Green Sukuk Explained | All You Need To Know

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Green sukuk are Sharia-compliant fixed-income instruments that help finance environmentally sustainable projects. They follow Islamic finance principles by avoiding riba (interest), maysir (gambling), and gharar (uncertainty), and contribute to areas like renewable energy, water conservation, and green transport. As of early 2025, global green sukuk issuance has crossed $35 billion, with strong participation from Southeast Asian and Middle Eastern markets, which reflects a year-on-year growth from 2023.

The convergence of ethical finance and environmental responsibility is no longer a niche idea. Green sukuk are now among the fastest-growing segments in Islamic capital markets, providing a Sharia-compliant path to fund sustainable development. These instruments respond to the growing interest in eco-conscious investing and reflect Islamic principles of stewardship (khalifa) and social benefit. In this article, we discuss what is green sukuk, covering its core idea, Shariah compliance status, benefits, and a lot more.

Risk warning: All investments carry risk, including potential capital loss. Economic fluctuations and market changes affect returns, and 40-50% of investors underperform benchmarks. Diversification helps but does not eliminate risks. Invest wisely and consult professional financial advisors.

What are green sukuk?

Green sukuk bonds

Green sukuk has a meaning beyond the regular description you generally see. For those exploring green sukuk meaning in a deeper sense, they are a subset of Islamic bonds (sukuk) used specifically to raise capital for climate-positive or environmentally sustainable projects. Just like traditional sukuk, green sukuk are backed by tangible assets or services and follow profit-sharing or lease agreements instead of charging interest. features:

Must follow Islamic finance principles (no interest, uncertainty, or speculation).
Use of funds limited to green projects.
Backed by real economic assets.
Requires third-party certification or green sukuk framework compliance (e.g., Climate Bonds Initiative).

Green sukuk are changing the way environmentally conscious capital is raised within the Islamic finance system. For those exploring the concept, green sukuk refers to a Sharia-compliant fixed-income instrument intended for climate-positive or sustainability-linked initiatives. They combine core Islamic financial ethics with broader green investment goals.

Each issuance adheres to a defined framework that outlines project eligibility, use of funds, and disclosure requirements. This framework usually aligns with international benchmarks like the Green Bond Principles or Climate Bonds Initiative standards, while still fulfilling Islamic legal guidelines.

Global trends and growth

According to Fitch Ratings, the outstanding value of ESG sukuk reached $44.5 billion by early 2025. This marks a 23% year-on-year increase. The surge is driven by government climate finance policies, growing demand for ethical investing, and ESG mandates.

Leading issuers include:

Indonesia. Pioneered sovereign green sukuk issuance in 2018. In 2024, it issued $3.3 billion as part of its ongoing programme.
Malaysia. Continues to be a top corporate and sovereign issuer, supported by regulatory innovation.
UAE and Saudi Arabia. Both are expanding their pipeline of clean energy and infrastructure sukuk.

Key institutional supporters include the UNDP, World Bank, and ICMA. These organizations play an active role in standardizing the green sukuk framework.

How does green sukuk work?

If you're curious about how green sukuk work, here's the deeper layer most beginners never get to hear.

Focus on use-of-proceeds audits. Most people don’t even ask how the money is actually being used in eco-projects. Make sure you get audit documents from independent firms.
Look for backward-verifiable projects. Some sukuk are only promises of what might come, but the safer ones are tied to running projects so you can see for yourself what’s already working.
Know the difference between green bonds and sukuk. Both support environmental work, but only sukuk stick to Islamic financial ethics. Watch for bonds using Islamic labels without real compliance.
Pay attention to Shariah governance layers. One panel isn't enough. A real green sukuk needs an expert panel checking the eco side too.
Project risk is still your risk. A wind farm or recycling plant can still fail. Green doesn’t mean risk-free, so know what you’re backing.
Check alignment with the green sukuk framework. The most trustworthy green sukuk follow well-known global standards. If the issuer avoids this step, question the legitimacy.
Track reporting frequency. You need updates showing how the project’s helping the planet. If there’s no report after launch, something’s off.

