4Good harnesses geospatial technology to mon- by 12.5 percent. By adopting the Alternate Wetting and itor, verify, and report (MRV) vegetation insights across Drying method, farmers reduced their irrigation cost and agroforestry, forest conservation, biodiversity, and re- overall production expenses by 22.7 percent. generative agriculture projects. What more could be done? Access to finance Its MRV platform, CarboCatch, developed together with • Regulatory support: Develop a thematic regulatory the Louis Bolk Institute, delivers precise above-ground sandbox to test Shariah-compliant agricultural biomass and carbon estimates in the Netherlands, with financing models. the aim of helping smallholder agroforestry projects ob- • Financial ecosystem: Develop early-stage VC tain green finance and access voluntary carbon markets. funding, specifically for facilitating Shariah- A separate high-profile partnership with Rabobank’s compliant green financing. Acorn program demonstrates the technology’s impact • Capacity building: Creating formal mechanisms for in the tropics facilitating the issuance of satellite-linked, knowledge sharing and technology transfer among high-quality carbon credits bought by international com- OIC countries to scale up successful models. panies such as Microsoft. 78 Islamic Finance and Climate Agenda CHAPTER 3 – Islamic Climate Finance in Practice Islamic Finance and Climate Agenda 79 CHAPTER 4 Key Actions for Islamic Climate Finance Development 80 Islamic Finance and Climate Agenda CHAPTER 4 – Key Actions for Islamic Climate Finance Development Generally, developing a climate finance ecosystem in for domestic and foreign issuers, borrowers, and investors, the OIC, whether conventional or Islamic, faces common thereby establishing a deeper and more liquid market. This challenges. OIC countries, many of which are low- or will require: middle-income and some affected by fragility and (i) Developing a strong climate project pipeline conflict, encounter barriers such as weak governance, limited institutional capacity, and inadequate and often OIC policymakers must take the mandate to identify fragmented policy frameworks in both the real economy and structure a robust list of eligible climate- and financial sectors. For most of these countries, the aligned projects in their respective jurisdictions. environment conducive to private sector investment As such, they must accelerate efforts through is also weak, with inadequate risk mitigation tools, collaboration between the public and private underdeveloped capital markets, and a lack of green sectors to develop a pipeline of financially viable finance products. When their domestic financial sectors projects that can be financed through green are underdeveloped, accessing international climate sukuk or other modes of Islamic bank financing. funds becomes necessary. However, this process is Governments can help develop the Islamic climate often complicated and lengthy, with higher borrowing finance market through sovereign sukuk issuances to costs and strict accreditation requirements that many establish market benchmarks for emerging climate- national institutions find difficult to meet. This situation aligned projects and financial products, such as is worsened by low technical capacity, data scarcity, green sukuk, blue sukuk, biodiversity sukuk, and and limited awareness of designing and implementing nature-based solutions. Sovereign issuances can bankable climate projects. demonstrate policy commitment to climate action and provide essential reference points for pricing, This report focuses on the challenges specific to maturity profiles, and contractual structures. The Islamic climate finance, which is part of the broader development of the Climate-Aligned Takaful market climate finance ecosystem within the respective OIC significantly lags behind Islamic banking and capital financial markets. To fully realize Islamic finance’s markets. Islamic finance standard-setting bodies and potential in bridging the climate funding gap, MDBs are urged to lead strategic policy discussions policymakers and the Islamic finance industry must to address critical gaps, namely, small market size, address key issues related to the market size and its limited product innovation, and a lack of integration technical and institutional capabilities. In many OIC into the climate project risk-transfer pipeline. countries, Islamic financial sectors are mainly led by (ii) Introducing well-designed incentives for utilizing Islamic banks with relatively smaller capital market Islamic finance instruments activity, low liquidity, and a narrow range of products. This restricts their ability to provide long-term, Policymakers can introduce targeted tax incentives affordable financing for climate-related projects, which and grants to facilitate the issuance of climate- often require significant upfront capital and extended aligned sukuk and Islamic bank financing, which repayment periods (World Bank, 2024a). Strengthening aligns with their respective national climate Islamic climate finance markets through regulatory strategies. Such incentives must be designed to reforms, capacity building, and product innovation optimize the net present value (NPV) of climate is crucial for unlocking Islamic climate finance and projects, specifically lowering issuance costs (e.g., advancing sustainable development within the OIC. waiving stamp duties, reducing regulatory