Keywords

1 Background

Climate change poses a significant risk to the United Nations Sustainable Development Goals (SDGs). It is one of the most urgent global issues to be faced, both in developed and developing countries. Climate change has sprung up to the primacy of the development agenda as the intensity of rabid weather has increased globally, starting from higher water temperatures to severe droughts and the intensity of floods that have adverse impacts on human life, people’s health, social, economic, and business activities. Certainly, climate change deepens poverty. It has already imposed a high charge on low-earning and undefended people, mainly in emerging economies.

The Securities Commission (SC) and the World Bank (2019) observed a new wave in the financial community participating in sustainable development and addressing climate change after the Paris Agreement on Climate Change in 2015. Nonetheless, there are funding issues for achieving the SDGs on top of the funding gap in combating climate change (Buana & Musari, 2020; Ministry of Finance of the Republic of Indonesia (MoF) and United Nations Development Programme (UNDP) Indonesia, 2018; United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP), 2014; Yu, 2016). In this regard, countries like Indonesia require prodigious financial assistance to bridge the financial gaps between their funding necessities and currently available financial sources. UN ESCAP (2019) emphasized how important it was for countries to work together to fill the investment gap in combating climate change by encouraging fiscal space and the private sector to get involved.

In order to tackle climate change and reduce greenhouse gas (GHG) emissions, one of the most widely used Islamic financial instruments is the green sukuk. Moghul and Safar-Aly (2014) mentioned that many prominent environmentalists highlight the potential role of religion, or at least philosophical approaches originating from religion, in addressing the environmental crisis. Islamic law, also known as shariah, contains a deeply established ethical framework for caring for the environment. Hence, the main objective behind the development of green sukuk is to address Shariah’s concerns concerning safeguarding the environment, as stated by Alam et al. (2016).

The International Monetary Fund (IMF) pointed out in 2015 that sukuk could help bridge the funding gap for infrastructure projects. In addition, sukuk are seen as well-suited to infrastructure financing because of their risk-sharing features, making them suitable for filling financing gaps in emerging countries. Furthermore, Kahf (1997) cited that sukuk has the potential to act as a public sector financing instrument. Musari (2009) and Sriyana (2009) also mentioned the potential of sukuk for fiscal sustainability in the long term in managing public finances. Furthermore, Ismal and Musari (2009a, 2009b, 2009c) asserted that sukuk is a superior financing instrument to debt or loan. This is further proven by Ismal’s (2010) study that viewed sukuk as an effective instrument for managing liquidity and portfolio. Similarly, the study by Musari (2013a, 2013b) also found that sukuk has a significant positive influence on the independence of the state budget if it is used for industrial working capital and developing infrastructure as well as replacing foreign debt.

As an Islamic financial instrument, green sukuk must possess maslahah (public interest) that is in line with maqasid Al-Shariah, as they are the foundations of Islamic finance and the underlying principles and values for the preservation of the environment and society. The core of environmental development in Islamic economics is to reduce the environmental risks and increase the environmental benefits. Thus, this is an opportunity for Islamic finance to bridge the investment gap through green sukuk as an Islamic green financial instrument.

Indonesia’s Sovereign Green Sukuk can provide valuable lessons concerning national collaboration among state institutions in addressing climate change. As the world’s first sovereign green sukuk, Indonesia’s Global Sovereign Green Sukuk can serve as a case study to learn its impacts on SDGs, including its relevance to maqasid al-shariiah. Therefore, this study aims to address the topic of green sukuk by focusing on the following three sections: (1) Indonesia’s Sovereign Green Sukuk as a national collaborative effort to tackle climate change; (2) the relevance of Indonesia’s Sovereign Green Sukuk with maqasid Al-Shariah; and (3) the role of Indonesia’s Sovereign Green Sukuk in achieving SDGs.

