Promotion of green finance

Explanation

As the largest South–South Public Development Bank (PDB), the IsDB faces unique challenges and opportunities in mobilising green finance. The Bank has positioned itself as a key sustainable finance actor across its member countries, particularly as a leader in the promotion of Islamic finance (finance that is compliant with Shariah principles) with a focus on integrating green and social considerations.

Greening the system

The IsDB’s Climate Change Policy (CCP) lays the foundation for the Bank’s efforts to promote green finance, with a focus on green growth and supporting the transition to a green economy by leveraging financial resources. The CCP references plans to support member countries in developing appropriate regulatory frameworks to encourage private sector involvement in climate finance. However, concrete examples of systematic engagement with financial institutions, regulators and central banks on sustainable finance are limited across publicly available documentation. Best practice among peer institutions in this regard has included comprehensive programmes to support greening national and regional financial systems.[1]

Similarly, the IsDB’s Climate Action Plan (CAP) identifies the need for increased capacity within the Bank and among key stakeholders in member countries as essential requirements for meeting its climate finance goals. However, details of implementation and specific initiatives focused on sustainable finance capacity building are also not well documented.

As of late 2024, the IsDB had developed a dedicated “Blueprint for Green Finance” providing internal guidance to lay the groundwork for the integration of green finance in the forthcoming .[2] The blueprint is a strategic note intended to support harmonisation of internal systems for green finance and facilitate dialogue with member countries (MCs) on expanding green finance mobilisation. It sets out several planned activities over the course of 2024 and 2025 for this purpose across areas that include knowledge building, collaboration, operational approaches, policy support, and financing.  

There is ample evidence of the IsDB socialising its learnings and experience on green finance (particularly as relates to Islamic finance approaches) to support efforts to green the system.[3] Notable relevant examples include:

• Ongoing support for the development of the Middle East Green Initiative () Charter
• Developing thought leadership pieces, such as on the mobilisation of Islamic Banking for Climate Action, and hosting knowledge building events and training programmes, such as the Massive Open Online Course on Islamic Finance for the SDGs
• Initiatives such as the Youth Green Skills Accelerator (in collaboration with the International Labour Organization) to promote youth participation and skills development relating to green jobs and the shift to a green economy

Green sukuk

In 2019 the IsDB published its Sustainable Finance Framework (SFF), enabling the Bank to issue green, social and sustainability sukuk.[4] This framework integrates both Islamic finance principles and international sustainable finance standards, aligning with the International Capital Market Association’s (ICMA) Green Bond Principles and Social Bond Principles. In 2025, the Bank updated its SFF framework to align with market best practice, the latest ICMA principles, and the Bank’s own Strategic Realignment 2023–2025.[5] However, this updated version of the SFF is yet to be made publicly available.

Under the SFF, the IsDB has played an instrumental role in developing the sustainable sukuk market through issuing three types of sukuk:

1. Green sukuk – proceeds are exclusively allocated to green projects categories.
2. Social sukuk – proceeds are exclusively allocated to social projects categories.
3. Sustainability sukuk – proceeds are allocated to both green and social projects categories.

Alongside a list of eligible project categories, the SFF also sets out exclusion criteria for certain prohibited activities. This notably includes a full exclusion on upstream fossil fuel activities, as well as coverage of mid- and downstream fossil fuel activities as well as energy efficiency activities associated with emissive infrastructure.

Green sukuk issued under the SFF are also required to align with the four components of ICMA’s Green Bond Principles, meaning:

• Use of proceeds must go exclusively to eligible green projects such as renewable energy, clean transportation, energy efficiency, and pollution prevention and control.
• Project evaluation and selection involves screening by the Sustainable Finance Task Force (SFTF), which includes representatives from the Climate Change Division, Treasury Department, and other relevant departments.
• Management of proceeds is tracked through a dedicated Green or Sustainability Sukuk Register.
• Regular reporting on both allocation and impact metrics.

Although both the SFF and ICMA principles refer to regular reporting on allocation and impact metrics, the latest publicly available impact report on the IsDB’s sukuk issuance dates from late 2020.

Data from the London Stock Exchange Group (LSEG) show strong and consistent growth in the sustainable sukuk market over the period 2017–2024, with a cumulative issuance of USD 42.7 billion globally as of Q1 2024. The IsDB was the second largest global issuer in this period (behind the Indonesian government) with USD 5.1 billion in cumulative issuance. This has been driven by several landmark sukuk issuances since the SFF was published in 2019. For example, its USD 2.5 billion issuance in March 2021 was the Bank’s largest ever sustainability sukuk and has allocated proceeds to finance both social development (90%) and green projects (10%).

Innovative financial instruments

The IsDB’s CAP recognises the need to develop blended finance approaches and mobilise private capital for climate action. However, beyond the issuance of green sukuk detailed above, concrete examples of innovative instruments being developed for this purpose are sparse across publicly available documentation.

Notably, the CCP refers to the development of dedicated Climate Change Facility to mobilise additional climate finance resources, and plans to develop green trade financing through the International Islamic Trade Finance Corporation. However, comprehensive details on the implementation status of these efforts are not yet publicly forthcoming.

Recommendations: 

• There is an opportunity for the IsDB to contribute to further scaling green finance by developing an integrated offering of upstream green finance policy work alongside national-level, real-economy oriented development and climate support. This would align well with the CCP’s reference to supporting member countries in developing appropriate regulatory frameworks to encourage private sector involvement in climate finance, with the IsDB well positioned to support both national implementation and international coherence. In practice, this could include:
  • Working with countries to deploy regulatory toolkits, including taxonomies and other mechanisms, to help client countries anticipate and respond to the requirements and opportunities of international private sector transition planning in line with Islamic finance principles.
  • Furthering engagement in relevant international sustainable finance fora (such as the International Platform on Sustainable Finance). This would enable the Bank to increase the role of member countries in shaping and implementing internationally recognised best practice initiatives and standards.
  • Systematically engaging with a wider set of sustainable finance actors (such as financial institutions, regulators, and central banks) to support greening national and regional financial systems.
• The IsDB should aim to fulfil the reporting provisions of its SFF and the ICMA principles by issuing more regular (at minimum annual) impact and allocation reports for its sukuk issuances. Ensuring a strong level of transparency of sukuk activity is critical for the Bank to retain its positioning as a leading actor in this area.
• The IsDB should consider drawing on best practice among peer institutions in its utilisation of innovative financial instruments, with a focus on blended finance solutions and risk-sharing mechanisms that can effectively mobilise private capital for climate projects while remaining Shariah-compliant.

[1] See, for example, efforts by the Asian Development Bank (ADB) and Inter-American Development Bank (IDB).

[2] Information received directly from the IsDB.

[3] See “Institutional leadership and information sharing” metric for further details.

[4] Sukuk are Islamic bonds that comply with Islamic finance principles. In particular, they do not offer interest payments to investors as a debt obligation would, but are tied to tangible real economy assets, providing earnings through profit-sharing or rental income (depending on the underlying asset).

[5] Information received directly from the IsDB.