fees) and improving yield profiles to enhance project viability This report details a three-pillar strategic call to action and attractiveness to a broader investor base. to catalyze and scale Islamic climate finance across the (iii) Technical collaboration with MDBs OIC member countries. This call to action identifies key stakeholders including policymakers, financial The IsDB, the World Bank, and other MDBs regulators, MDBs, Islamic financial institutions, and have extensive technical expertise in project private sector actors, responsible for the leadership and development, financial structuring, and implementation of each action. environmental impact assessment. Their collaboration can help OIC members identify suitable projects and structure climate-aligned Islamic financial instruments effectively. MDBs First: Mainstreaming and Deepening Islamic Climate can also provide crucial anchor investments, Finance Instruments credit enhancements, and co-financing options to Mainstreaming Islamic climate finance involves reduce financing risks, thereby boosting investor transforming sukuk, Islamic bank financing, and takaful into confidence and making the project more attractive accessible, standardized, and competitive financial vehicles to a diverse range of investors. Islamic Finance and Climate Agenda 81 CHAPTER 4 – Key Actions for Islamic Climate Finance Development Second: Accelerate Capacity Building and Technical (iii) Strategic focus on both climate adaptation and Exchanges mitigation strategies A key strategic imperative involves the This focuses on building the necessary Islamic climate simultaneous, integrated deployment of climate finance expertise to help with Islamic climate finance adaptation and mitigation strategies to build long- market development. This will require: term resilience and ensure sustainable growth. (i) Developing a dedicated online knowledge Currently, a key focus of MDBs and policymakers is resource to expand access to critical training climate mitigation efforts, such as accelerating the transition to renewable energy, directly addressing The financial development index of most OIC the root causes of climate change by reducing countries is low, and there is a general lack of greenhouse gas emissions. However, climate expertise in Islamic and climate finance. Training adaptation efforts are still lagging, in part due to a for financial regulators in these countries is lack of expertise. Climate adaptation efforts, such essential to equip them with not only foundational as investments in climate-resilient infrastructure knowledge in Islamic finance, but also knowledge and developing early warning systems, are crucial to effectively assess and supervise climate- for minimizing the unavoidable physical and related financial risks (including transition and economic impacts of current and future climate physical risks), to develop appropriate regulatory hazards. Accordingly, it is essential to prioritize sandboxes, and implement global best practices. capacity building on climate adaptation solutions Islamic finance standard-setting bodies, such and financing models, ensuring they receive as IFSB, AAOIFI, and CIBAFI, advanced Islamic appropriate attention and emphasis. financial regulators, (e.g., Malaysia and the UAE) Third: Enhance the Development of Islamic Climate and MDBs can enhance collaboration to develop a Finance Products dedicated, multi-lingual online knowledge hub on Islamic climate finance development. This resource This focuses on expanding Islamic climate finance should include sector-specific Islamic finance products and services. This will require: toolkits and cross-region technical knowledge exchanges, leveraging existing knowledge (i) Developing innovative Islamic climate finance resources to be adapted for Islamic finance products, including blended finance regulators and practitioners. These resources Islamic finance has a significant opportunity to can significantly improve technical capabilities leverage its inherent risk-sharing principles (e.g., and promote the harmonization of Islamic climate Mudarabah, Musharakah) in developing Shariah- finance standards implementation across various compliant PE and VC for climate innovation. PE jurisdictions. and VC are essential sources of funding due to their unique ability to finance innovation, scale (ii) Enhancing Islamic climate finance data emerging technologies, and close significant infrastructure investment gaps in transitioning to a low-carbon In the information and data environment, while economy. the development of critical infrastructure, such as taxonomies and reporting disclosures, applies to Islamic blended finance can catalyze public and both Islamic and conventional markets, there is private capital. To unlock their full potential, an urgent need for the standardized, concurrent strong public-private collaboration is essential. development of an Islamic Climate Finance- Coordinated fund governance and multi- Centric Dashboard. Islamic finance regulators stakeholder alignment are critical to ensuring and the industry must support centralized scale, impact, and sustainability. Policymakers dashboards that track not only the volume and should establish enabling legal and regulatory progress of Islamic climate finance but also the frameworks to support the creation, governance, ESG performance of the Islamic finance industry and operation of Islamic Blended Climate Funds. and, crucially, the measurable impact of supported These frameworks must explicitly mandate climate mitigation and adaptation projects (e.g., Shariah-compliant risk-return structures, uphold GHG emissions reduction, number of protected transparency, and ensure operational efficiency to households). build trust and attract diverse pools of concessional and commercial capital. 