2 Indonesia’s Sovereign Green Sukuk

Indonesia is verily dedicated to fighting climate change, considering this country is most susceptible to climate-induced catastrophes. As part of the global community that is responsible for dealing with climate change in the world, Indonesia in 2016 ratified the Paris Agreement and submitted Nationally Determined Contributions (NDCs). This shows Indonesia’s seriousness in taking part in the movement of low-carbon and climate-resilient.

In order to put the commitment into action, the government needs funding to fulfill its financial needs. However, Yu (n.d.) and Tamura and Yu (2015) mentioned that there is still no mechanism that oversees the coordination of how resources might be allocated and utilized effectively among government agencies. They further asserted that climate change should be fully integrated into national and sectoral development plans and be channeled into the public financial management system, and therefore, developing countries need to develop robust national strategies for scaling up domestic climate finance.

The Indonesian Sovereign Green Sukuk is an exemplary national collaboration to face climate change. It employs the climate budget tagging mechanism results and channels investments toward and across green sectors. This is shown in Table 1, where Indonesian Green Bond and Green Sukuk Framework ensure green sectors have the most climate impacts.

Table 1 Indonesia’s Green Bond & Green Sukuk framework
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The Indonesian Green Bond and Green Sukuk Framework have received a second opinion from the Centre for International Climate Research (CICERO), the foremost institute for interdisciplinary climate research in Norway, as external reviewers, and have been awarded Medium Green Shading. This shading contemplates the nations’ ambitiousness for the climate and environment in making the transformation to a low-carbon society (CICERO, 2018). This shading also shows that eligible listed projects, as a reflection of the policy’s work in realizing the vision of the future in lowering carbon emissions, have not reached the target yet (MoF, 2019, 2020). According to the Framework, there are nine sectors which can be financed by Green Sukuk as shown in Table 2.

Table 2 The projects of eligible green sectors
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The Eligible Green Sectors refer to projects which promote the transition to a low-emission economy and climate resilient growth, including climate mitigation, adaptation, and biodiversity in accordance with the criteria and process set out in this Framework. To avoid confusion, MoF (2019) stated that the Eligible Green Sectors will be exempt from the following: (1) the expenditure and capacity of new fossil fuel-based electric power generation associated with the efficiency improvement of fossil fuel-based electric power generation; (2) high scale hydropower plants (capacity > 30 MW); and (3) nuclear and nuclear-related assets.

The government of Indonesia debuted its first green sukuk in March 2018 with a USD1.25 billion offering. Then, the government issued the second sukuk of its in February 2019, generating USD 750 million of funds. Additionally, in November 2019, the government issued Savings Retail Sukuk, the first retail green sukuk in the world. The three instruments are evidence of the government’s serious commitment toward climate action. The two sovereign global green sukuk have a total value of USD 2 billion. Each issuance is comprised of 51% refinancing for existing projects and 49% financing for new projects. Table 3 provides an executive summary of Indonesia’s Sovereign Global Green Sukuk for the period 2018–2021.

Table 3 Indonesia’s Sovereign Global Green Sukuk (2018–2021)
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Overall, projected environmental benefits from the issuance of Indonesia’s Sovereign Green Sukuk in 2018 reduced 5,776,497.49 tonnes of CO2 emissions and 3,218,014.41 tonnes of CO2 emissions in 2019 (MoF, 2020). As for allocation by activity, the cumulative Indonesia’s Global Green Sukuk issuance between 2018 and 2020 was 57% for mitigation and 43% for adaptation. Accordingly, allocation by sector yielded 5% for Renewable Energy (Clean Energy), 11% for Energy Efficiency (Efficient Energy Use), 41% for Sustainable Transportation (Environmental-friendly Transportation), 36% for Climate Change Resiliency of Very High-Risk Sectors and Areas and Minimize Disaster Risk, as well as 6% for Waste-to-Energy (Energy-from-Waste/Energy Recovery) and Waste Management (MoF, 2021). These results represent the continuing efforts to support sectors with green growth and maintain Indonesia’s integrity and dedication to creating a low carbon and climate-resilient economy.

