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Unsustainable economic activities have led to the destruction of nearly 70% of Earth’s biodiversity since 1970 (NPR, 2022), diminishing the capacity of these ecosystems to provide climate change mitigation and adaptation benefits. Neglecting nature and biodiversity conservation amidst worsening climate change could result in a detrimental cycle of escalating effects, considering the interconnectedness of biodiversity loss and climate change (IFC, 2022). However, conservation efforts cannot be accomplished without adequate funding from all sources. 

In support of global discussions aimed at addressing the funding gap of $598-824 billion per year (NC and others, 2020) and recognising the sustainable development opportunities in Islamic finance products, this article will explore the use and flexibility of Green Sukuk as a finance tool to expand and diversify funding sources for nature and biodiversity. 

Financial institutions currently view nature and biodiversity loss as a calculable material risk in terms of physical flows, corporate reputation, or other broader impacts (Richard and Nowella, 2022). However, with financiers treating nature as ‘natural capital’, the value of biodiversity remains embedded in its accounting prices (Dagpusta, 2021). 

The need to enhance the financial attractiveness of ecosystem conservation practices is an important issue to be addressed. Global discussions emphasise attaching commercial value to nature and biodiversity preservation to attract private sector investment, as public sector funding alone cannot bridge the funding gap (NC and others, 2020). Placing a monetary value on nature and biodiversity is essential for long-term sustainable development, as it not only attracts investors and innovative sustainable financial products, but it also encourages systemic change across value chains where businesses would be compelled to account for nature and biodiversity in their products and processes to attract funding. This is particularly crucial for economies that have been built on unsustainable practices due to various geographical and political factors, such as the fossil-fuel dependent GCC countries. It is also important when considering a shift away from interest-dominant green financial products (Edana, 2019) to expand the green finance pool and include Islamic finance products.  

In a comprehensive catalogue of finance solutions to address nature and biodiversity loss, BIOFIN has identified Green Sukuk as one of the financing solutions for sustainable development (BIOFIN, 2022). It is estimated that $30-$50 billion of capital dedicated to the UN Social Development Goals (SDGs) could be raised through green and sustainable Sukuk by 2025 (UKIFC, 2022). Green Sukuk presents a unique opportunity to attract investors mandated to comply with Shari’ah principles and offers an alternative fixed-income investment channel for ESG-focused investors, while also contributing to bridging the funding gap. Notably, reported subscription data indicates that green and sustainable Sukuk were oversubscribed 4.4 times compared to 3.3 times for traditional Sukuk  (Refinitiv, 2022). This demand is driven by both non-Shari’ah-related ESG-centric investment mandates (42%) and Shari’ah compliance-focused investors (38%), signifying growing interest in Green Sukuk beyond its religious significance. 

Another distinct feature lies in the Shari’ah law that govern Green Sukuk, which have the ability to address some of the limitations of the current green bond framework by promoting enhanced governance and accountability. One of the core Shari’ah principles require funds raised through Sukuk to be specifically allocated to an identifiable asset, typically through a special purpose vehicle established and owned by the issuer seeking to finance the asset (Pegah, 2017). This differs from green bonds, which are generally issued directly from a company’s balance sheet. Consequently, a sukuk structured to fund a designated green project is less likely to be diverted for non-green purposes, thereby enhancing legal accountability (Hussain et al., 2017). 

Furthermore, there is potential for stronger governance regarding the environmental aspect under Islamic principles. The Shari’ah board, a committee of Islamic scholars within an Islamic bank responsible for determining the compliance (halal) and theological purity (tayyib) of transactions, has authority to establish the specific Islamic principles that a Green Sukuk must adhere to. This means that the environmental and sustainability principles would be integrated into the underlying asset itself, rather than merely being reflected in the structure of the Sukuk. Such characteristics demonstrate an effective mitigation tool against greenwashing risks commonly present in traditional green bonds. 

Previous Green Sukuk issuances and the accompanying frameworks in the GCC, Indonesia, and Malaysia, which currently hold a significant share of the Green Sukuk market, have primarily concentrated on renewable energy, energy efficiency, sustainable transportation, sustainable water and wastewater management, and achieving carbon neutrality (UKIFC, 2022). Nevertheless, it’s noteworthy that the Malaysian federal government has revealed plans to introduce a RM1 billion (US$209.87 million) biodiversity Sukuk facility. This announcement came during the presentation of the 2024 national budget in October 2023 (Marlena, 2023). 

Although the market is at a nascent stage, a lack of innovative development in biodiversity-related Islamic finance products risks an interest-dominated market of biodiversity investment instruments (World Bank, 2020) inaccessible to Shariah-compliant investors. The development of innovative and Shari’ah-compliant investment instruments focused on nature and biodiversity would reflect and internalise the Islamic concepts of Maṣlaha (public good), Qawa’īd (ethics) and the Maqāsīd al-Sharī’ah (the broader goals of Islamic law) into contemporary Islamic finance practices. This would not only address the existing gap but also underline the fundamental compatibility between Islamic finance and sustainable investment in nature and biodiversity.    

To draw the attention of innovative Islamic finance products to direct investment in nature and biodiversity, the following section will highlight how existing and potential (Green) Sukuk contracts can be used for the purpose of directing private finance to ecosystem conservation efforts. 

