Green Sukuk: Framework, MENA market, and Islamic finance alignment

Fitch Ratings reported that ESG sukuk outstanding crossed $44.5 billion by early 2025, a 23% year-on-year increase. S&P Global projects total sukuk issuance to reach $280 billion in 2026. Green sukuk sits at the convergence of these two accelerating markets: Islamic sustainable finance and climate-directed capital. The April 2024 guidance from ICMA, the Islamic Development Bank, and the London Stock Exchange Group gave the market its first unified labelling framework. MENA sovereigns are now scaling issuance with clearer structural guardrails. This blog maps the green sukuk framework, examines issuance momentum across the Middle East, and explains where Shariah principles and ESG objectives converge operationally.

What does green sukuk mean?

Core structure

A green sukuk is a Shariah-compliant fixed-income instrument whose proceeds are restricted to climate-positive or environmentally beneficial projects. Like all sukuk, it is asset-backed and interest-free, with returns generated through profit-sharing or lease-based arrangements rather than coupon payments.

What qualifies as "green"

Eligible use-of-proceeds categories typically include renewable energy, energy efficiency, clean transport, sustainable water management, and climate adaptation. The issuer must designate proceeds to one or more of these categories and report on allocation annually.

How it differs from a conventional green bond

Three structural distinctions matter. First, a Shariah supervisory board must certify compliance before issuance. Second, every green sukuk requires an underlying tangible asset or project, not a general corporate balance sheet. Third, proceeds cannot flow to activities prohibited under Shariah, which excludes fossil fuel extraction, gambling, and alcohol, among others.

The green sukuk framework after ICMA-IsDB guidance

April 2024: the first unified standard

ICMA, the IsDB, and LSEG published dedicated guidance on labelling sukuk as green, social, or sustainability instruments. Initiated at COP28 in Dubai, this was the first industry-level attempt to standardise what "green" means in a sukuk context. Before this, issuers relied on general ICMA Green Bond Principles adapted informally for Shariah structures.

Four pillars

The guidance mirrors the ICMA Green Bond Principles but applies Shariah-specific overlays:

• Use of proceeds: restricted to eligible environmental categories, verified by both green and Shariah review

• Project evaluation and selection: issuers must disclose criteria for selecting projects, including Shariah board involvement

• Management of proceeds: ring-fenced in a dedicated sub-account or tracked through a formal internal process

• Reporting: annual allocation and impact reporting, with an independent external review recommended

IsDB's 2025 enhanced framework

In July 2025, the IsDB published an updated Sustainable Finance Framework aligned with the 2025 edition of the ICMA Green Bond Principles. The enhanced framework added two new eligible categories: climate change adaptation and food security. In October 2025, IsDB raised EUR 500 million through a green sukuk benchmark under this framework, rated Aaa/AAA/AAA by Moody's, S&P, and Fitch.

Green sukuk issuance in the Middle East

Regional scale

Green sukuk issuance across the Middle East reached $11.4 billion in 2025, up from $7.9 billion in 2024. Sustainable sukuk now accounts for over 45% of the region's total sustainable bond activity, according to S&P Global. That proportion is rising as GCC governments embed climate targets into national economic strategies and decarbonisation commitments in the Middle East accelerate.

Saudi Arabia and the UAE lead issuance

Saudi and UAE issuers represented 68% of total ESG sukuk issuance in the first nine months of 2025, according to Zawya. Saudi Arabia's Green Financing Framework, published in 2024, set the structural basis for sovereign green sukuk. The UAE's regulatory push, including ADGM and DFSA sustainability disclosure rules, created a parallel track for corporate issuers.

2026 outlook

S&P projects MENA sustainable bond and sukuk issuance between $20 billion and $25 billion for 2026. That range reflects both sovereign pipeline activity and growing corporate participation from utilities, real estate, and transport sectors.

Green sukuk examples: sovereign and institutional issuers

Indonesia

Indonesia issued the world's first sovereign green sukuk in March 2018. Five issuances have followed, totalling $7.7 billion in cumulative volume according to the UNDP. Proceeds fund solar installations, sustainable transport infrastructure, and coastal resilience projects across the archipelago.

Malaysia

The global green sukuk market began in Malaysia. Tadau Energy issued the first green sukuk in July 2017, financing a 50 MW solar plant in Sabah. Between 2017 and 2022, Malaysian issuers accounted for approximately 20% of cumulative global green and sustainability sukuk volume.

Islamic Development Bank

The IsDB has become the institutional anchor for green sukuk issuance. Its October 2025 EUR 500 million benchmark was the latest in a series of transactions under its enhanced Sustainable Finance Framework. The triple-AAA rating and multilateral status make IsDB issuances a pricing benchmark for the broader market.

How Islamic sustainable finance aligns with ESG

Structural convergence

Shariah principles, codified as maqasid al-shariah, map onto ESG pillars with notable precision. Environmental stewardship falls under the preservation of progeny and wealth. Social welfare aligns with the preservation of life and intellect. Governance is embedded through mandatory Shariah board oversight. The CIBAFI Sustainability Guide, published by the General Council for Islamic Banks and Financial Institutions, formalises this bridge by mapping ESG metrics onto maqasid categories.

Dual governance layer

Green sukuk carries two layers of independent oversight. A Shariah supervisory board certifies compliance with Islamic law. A separate environmental reviewer, often a second-party opinion provider like Sustainalytics or CICERO, verifies the green credentials. This double-gated process produces a governance standard that exceeds what conventional green bonds require.

Operational implication for issuers

Organisations operating across both Islamic finance and ESG reporting jurisdictions can reduce compliance duplication. Where a single instrument satisfies Shariah certification, green bond labelling standards, and national ESG disclosure rules simultaneously, the reporting and assurance burden consolidates rather than multiplies.

Key Takeaways

As GCC regulators tighten ESG disclosure requirements and MENA green sukuk issuance scales past $20 billion annually, issuers will need an integrated sustainability data infrastructure that handles both Shariah-aligned reporting and climate metrics. The convergence of Islamic finance governance and ESG frameworks creates a compliance advantage for those who build the right data systems early.

Schedule a demo with Oren to see how our platform supports ESG data management and sustainability reporting across GCC disclosure frameworks.