3 Green Sukuk and Maqasid Al-Shariah

SC and the World Bank (2019) reported that Islamic finance offers huge potential in promoting the agenda for climate change and the development of a green economy across numerous economic sectors. In principle, the greener the economy, the better climate change can be tackled. Also, it would need well-balanced economic development programs that work well with the core principles of Islamic finance, which are based on the values of maqasid Al-Shariah.

Regarding the existence of green sukuk as an Islamic green financing instrument, it is important to note that maqasid Al-Shariah must be the main objective, and therefore, the allocation and impact of green sukuk should be the manifestation of the maqasid Al-Shariah. Wahab and Naim (2020) argued that the consequences of ignoring maqasid Al-Shariah and maslahah would cause Islamic financial products to lose their intrinsic values and would become unacceptable in the global market.

Therefore, the approach to assessing the relevance of green sukuk in achieving maqasid Al-Shariah should be through the quality of allocation and impact of green sukuk. In general, the quality of allocation and impact of green sukuk is expected to improve environmental quality within the limits of regeneration and assimilation. Musari (2020c) wrote that the environment as a resource has limited regeneration and assimilation. If this limit is exceeded, natural resources will suffer damage because they are exploited as factors of production and consumption. Figure 1 shows how green sukuk as an Islamic financial instrument works to combat climate change.

Fig. 1
figure 1

(Source Adapted from Musari [2020c] and Musari and Zaroni [2021])

Green Sukuk in tackling climate change

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Economic policies that favor short-term growth have triggered aggressive, exploitative, and expansionary patterns of production and consumption, resulting in a decline in the carrying capacity and function of the environment. One of which is the acceleration of climate change. In the Quran (2:29; 15:19—20; 16:14, 66; 42: 4; 67:15), Allah has mentioned that Allah is the owner of the earth and Allah created everything on earth, including the sea and livestock, which the earth is spread to and smoothed out for humans to move, eat, and fulfill all their needs of life. However, the Quran (11:61) also reminds us of the obligation of humans to maintain the environment and nature.

Various studies such as Rohmah et al. (2020), Utama et al. (2019), Maimunah (2018), Suryani (2017), Pratama (2015), Iswanto (2013), and Ghufron (2010) showed multiple encouraging examples for the five of maqasid Al-Shariah to be developed into new interpretations which reconstruct these universal principles to suit the times. One thing that needs to be echoed is environmental preservation (hifz al-bi’ah). It is important to note that the current environmental damage will threaten the sustainability of all living things. Earlier, Yafie (2006, 2007) also sounded the need to add hifz al-bi’ah in addition to the rules of hifdzul an-nafs (life preservation), hifdzul al-aql (life preservation), hifdzul an-nasl (progeny preservation), hifdzul al-māl (wealth preservation), and hifdzul ad- ‘din (religion preservation).

The same thing was also conveyed by Al-Qardhawi’s (2001, 2002) writings that state protecting the environment as riayatu al-bi’ah (preserving the environment) is the same as preserving the five objectives of maqasid Al-Shariah, as it provides maslahah (public interest) and prevents mudharrah (harms). Any behavior that leads to environmental destruction will threaten an-nafs, al-aql, an-nasl, al-māl, and ad ‘din so that riayatu al bi’ah is in line with maqasid Al-Shariah.

Additionally, within ushul fiqh (principles of Islamic jurisprudence), there is an established shariah maxim that states, “mā lā yatim al-wāǧib ilā bihi fahūwa wāǧib,” which means that without which an obligatory command cannot be accomplished, it also becomes obligatory.

In order to ensure that all green sukuk project financings in Indonesia comply with hifdzul al-bi’ah or riayatu al-bi’ah and maqasid Al-Shariah, several references need to be followed, namely Government Regulation of the Republic of Indonesia Number 56, year 2011 on Project Financing through the Issuance of Sovereign Shariah Securities and Decision of the National Shariah Council-Indonesian Ulema Council (DSN-MUI) Number 01/DSN-MUI/III/2012 on Criteria of Projects in accordance with Shariah Principles. In addition, referring to Suminto (Ed.) (2015), the two regulations also regulate all utilization of projects not for purposes related to implementation and/or their contribution to the activities of destructive and dangerous (harm) against morals and the environment (al-bi’ah).

