A green sukuk is a Shariah-compliant certificate whose proceeds go exclusively to environmental projects such as solar power, energy efficiency or clean transport, combining a standard Islamic structure with commitments on use of proceeds and reporting.
Two successive filters: Shariah, then impact
A green sukuk first passes the usual Shariah board review of the contract used, then an environmental review of the project financed. A solar plant funded through a compliant Ijara qualifies; a lawful but polluting activity does not.
Which projects can receive the proceeds?
Issuance frameworks usually list renewable energy, energy-efficient buildings, water and waste management, low-emission transport and climate adaptation. Projects linked to fossil fuels are normally excluded. Some frameworks also add sustainable agriculture or forest conservation to the list.
The framework published before the sale
The issuer drafts a reference document describing eligible categories, the project selection process, management of the proceeds and the content of reports. It usually aligns with the ICMA Green Bond Principles, a voluntary market benchmark.
Why obtain an external second opinion?
An independent environmental reviewer examines the framework and publishes an opinion on its credibility. This reassures responsible investors, but it does not replace Shariah approval, which is still issued separately by the board's scholars.
Which Islamic structure sits under the green label?
The label does not change the legal mechanics: most green sukuk rely on Ijara, Wakala or a combination with Istisna for assets under construction. Holders therefore receive rent or profit tied to identified assets.
Funding a solar plant during construction
When the asset does not yet exist, an Istisna orders the plant from a builder and an Ijara takes over once it is commissioned. Before delivery, payments are treated as advance rent, a treatment Shariah boards regulate closely.
Where do unallocated proceeds sit?
Between issuance and full disbursement, idle funds must be placed in compliant instruments, such as short-term Islamic deposits, rather than interest-bearing investments. The framework spells out this temporary treasury rule.
Allocation and impact reports for holders
Each year the issuer publishes the list of projects financed and indicators such as megawatt-hours generated or tonnes of CO2 avoided. Failing to report does not necessarily mean a legal default, but it damages the issuer's reputation.
Malaysia, the market pioneer
The Securities Commission Malaysia introduced a framework for sustainable and responsible investment sukuk in 2014. The first green sukuk, issued in 2017 by Tadau Energy, financed a solar power plant in the state of Sabah.
Malaysian tax incentives and grants
To grow this segment, Malaysia offered tax relief and grants covering part of the cost of external review. These measures attracted solar energy and sustainable real estate issuers that might not otherwise have absorbed those costs.
Indonesia and the sovereign green sukuk
In 2018 Indonesia became the first state to issue a sovereign green sukuk on international markets. It also offers green sukuk for retail investors at home, linking household savings to climate spending in the budget.
Green, social or sustainability sukuk: three related labels
A social sukuk funds goals such as health or affordable housing, while a sustainability sukuk combines green and social projects. Several multilateral lenders, including the Islamic Development Bank, have issued sustainability sukuk to fund their programmes.
Specialist external source
The Islamic Financial Services Board publishes its prudential standards, which help explain how authorities treat sukuk held or issued by Islamic financial institutions.