82 Islamic Finance and Climate Agenda CHAPTER 4 – Key Actions for Islamic Climate Finance Development Islamic financial institutions can serve as catalytic government counterparts. For example, piloting actors, functioning as fund sponsors, coordinators, an Islamic fintech solution to finance climate- or implementers, leveraging their institutional smart agriculture practices by small-scale farmers capacity to manage fund structures, assess project and halal food producers. Such a pilot program viability, and channel capital effectively. In parallel, will require collaboration between the relevant regulatory support can facilitate innovation of government agency, technology provider, and Islamic financial products which contribute to farmers’ association. climate outcomes. Takaful is also well-suited for product innovation, MDBs can facilitate access to global climate which can offer much-needed financial protection finance funds and investor networks, enhancing for communities against climate vulnerability while the credibility and visibility of member states. aligning with social-welfare principles of Islamic In particular, MDBs can enhance collaboration finance. The Global Takaful Alliance by UNDP, the to facilitate Islamic finance schemes or blended IsDB, and other partners can be promoted as a facilities, within the existing global climate facilities central forum, facilitating technical exchanges with such as the Green Climate Fund, the Global other global initiatives such as the Global Facility Environment Facility and the Climate Investment for Disaster Reduction and Recovery and the Funds. MDBs can reinforce these efforts by Southeast Asia Disaster Risk Insurance Facility. facilitating intergovernmental cooperation, harmonizing climate finance policies, and co- (iii) Enhancing utilization of Islamic social finance investing in transnational projects. instruments Islamic social finance instruments like zakat, waqf, (ii) Establishing financial innovation platforms and qard are designed to promote social welfare Islamic financial institutions can position and economic justice. Their application in Islamic themselves to create a market by prioritizing and climate finance can provide crucial support where innovating in climate mitigation and adaptation commercial finance might fall short, particularly financing instruments, targeting the halal industry supporting vulnerable communities, community- and MSMEs. Collaboration among Islamic finance based initiatives, and microenterprises. Zakat regulators, Islamic financial institutions, and private and Waqf governing bodies need to establish sector players is essential for the development standardized governance, transparency, and of innovative Islamic climate finance products reporting frameworks that explicitly allow for the and services. Leveraging collective expertise transparent and efficient deployment of funds for can promote the development of impactful climate action, particularly in areas of community- solutions that can be scaled up for broader level adaptation and disaster relief. Strengthening implementation. Islamic finance regulators the collaboration between these bodies, IFIs, and can support this collaboration by actively NGOs is crucial to ensure strategic alignment with facilitating Proof-of-Concept (PoC) pilot programs national climate strategies and that initiatives are through dedicated regulatory sandboxes and scalable, well-coordinated, and reach the most direct stakeholder engagement with relevant vulnerable beneficiaries. Islamic Finance and Climate Agenda 83 CHAPTER 4 – Key Actions for Islamic Climate Finance Development The following table summarizes the key action plans proposed by this report. Recommendation Stakeholder 1. Mainstreaming and Deepening Islamic Climate Finance Instruments (i) Developing a strong climate project pipeline Governments, Islamic finance regulators, private sector players (ii) Introducing well-designed incentives for Governments, Islamic finance regulators utilizing Islamic finance instruments (iii) Technical collaboration with MDBs Governments, Islamic finance regulators, MDBs 2. Accelerate Capacity Building and Technical Exchanges (i) Developing a dedicated knowledge resource to Islamic finance standard-setting bodies, Islamic finance expand access to critical training regulators, MDBs (ii) Enhancing Islamic climate finance data Islamic finance standard-setting bodies, Islamic finance infrastructure regulators, Islamic financial institutions, MDBs (iii) Strategic focus on both climate adaptation and Islamic finance standard-setting bodies, Islamic finance mitigation strategies regulators, Islamic financial institutions, MDBs 3. Enhance the Development of Islamic Climate Finance Products (i) Developing innovative Islamic climate finance Governments, Islamic finance regulators, Islamic products, including blended finance financial institutions, MDBs, private sector players (ii) Establishing financial innovation platforms Islamic finance regulators, Islamic financial institutions, private sector players, MDBs (iii) Enhancing