If you’re also interested in alternatives to green sukuk for investing, like stock, crypto, and Forex, we recommend you to invest using brokers that provide Islamic accounts. We have researched the market and shortlisted the top options for the same below. You may compare and choose one for yourself:

Best brokers that offer Islamic account
	Currency pairs	Min. deposit, $	Regulation	TU overall score	Open an account
Plus500	60	100	FCA, CySEC, MAS, ASIC, FMA, FSA (Seychelles)	6.83	Open an account Your capital is at risk.
Pepperstone	90		ASIC, FCA, DFSA, BaFin, CMA, SCB, CySec	7.17	Open an account Your capital is at risk.
OANDA	68		FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA	6.8	Open an account Your capital is at risk.
FOREX.com	80	100	CIMA, FCA, FSA (Japan), NFA, IIROC, ASIC, CFTC	6.95	Study review
RockGlobal	50	200		1.97	Study review

Compliance with islamic principles

Green sukuk are structured to comply fully with Sharia, avoiding prohibited elements such as:

Riba. Returns are tied to economic performance, not fixed interest. Unlike conventional bonds, sukuk avoid guaranteed income. Instead, investors earn profits from the actual revenue generated by the underlying asset or project.
Maysir. Investments are not speculative but tied to tangible assets. Sukuk represent ownership in real economic ventures, reducing the element of gambling or pure guesswork in returns.
Gharar. Terms are clearly defined in the sukuk contract, minimizing ambiguity. All parties know their rights, obligations, and the nature of the investment, ensuring transparency and fairness.

These features ensure green sukuk support the goals of maqasid al-shariah, notably the preservation of life, wealth, and the environment. This makes them both legally sound and ethically meaningful within Islamic financial systems.

Other types of bonds

Beyond regular bonds or green sukuk, investors have a few other types of bonds to consider:

Sukuk bonds. These are the primary halal alternative, representing ownership in tangible assets or approved projects rather than debt. Returns are generated through profit-sharing or lease arrangements, fully adhering to Islamic finance principles.
Premium bonds. Generally considered haram due to their speculative, prize-linked structure, although there are differing scholarly views.
Prize bonds. Typically seen as a form of gambling (maysir) and thus prohibited under Islamic finance rules.
Government bonds. Standard government bonds are usually not Shariah-compliant unless structured as sovereign sukuk.

When evaluating these instruments, it is essential to examine each one individually, focusing on the underlying structure and the source of returns to ensure full compliance with Islamic law.

Benefits of green sukuk for investors

Here’s what beginners rarely hear when exploring the benefits of green sukuk as investors:

Unlock exposure to untapped sovereign initiatives. Green sukuk often fund government projects in emerging markets that traditional investors overlook, letting you invest before the crowd in projects that pay off over time.
Build impact without greenwashing risk. Unlike many ESG funds, green sukuk must meet both Shariah and environmental standards, so you’re less likely to fall for companies just pretending to be eco-friendly.
Tap into long-duration ethical assets. Many green sukuk have longer maturities, making them a great fit for long-term, values-based investing.
Leverage tax incentives in select jurisdictions. Some countries offer unique tax breaks for investors in green sukuk, especially if they’re connected to clean power or public works.
Get early-mover advantage in faith-based climate finance. The green sukuk framework is still developing worldwide, putting you ahead of the curve in a faith-based green movement.
Earn stable yields without interest. These sukuk avoid riba and the returns are steady because they’re linked to real stuff like solar farms or water systems.
Access high-grade government guarantees. In many cases, sukuk projects are backed by sovereign entities, so your money supports good causes with decent repayment backing.

