An important area for Islamic finance to venture into is green financing. Islamic banking is not just a financial system, but is part of a total value-based social system that seeks to enhance the general welfare of society as a whole. Environmental, social, and governance goals should become part of the Islamic finance agenda to ensure the fulfillment and establishment of the spirit of Islamic tenets and to contribute to the greening of the world. The global economy is transitioning towards a low-carbon, more sustainable model – and this means investment. Hence, the development of an Islamic financing facility for the green technology sector is another blue ocean waiting to be discovered.
Islamic finance has remained largely passive and absent from the international debate on environmental issues in spite of its value proposition. Islamic finance should move from being concerned with just the way in which activities are being financed to start focusing on what kind of activities are funded and on their impact on the environment.
Islamic environment funds and Shariah-compliant financing mechanisms need to seriously consider supporting projects that are involved in carbon trading, bio-fuel ventures, solar and
hydrogen power plants, waste incineration and recycling projects. Such investments are the need of the hour and represent a serious alternative to the unchecked free market approach. Growth in Islamic banking should equal the swift increase in awareness on climate change and its impending consequences and develop onto a more environmentally friendly path. Environmental, social, and governance goals should become part of the Islamic finance agenda to ensure the fulfilment and establishment of the spirit of Islamic tenets and to contribute to the greening of the world.
Moving forward, Islamic finance needs to promote the issuance of sukuk for financing of climate change investments and projects, particularly renewable energy and climate adaption projects. Spearheading these initiatives in the Middle East is establishment of the Green Sukuk Working Group by the Climate Bonds Initiative, the Clean Energy Business Council (CEBC) of the Middle East and North Africa, and the Gulf Bond and Sukuk Association. This working group will identify green energy projects that fall under Shari’a-suitable categories for potential investors.
In Malaysia, Malaysian Amanah Raya Investment Bank had teamed up with the Asian Finance Bank (AFB) to launch an Islamic green fund. This was set up to invest in environmentally friendly projects such has bio-fuel ventures that are Shari’a compliant. Plans to launch a second Islamic green fund that will focus on developing environmentally friendly projects in Asia and the Middle East has already been on the table.