Referring to the Eligible Green Sectors and the projects during 2018–2019, Table 4 sums up the relevance of Indonesia’s Sovereign Green Sukuk with maqasid Al-Shariah. As such, the projects were financed by green sukuk and must manifest the allocation and proceeds of green sukuk, which is in accordance with the maqasid Al-Shariah.

Table 4 Relevance of Green Sukuk in maqasid Al-Shariah
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Furthermore, Sodikun (2012) noted that there are approximately 94 verses of the Qur’an concerning the environment and the prohibition of causing damage to it. This shows the importance of nature and the environment in Islam, where it gives warnings to the people to preserve and safeguard the environment from any calamity. The preservation of the five of maqasid Al-Shariah requires Muslims to create a balance, harmony, and conformity in the order of life, including nature and the environment (al-bi'ah).

According to Sayadi (2012), there are chapters (surah) in the Qur'an that are named after animals, such as al-Baqara (The Cow), al-An'aam (The Cattle), an-Nahl (The Bee), an-Naml (The Ant), al-'Ankaboot (The Spider), al' Aadiyaat (The Courser), al-Fīl (The Elephant), and names of plants such as at-Tīn (The Fig), and other names such as al-Hadīd (The Iron), adh-Dhāriyat (The Winnowing Winds), an-Najm (The Star), ash-Shams (The Sun), al-Layl (The Night), al-Fajr (The Dawn). One of the wisdom behind the names is to serve as a sign to humans to realize that their existence is tied to the natural environment, and they are obliged to preserve it.

As for the relevance of green sukuk in achieving maqasid Al-Shariah, it is noted by Çizakça (2007, 2011, 2014) that all innovations on Islamic financial products must meet at least three requirements:

  1. 1.

    The innovation must not represent rib.

  2. 2.

    It must lead the risk sharing, not risk shifting.

  3. 3.

    It must be good to encourage the society toward the al-Ghazali and Shatibi Optimum.

By adopting Pareto’s insight, it can be explained that any policy which contributes to one of maqasid Al-Shariah without undermining any of the other four would be desirable. Furthermore, each policy has to lead the society toward al-Ghazali and Shatibi Optimum. The al-Ghazali and Shatibi Optimum would be reached when it is no longer possible to improve any components without undermining one of the maqasid Al-Shariah.

4 Green Sukuk and SDGs

Indonesia is among the leading countries in adopting the SDGs agenda. According to Musari (2022a, 2022b), Indonesia, as a major global economy in Asia, is engaging in financial inclusion as a strategy to achieve inclusive growth and SDGs. Through Islamic philanthropy, Indonesia has been recognized as the most generous country. In addition, through the various innovations that have developed in recent years, Indonesia is now seen as an emerging force in Islamic finance globally. The country has a great opportunity to eradicate poverty and achieve the SDGs through the untapped potential of Islamic finance and funding, which has now become a vital and innovative financing modality to close the funding gap for the SDGs as well as climate change.

Buana and Musari (2020) and Musari (2020a) mentioned that there must be a gradual change to pull money back into real economies through innovative financing, and Indonesia has realized this pathway, which among others is green sukuk. Despite being innovative in their own stature, the three greens (green economy, green financing, and green instruments) exclude certain sectors from their framework. This, as a result, can trigger new constructs, one of which is the blue economy, which in the future could take the form of Blue Sukuk and White Sukuk.

All in all, the role of green sukuk in achieving SDGs can be indicated by the allocation of Indonesia's Global Green Sukuk projects and their impacts on achieving the SDGs. Table 5 shows the financing and refinancing projects by Global Green Sukuk in 2018, their results, and their impacts on SDGs achievement in Indonesia.