utilization of Islamic social finance Zakat and waqf governing bodies, Islamic finance instruments regulators, Islamic financial institutions, NGOs In conclusion, Islamic climate finance is uniquely pursue their climate goals, Islamic climate finance positioned to advance the global climate agenda. can complement conventional mechanisms and forge It offers the potential to enhance innovative climate cross-sector partnerships. The recommendations finance structures that can support inclusive, just, presented in this report are intended as a starting point and climate-resilient development. Its value-based for policy dialogue. They aim to foster collaboration approach can help facilitate climate resilience among across stakeholders and encourage the development underserved communities, while enhancing the of solutions that are both equitable and effective, competitiveness of halal industries in the transition to ultimately contributing to a more sustainable and low-carbon economies. As the OIC member countries climate-resilient future. 84 Islamic Finance and Climate Agenda Appendix 1: Islamic Sustainable Finance Dataset This report estimated the size of the Islamic sustainable source datasets. Government issuances include sovereign, finance market using the Climate Bond Initiative (CBI) subnational, development banks, and government-backed dataset for sustainable bonds and sukuk (January 2017 entities. In addition, corporate issuers are further split into – November 2024), the Refinitiv dataset for sustainable financial corporations and non-financial corporations. syndicated loans and financing (January 2017 – December The definitions adopted in this report were guided by 2024), and the Pitchbook dataset for PE/VC (January 2017 the following publications: International Capital Market – December 2024). While the Refinitiv dataset includes a Association (ICMA)’s guidelines (Green Bond Principles broader set of sustainable bonds and sukuk beyond those 2021, Social Bond Principles 2021, Sustainability Bond labeled by CBI, this report has chosen to only use CBI Guidelines 2021, Climate Transitions Finance Handbook data since it represents most of the sustainable issuances. 2020), the Climate Bond Initiative, World Bank (Toolkits The universe of sukuk issued globally is derived from the for Policymakers to Green the Financial System), and Refinitiv dataset, and hence, the market share calculated International Finance Corporation (IFC Guidelines for Blue in this report represents the lower bound. This report uses Finance). the definition of issuing entities available in the respective Comparison of Sustainable Dataset, 2017-2024 Amount Issued (US$ Billion) Number of Unique Issuers All countries Sukuk Syndicated loans and Sukuk Syndicated loans and financing financing Refinitiv 55.2 235.9 554 338 CBI 37.4 19.2 396 32 Islamic Finance and Climate Agenda 85 References Alam, A., Nashiruddin, A., Bafana, F. A., Bashir, M. S., & Alimusa, L. O. (2024). Implementing Waqf Forests in Indonesia: A SWOT and Internal-External Factor Evaluation Analysis. International Journal of Environmental Impacts, 7(3), 475– 483. https://doi.org/10.18280/ijei.070309 Ali, K. M., & Jannah, M. (2024). Hutan Wakaf: Teori dan Praktik (M. Mustaqimah & I. F. Sari, Eds.; 1st ed.). PT Penerbit IPB Press. Ali, K. M., & Kassim, S. (2020). Waqf Forest: How Waqf Can Play a Role In Forest Preservation and SDGs Achievement? ETIKONOMI, 19(2). https://doi.org/10.15408/etk.v19i2.16310 Ali, K. M., & Kassim, S. (2021). 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People in a Changing Climate: From Vulnerability to Action - Insights from World Bank Group Country Climate and Development Reports covering 72 economies. © Washington, DC: World Bank. http://hdl. handle.net/10986/42395 License: CC BY-NC-ND 3.0 IGO. World Bank. (2023). Outcome-based development financing: Leveraging private capital for public good. Retrieved from https://www.worldbank.org World Bank. 2019. Helping Malaysia Develop the Green Sukuk Market: Facilitating Sustainable Financing - Case Study (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/586751546962364924 World Bank. 2024b. Finance and Prosperity 2024. Finance and Prosperity. © Washington, DC: World Bank. http://hdl. handle.net/10986/42075 License: CC BY 3.0 IGO. 88 Islamic Finance and Climate Agenda isdb_stories Cover photo: The cover illustration is designed to convey a sense of connection and collaboration. It features two tables— one representing Malaysia and the other the Middle East—each adorned with elements of sustainable, green cities that are deeply embedded in their respective cultural identities. These tables are envisioned as gathering places where ideas and solutions are exchanged. The rail connecting them symbolizes friendship, movement, and the exchange of knowledge between regions. The illustration represents the collaborative vision of the World Bank Group and the Islamic Development Bank. It underscores the importance of addressing global challenges, such as climate change and urban growth, through cross-regional partnerships and collective efforts rather than in isolation. Despite the geographical distance between Malaysia and the Middle East, the illustration demonstrates how shared values can bridge this gap. The artwork symbolizes unity, the strength derived from collaboration, and the potential to build a greener, more inclusive future when we connect, listen, and collaborate.