The structuring of a Green Sukuk is similar to a traditional Sukuk with the only difference being greener assets used to support the Sukuk or an environmentally friendly project (Norhayati and Masri, 2020).  

Existing contractual arrangements for Green Sukuk have been structured around the following Shari’ah arrangements (Edana, 2021):  

• Commodity Murabaha (sales agreement):most common and was used for the UAE’s MAF Green Sukuk- which was an international issuance, and the Malaysian Sarawak Green Hydro Sukuk 
• Ijarah (leasing), Istisna (manufacturing sale):used for SRI Green Sukuk Tadau (Solar photovoltaic construction) 

• Wakalah (agency- share of expertise and management for a fee):used for the BEWG (M) Sdn. Bhd. (Solar photovoltaic) Green Sukuk 

 Reflecting on IFC’s biodiversity finance reference guide (IFC, 2022), these contractual arrangements can prove effective and straight forward in one of the biodiversity finance streams: the investment into business operations and production practices that seek to address the key drivers of nature/biodiversity loss. However, it can prove challenging for the other IFC-identified streams: the investments in nature-based solutions to conserve, enhance, and restore ecosystems and biodiversity; and the direct financing of conservation and restoration of terrestrial and marine ecosystems. 

The returns provided to investors under the listed contracts depend on profit from sale or lease, fees for managerial and know-how sharing benefits, or a combination. Such returns under the 1st stream of biodiversity finance can be enabled through investment projects themed around productive agriculture and land use; replacement of biodiversity-adverse infrastructure, processes, and equipment; ecotourism services; freshwater/marine sustainable production; waste and plastic management for pollution control; transport and logistics innovation to avoid the transport of invasive species, etc. 

At face-value, it may seem that the non-revenue-based characteristics of conservation projects and nature-based solutions risk their exclusion from the biodiversity Islamic finance agenda, especially since these non-revenue projects have traditionally relied on interest-based funding. However, with the emergence of carbon markets and carbon credits, Islamic finance has the opportunity to play a pivotal role in advancing and establishing the regulatory and market infrastructure for carbon markets to address this challenge, particularly as conservation practices generate tradable carbon credits. Expanding financial offerings through innovative product development can optimise investment in ecosystems and create more opportunities for risk-sharing among Shari’ah-compliant investors. 

The 2 series SRI Malaysian Sukuk Ihsan by Khazanah Nasional Bhd, which involved Wakalah, commodity Murabaha and Istithmar (Islamic investment agency) arrangements, were innovative in addressing gaps in community investments as it linked returns to specific performance targets (Edana, 2019). Since their issuance, Securities Commission of Malaysia has introduced the Sustainable and Responsible Investment linked (SRI-linked) Sukuk Framework, tax incentives, and grant schemes to promote funding into the Sustainable Development Goals (CM, 2023).  A replication of SRI Sukuk Ihsan contractual structuring would be effective in a nature and biodiversity context as it complies with Shari’ah mandates and also fosters a performance-centric approach.   

An additional innovative Islamic finance model worth considering is the Cash Waqf-linked Sukuk (CWLS). In this model, assets from Waqf, which are Islamic charitable donations or endowments, serve as the underlying support for issuing Sukuk (Rozaq, 2021). The CWLS model, initiated by the Ministry of Finance of the Republic of Indonesia, is a pioneering effort that utilises non-profit instruments overseen by the government to finance social projects on a large scale (Eko, 2022). This approach, available to public and private sectors, promotes the integration of Islamic social and commercial finance and enriches the diversity of the Islamic capital markets. The success of this model is evident in the recent issuance of the 2023 “Sukuk Al-Salam” by the Central Bank of Bahrain, which was oversubscribed by 197% and its recent award of the Islamic Development Bank Prize for Impactful Achievement in Islamic Economics (1444H, 2023) (Zawya, 2023) 

To further strengthen and broaden the impact of CWLS, UNDP, in collaboration with Badan Wakaf Indonesia (BWI), Waqf Centre for Indonesian Development and Studies (WaCIDS), and the Green Waqf Movement Team published the “Green Waqf Framework” (UNDP and BWI, 2022). By integrating green development initiatives, Cash Waqf-linked Sukuk has the potential to create a more robust, extensive, and sustainable influence on the environment and society.

As discussions on climate change and the role of nature continue, Green Sukuk emerges as a promising finance tool for nature and biodiversity, particularly considering the crossover between Shari’ah mandates and ESG. However, while it was noted that existing Green Sukuk contracts offer flexibility, they may fall short in addressing nature-based and conservation solutions. It is crucial for issuers to develop innovative products that effectively tackle the challenges of nature and biodiversity preservation. 

The Malaysian Sukuk Ihsan issuance serves as a notable example of innovation in this field, highlighting the potential for linking returns to specific performance targets. Additionally, exploring the use of Cash Waqf-linked Sukuk, which utilises Islamic charitable donations or endowments, can further enhance the integration of social and commercial finance for impactful projects on a larger scale. Continuously expanding the range of inventive Islamic financial products is vital to maximise investment opportunities, promote risk-sharing, and ultimately create substantial positive environmental and societal impacts.