Which of Green Would You Prefer, Case of Green Sukuk and Green Bonds?

Abstract

Growing environmental concerns highlight the urgent need to protect the planet and promote sustainable development. Consequently, many organizations are adopting environmentally friendly practices. Green finance helps projects that enhance environmental sustainability. Because of worldwide demand, green sukuk and bonds have grown significantly. The average yields of green bonds and sukuk differ substantially, indicating distinct return profiles. Empirical evidence suggests that green sukuk generate higher returns than green bonds. These findings imply that investors in green sukuk may achieve higher returns compared to other green finance instruments. Green sukuk may appeal to investors looking for higher returns with lower risk, those investing in non-Islamic financial jurisdictions, investors motivated by ethical or religious considerations, or those aiming to diversify their portfolio. From the issuer’s perspective, green sukuk offer higher yields than green bonds, potentially attracting a broader investor base, especially Shariah-compliant investors. When properly managed, both green bonds and green sukuk can reduce risk while enhancing returns. Green sukuk also enable non-Islamic issuers to diversify their investor base while financing environmentally sustainable projects. The findings suggest that governments should adopt innovative approaches to promote green bonds and sukuk. Given their distinct structures and limited interconnectedness, these instruments require tailored regulatory frameworks, particularly in jurisdictions utilizing Islamic finance. A comprehensive green finance strategy can enhance national risk management and sustainability outcomes.