Table 5 Projects of Global Green Sukuk 2018, its results and impacts to SDGs
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Then, in 2019, the role of green sukuk in achieving SDGs in Indonesia can also be indicated by the allocation of Global Green Sukuk projects and their impacts on achieving the SDGs. Table 6 shows the financing and refinancing projects by Global Green Sukuk in 2019, their results, and their impacts to SDGs achievement in Indonesia.

Table 6 Projects of Global Green Sukuk 2019, its results, and impacts to SDGs
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Undoubtedly, Indonesia’s Sovereign Green Sukuk can be a lesson as a national collaborative effort to tackle climate change through Islamic green financing. This instrument has paved the way for the enforcement of hifdzul al-bi’ah/riayatu al-bi’ah and maqasid Al-Shariah as well as also to achieving the SDGs. Green Sukuk also can be a gateway to finding innovative sustainable financing instruments to diversify risks through Islamic borrowing public. In the future, in line with a study by Morea and Paggio (2017), it is necessary to provide incentives for issuing sukuk to provide appropriate and sustainable investments to tackle climate change and GHG emissions. In addition, Musari (2020a, 2020d, 2022c) recommended the integration between perpetual cash waqf linked sukuk (CWLS) with green sukuk as a new socially responsible investment (SRI) alternative in the form of Perpetual Green CWLS. Perpetual Green CWLS is expected to link the real and financial sector as well as Islamic commercial and social finance by serving exponential benefits for tackling climate change. In addition, esham structured sukuk (Çizakça, 2011, 2014; Musari, 2019, 2021, 2022b) are also worth proposing to be developed as an alternative to sukuk.

5 Conclusion and Recommendations

This chapter shows that Indonesia has addressed climate change as one of its national priorities. It is imperative to ensure that policy transformation, an enabling environment, and financial investment go hand in hand to support this national agenda. As an Islamic financial instrument, Green Sukuk can serve the enforcement tool for hifdzul al-bi'ah/riayatu al-bi'ah and maqasid Al-Shariah. Regarding the SDGs, the allocation and impact of Indonesia’s Sovereign Green Sukuk have roles not only to support the achievement of SDGs for Climate Action (Goal 13) but also for Good Health and Well-Being (Goal 3), Gender Equality (Goal 5), Clean Water and Sanitation (Goal 6), Affordable and Clean Energy (Goal 7), Decent Work and Economic Growth (Goal 8), Industry, Innovation, and Infrastructure (Goal 9), Reduced Inequalities (Goal 10), Sustainable Cities and Communities (Goal 11), and Peace, Justice and Strong Institutions (Goal 16).

Several recommendations related to the issuances of Sovereign Green Sukuk in Indonesia are: First, sovereign green sukuk issuance is still irregular and relatively done in small size due to the limited number of available green projects in the country as the underlying assets to issue green sukuk. Therefore, the government needs to increase the number and size of green projects as part of the commitment to the Paris Agreement. Second, at the moment, it takes a longer time to issue green sukuk than regular sukuk due to the lack of standardized guidelines on domestic green sukuk issuance. Preparation of the guidelines will speed up the issuance process and will also encourage corporations in Indonesia to issue green sukuk. Third, the government at the moment mainly focuses on attracting domestic investors to invest in all government securities, including green sukuk. As a result, a lot of potential global investors in green sukuk, especially in Europe, have not yet been well explored. Therefore, marketing green sukuk to those investors needs to be intensified. Fourth, as Islamic commercial finance, green sukuk can collaborate with Islamic social finance toward a new blended Islamic finance. CWLS and esham structured sukuk are worth a proposal for being integrated with green sukuk as an SRI instrument. Fifth, public involvement in tackling climate change is rational to fill the financing gap. Therefore, Islamic public borrowing must have attention and meet at least the three requirements: it does not represent riba, lead the risk-sharing, and encourage society toward the al-Ghazali and Shatibi Optimum. Hence, Perpetual Green CWLS can be an alternative scheme to be explored.