Green Sukuk and Their Role in Financing Sustainable Development Projects: Renewable Electricity Financing as a Model — The Saudi Electricity Company Experience (2/3)

Opinion
Oplus_131072

 

Dr Ahmed Abdel-Baqi
The first instalment discussed the importance of Sustainable Development Goal 7 and the efforts being made to achieve it through a range of investment mechanisms designed to finance renewable energy. The aim is to generate sufficient electricity from clean sources while reducing carbon dioxide emissions.
To this end, a number of instruments have been employed, including conventional bonds, Islamic sukuk, green bonds, and green sukuk. The latter have been specifically directed towards supporting sustainable development projects, with particular emphasis on the electricity sector.
This instalment examines the definitions of conventional bonds, Islamic sukuk, green bonds, and green sukuk, as well as the increasingly important role these instruments play in financing investments intended to support the achievement of the Sustainable Development Goals by 2030.
What, then, are green bonds and green sukuk?
Sukuk and Bonds
Bonds
The Arab Monetary Fund defines a bond as a financial obligation under which the bond issuer, or borrower, undertakes to repay the creditor or lender—the investor—the amount borrowed, known as the bond’s nominal value, together with periodic interest payments on the principal over the term of the obligation.
Borrowers issue bonds in order to cover budget deficits or finance infrastructure projects such as road networks, public utilities including electricity and telecommunications, schools, hospitals, or production lines in the case of companies.
Borrowers generally use bonds as medium- or long-term financing instruments. Depending on the rules governing the issuing entity, these instruments may take the form of Islamic securities or conventional interest-bearing bonds.
Islamic sukuk emerged as an alternative to conventional interest-bearing bonds.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines Islamic sukuk as certificates of equal value representing undivided ownership shares in tangible assets, usufructs, services, the assets of a particular project, or a specific investment activity. This ownership takes effect after the value of the sukuk has been collected, the subscription period has closed, and the proceeds have begun to be used in accordance with the Sharia requirements and controls established by Islamic finance supervisory boards.
Both bonds and sukuk may also be used to implement sustainable development projects.
Green Sukuk and Green Bonds
A. Green Bonds
The World Bank defines green bonds as debt securities issued to raise capital specifically for environmentally related projects.
The People’s Bank of China defines them as securities issued in accordance with legal procedures, under which interest and principal are paid according to the terms set out in the instrument, for the purpose of raising funds and promoting the development of green industries, green projects, and environmentally sustainable economic activities.
One of the most prominent examples was the European Investment Bank’s introduction in 2007 of a new financial instrument known as the green bond. Its purpose was not merely to raise funds, but also to involve ordinary citizens as direct investors in environmental protection, enabling every purchaser to feel that they were contributing to efforts to address the climate crisis.
The World Bank Group is one of the largest issuers of green bonds globally. In 2008, its green bond issuances exceeded US$16 billion through more than 200 bonds supporting climate- and environment-related investments.
By September 2017, the World Bank had issued 135 green bonds denominated in 18 currencies, with a combined value exceeding the equivalent of US$10.2 billion. The International Finance Corporation had meanwhile issued 77 green bonds worth US$5.8 billion across 12 currencies.
B. Green Sukuk
Green sukuk are Islamic securities issued by governments, banks, and Islamic financial institutions and directed towards green investments, including environmentally friendly and socially responsible projects undertaken within the framework of sustainable development.
They provide Muslim investors, as well as Islamic and non-Islamic capital, with opportunities to invest through financial contracts structured in accordance with the principles and rules of Islamic Sharia, both in issuance and subscription.
Among the most important projects currently targeted by green sukuk are renewable-energy schemes, particularly the production and generation of solar photovoltaic power, in addition to other sustainable development projects.
The Difference Between Green Sukuk and Green Bonds
Green sukuk differ from green bonds in several respects.
Green bonds are debt instruments issued by governments and conventional interest-based banks to raise funds for projects related to environmental protection and clean renewable energy. Their holders receive a fixed rate of interest and are regarded as creditors rather than partners in the issuing entity. From an Islamic legal perspective, they are therefore inconsistent with Sharia principles.
Green sukuk, by contrast, are issued locally or internationally by certain governments and Islamic banks to finance projects related to the environment and renewable energy. Their holders are regarded as partners in the underlying investment projects.
Because they are structured in accordance with Islamic law, green sukuk are considered Sharia-compliant. Their investment structures are generally based on recognised Islamic contracts, including:
istisna’ or manufacturing contracts;
agricultural development contracts;
ijara or leasing;
mudaraba or profit-sharing;
musharaka or partnership;
murabaha or cost-plus financing;
deferred-payment sales; and
investment agency arrangements.
In 2025, the combined global market for green sukuk and green bonds exceeded US$50 billion. Of this amount, US$9.47 billion was issued in the Middle East and North Africa during the first half of 2025.
The Expansion of Green Sukuk
To help accelerate progress towards the Sustainable Development Goals, green sukuk have been allocated to financing environmentally beneficial green projects, including:
renewable energy, particularly electricity generation from renewable sources;
sustainable natural-resource management;
reducing or avoiding carbon emissions through the protection of vegetation and natural ecosystems;
biodiversity conservation;
energy efficiency and storage;
climate-change resilience;
green buildings;
sustainable transport;
green tourism;
sustainable agriculture; and
waste management.
One of the clearest indications of growing international interest in green sukuk can be found in a report on green and sustainability sukuk jointly issued by the London Stock Exchange, the UK Islamic Finance Council, and the Global Ethical Finance Initiative.
The report noted a decline in demand for conventional interest-bearing bonds in 2024, while the green and sustainability sukuk market experienced strong demand, with total issuance reaching US$11.9 billion.
Sustainability sukuk are also Sharia-compliant Islamic financial instruments. Their proceeds are allocated entirely to financing or refinancing a combination of environmental, or green, projects and social projects.
These instruments bring together the ethical principles of Islamic finance and environmental, social, and governance standards, commonly known as ESG, enabling governments and companies to raise capital from investors interested in achieving a positive and sustainable impact.
Green and sustainability sukuk have been issued by companies, commercial banks, and sovereign wealth funds.
Malaysia is regarded as the first country to issue socially responsible green sukuk, doing so in 2017 with the encouragement and approval of the World Bank. Several Islamic countries, including Saudi Arabia, Indonesia, the United Arab Emirates, and countries of the Maghreb, subsequently followed it.
Among these countries, this study focuses on the experience of the Kingdom of Saudi Arabia in using green sukuk to finance sustainable development projects generally, while taking the Saudi Electricity Company as a case study in diversifying investments in renewable electricity generation.
This experience will be examined in the final instalment.
To be continued…

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