The report examines the role of Islamic finance in the sustainable and climate finance markets by exploring market trends, instruments, and innovations across the Organization of Islamic Cooperation (OIC) member countries. The report draws on insights from surveys conducted with Islamic finance professionals and halal industry enterprises, as well as interviews with policymakers and private sector participants. The objective of this report is to identify opportunities and address challenges that can enhance the development of the Islamic sustainable finance market, with a focus on climate finance, which encompasses funding for climate mitigation, adaptation, and resilience building.
KEY FINDINGS
Climate change presents a major global challenge with profound effects on economic growth, especially in highly exposed and poorly prepared regions. The 57 member countries of the Organization of Islamic Cooperation (OIC) are particularly vulnerable due to their high exposure and low adaptive capacity to climate change.1 The OIC is enhancing efforts to meet climate and development goals, with 54 OIC member countries having ratified the Paris Agreement, and 35 committed to achieving net-zero targets.
Low-carbon strategies require significant investment, and the World Bank estimated2 over US$1 trillion is needed by 2050 for climate action in the OIC, requiring the mobilization of public and private sector funding.
The sustainable finance market within the OIC has been on an upward trajectory.3 Sustainable finance raised grew from US$17.8 billion in 2017 to US$82.3 billion in 2024 – a compound annual growth rate of 24.4%. Islamic instruments represented 16% (US$53.9 billion) of the total sustainable finance raised between 2017 and 2024.
Nevertheless, the sustainable finance market within the OIC is still in its developmental phase. Between 2017 and 2024, 19 OIC countries issued sustainable bonds, and 5 issued sustainable sukuk. Sustainable sukuk have been a major channel of Islamic climate finance, accounting for 35% of total sustainable bond/sukuk issuances. This suggests opportunities for growth, especially given the potential alignment of sukuk structures with infrastructure and climate projects.
About one-third of sustainable sukuk were labelled “green,” whereas nearly two-thirds of sustainable bonds carry a green label. This implies that sukuk are currently being used across a broad range of sustainability objectives, rather than being specifically used for climate mitigation or adaptation. Hence, targeted initiatives for green sukuk can help channel more capital to climate-specific outcomes.
Climate finance through Islamic bank financing has considerable growth potential. It’s estimated that only 8.2% of sustainable syndicated loans raised between 2017 and 2024 were Shariah-compliant. With Islamic banking assets estimated at US$2.8 trillion, this segment represents a significant opportunity for further development.
Islamic finance standard-setting bodies have committed to developing the critical enablers to support the development of the Islamic climate finance market. The Islamic Financial Services Board (IFSB), the General Council for Islamic Banks and Financial Institutions (CIBAFI), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) have made significant progress in developing prudential guidance and governance standards, and facilitating capacity building, as well as leading policy discourse with other international standard-setting bodies to ensure alignment with global best practices.
Generally, developing a climate finance ecosystem in the OIC, whether conventional or Islamic, faces common challenges. To unlock the potential of Islamic climate finance and bridge the climate funding gap, targeted reforms are needed. The Islamic finance sector is uniquely positioned to drive meaningful progress on global climate goals through values-based, inclusive financial solutions. To realize this potential, policymakers, regulators, multilateral development banks (MDBs), and other development partners must act decisively across three strategic priorities:
৹ Mainstreaming Islamic climate finance instruments by preparing bankable projects, designing targeted incentives to facilitate green sukuk and sustainability-linked issuances, and harnessing the technical collaboration with MDBs to support market development.
৹ Accelerating capacity building and technical exchanges among OIC member countries by developing practical knowledge tools and improving data systems for better tracking and reporting.
৹ Enhancing Islamic climate financial innovation, such as blended finance solutions, by developing innovation platforms and scaling Islamic social finance tools like zakat, waqf, and micro-takaful to support community resilience and measurable climate outcomes.