Challenges and market outlook

If you're just stepping into the world of sustainable Islamic finance, it's important to uncover what is not too obvious about green sukuk investing:

Local verification matters. Many countries don’t have a local team to double-check if projects are really eco-friendly, so investors should compare claims with regional standards.
Beware of shallow greenwashing. Some sukuk use vague project labels that sound green but don’t do much. If there’s no measurable impact, it’s probably just a buzzword.
Liquidity risk is real. Green sukuk don’t trade as actively as green bonds in many regions, which makes it harder to sell if you need your money back.
Shariah alignment adds more layers. These sukuk must meet Islamic principles too, which means there’s more red tape and slower launch times.
Impact reporting isn’t standardised. While many global ESG bonds often stick to checklists like ICMA, green sukuk updates can be delayed or unclear. Ask for regular reports.
Currency mismatch risk is overlooked. If a project earns in local currency but the sukuk is in USD, you might lose out if currencies swing too much and you haven’t planned for it.
Blending public-private money isn't easy. Government-backed green sukuk seem safer. But when private investors come in without support, investors get nervous fast.
Understand the full green sukuk framework. Don’t just read what the sukuk is funding — find out who actually makes sure those green promises are kept.

Scholarly and institutional references

These references underscore that green sukuk not only serve capital markets, but also align with the Islamic ethical mandate to protect the environment and support social welfare.

Religious texts

Qur’an, Surah Al-A'raf (7:31). “Eat and drink, but waste not by excess; for Allah loves not the wasters.” This verse underlines the Islamic principle of sustainability and responsible resource use.
Qur’an, Surah Al-Baqarah (2:205). “…and when he leaves, he strives throughout the land to cause corruption therein and destroy crops and animals. And Allah does not like corruption.” This reinforces the imperative to preserve the environment.

Religious and financial institutions

ICMA, IsDB, and LSEG (April 2024). Joint guidance issued to support alignment between sukuk structures and international green finance standards.
Indonesia Ministry of Finance. Pioneered sovereign green sukuk, issuing over $6.5 billion since 2018.
World Bank and UNDP. Actively support the development of green sukuk frameworks in emerging economies.

Green sukuk quietly became the most ethical power tool in Islamic finance

Green sukuk are more than just ethical bonds. They’re a clever way for growing economies to move away from oil dependence while sticking to Islamic finance principles. If you’re new to this space, here’s a smart tip: try linking your sukuk with partial guarantees from development institutions. That way, you can attract interest from non-Muslim investors focused on green causes. It’s not about making compromises, it’s about speaking a financial language that both sides understand.

There’s also a side to green sukuk that doesn’t get enough attention. Some Southeast Asian countries are using them as a quiet diplomatic tool to strengthen their voice in global climate talks. If you're getting into this, don’t just check whether the sukuk is Shariah-compliant. Look into how the issuer is matching the bond with real local climate issues, like water shortages or rising heat, instead of broad goals like carbon neutrality. That makes the investment more real, more useful, and much harder to ignore.

Conclusion

Green sukuk offers a Sharia-compliant way to finance climate-friendly projects while avoiding interest, speculation, and uncertainty. These instruments align with Islamic values and global sustainability goals, funding assets like clean energy and infrastructure. In 2025 alone, green sukuk issuance is projected to reach between $10 billion and $12 billion, while total ESG sukuk outstanding is expected to surpass $50 billion. Leading issuers include Indonesia, Malaysia, and the UAE. Despite structural challenges, strong institutional support and clearer frameworks are driving growth. For ethical investors, green sukuk provide both impact and compliance, making them a key pillar of Islamic sustainable finance.

FAQs

What makes sukuk 'green'?

They are categorized as green when funds raised are allocated to environmental projects verified by a recognized green framework.

Are green sukuk returns fixed?

No. Returns are based on project performance and structured under Islamic contracts such as ijara or mudarabah.

Can green sukuk be traded in secondary markets?

Yes, depending on the asset backing and local regulatory permissions.

Are green sukuk exclusive to Muslim investors?

No. Green sukuk are open to all investors seeking ethical and sustainability-linked opportunities.

Team that worked on the article

Alamin Morshed is a contributor at Traders Union. He specializes in writing articles for businesses that want to improve their Google search rankings to compete with their competition. With expertise in search engine optimization (SEO) and content marketing, he ensures his work is both informative and impactful.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

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