This research aims to investigate the role of Islamic financial institutions in supporting green finance and facilitating the transition to sustainable energy. With a focus on Sharia principles, such as the prohibition of riba and adherence to risk, profit, and loss sharing, Islamic financial institutions are considered ethical and socially responsible entities that have the potential to drive positive change in the global financial landscape. Through a layered methodology that includes an in-depth literature review, case studies of sustainable energy projects supported by Islamic finance, and analysis of regulatory frameworks, the research provides a holistic understanding of the dynamics taking place. The results highlight the unique creativity and innovation of Islamic financial institutions in supporting green finance, with a particular focus on financial instruments such as green sukuk and other financing products.
TopIntroduction
Recent years have witnessed an unprecedented surge in international discourse concerning environmental sustainability, propelled by the critical necessity to confront climate change and its extensive ramifications (Bastin et al., 2019; Destek & Sarkodie, 2019; Hasanuzzaman et al., 2020). In light of the adverse environmental impacts that nations are confronted with, there is a growing acknowledgment that the financial industry significantly influences the course of sustainable development. Islamic financial institutions are increasingly recognised as significant stakeholders in the pursuit of a financial environment that is both environmentally sustainable and ethically sound. This study aims to conduct an in-depth examination of the various functions performed by Islamic finance institutions in support of green finance and the transition to sustainable energy. It will provide a comprehensive evaluation of their guiding principles, operational procedures, and potential ramifications on worldwide endeavours to mitigate climate change.
Islamic finance, which is grounded in the ethical conduct and social accountability principles of Sharia, is progressively garnering recognition for its alignment with sustainable development objectives. An intrinsic tenet of Islamic finance is the abstention from “usury” and the observance of asset-based financing, risk and loss sharing, and profit and loss sharing (Irfan et al., 2021; Irfan, Elmogy, et al., 2023; Irfan, Kadry, et al., 2023; Nagimova, 2022; Setiawan, 2023). These principles foster transparency, equity, and the equitable distribution of wealth. Islamic financial institutions are ethical and socially responsible entities with the capacity to effect positive change in the financial landscape, as evidenced by these fundamental principles. In light of the environmental predicaments of the twenty-first century, financial institutions must immediately implement practices that safeguard the ecological equilibrium of the planet while simultaneously promoting economic expansion. Green finance, an area of sustainable finance that is expanding at a rapid rate, consists of investment and financial instruments that are tailored to support green initiatives and projects (La Torre et al., 2024; Narayanan & Pradhan, 2024). Islamic financial institutions possess the capacity to significantly contribute to the progress of green finance due to their ethical frameworks and steadfast dedication to social justice. The objective of this study is to investigate novel financial instruments that Islamic financial institutions employ in order to advance sustainability, focusing specifically on their implementations in the energy industry. Through an examination of case studies, regulatory frameworks, and emerging trends, this study endeavours to furnish a comprehensive comprehension of the ways in which Islamic finance can contribute to a more sustainable and resilient future by expediting the adoption of green finance.