The recent COP29 conference in Baku has underscored the critical need for innovative financial mechanisms to tackle the daunting challenges climate change poses, particularly in developing economies that are most vulnerable to its impacts. As nations grapple with the realities of extreme weather patterns, rising sea levels, and agricultural disruptions, Islamic finance emerges as a promising avenue for fostering sustainable development and enhancing climate resilience.
Climate change poses severe challenges for developing economies, where adverse impacts threaten both stability and growth. The need for effective climate adaptation and mitigation strategies has never been more urgent. Islamic finance, emphasizing principles rooted in ethical investment, risk-sharing, and social justice, offers a vehicle through which these nations can navigate the complexities of climate change while adhering to the Sustainable Development Goals (SDGs).
One of the key tenets of Islamic finance is compliance with Shariah law, which prohibits interest (riba), excessive uncertainty (gharar), and investments in harmful activities. Instead, it promotes structures that focus on profit-sharing, asset-backed financing, and socially responsible investments. This alignment with sustainable development makes Islamic finance particularly suitable for funding climate-resilient initiatives.
At COP29, a historic commitment was made by developed countries to provide “at least” $300 billion annually to support climate resilience in developing nations by 2035. This funding is essential for helping vulnerable economies adapt to the impacts of climate change while pursuing sustainable growth. The outcomes from COP29 highlight a keen emphasis on diversifying financial sources, and Islamic finance is well-positioned to contribute meaningfully.
There are various ways Islamic finance can be applied to climate adaptation strategies. Foremost among them is the investment in resilient infrastructure. Developing countries urgently require infrastructure capable of withstanding climate impacts. Green sukuk (Islamic bonds) can be instrumental in financing projects aimed at bolstering climate resilience—like flood defenses, renewable energy installations, and sustainable agriculture initiatives. Such financing tools enable investors to support projects with direct positive implications for climate change mitigation.
Another crucial area is sustainable agriculture, which is vital yet highly vulnerable in many developing nations. Islamic finance can significantly promote sustainable agricultural practices through Mudarabah (profit-sharing) and Musharakah (joint venture) agreements. These partnerships encourage collaboration between investors and farmers, fostering investments in climate-resilient crops and efficient water management methods.
Islamic microfinance also plays a transformative role in empowering small-scale farmers and businesses. By providing funds for climate-adaptive technologies and practices, Islamic microfinance strengthens community resilience. This financial model, based on risk-sharing and ethical investment principles, supports initiatives that uplift local populations while mitigating climate impacts.
In the realm of energy transition, Islamic finance can contribute by facilitating renewable energy projects. The adoption of green sukuk and Istisna (construction financing) contracts can foster the development of solar, wind, and hydroelectric power projects. By supporting this transition, developing countries can reduce their reliance on fossil fuels while enhancing their energy security, crucial given the rising threats of climate change.
As COP29 has emphasized, collaborative efforts are necessary for effectively utilizing Islamic finance for climate adaptation and mitigation. It is essential for stakeholders—including governments, financial institutions, and international organizations—to work together to create an enabling environment. This involves developing supportive regulatory frameworks, providing incentives for green investments, and raising awareness about the benefits of Islamic finance for sustainable development.
To enhance financial inclusion and social equity, Islamic finance is uniquely positioned to tackle climate challenges in developing economies. Its focus on empowering underserved populations can make a significant difference in climate resilience. Moreover, initiatives like zakat (obligatory almsgiving) and waqf (endowments) can provide much-needed funding for social welfare programs aimed at supporting vulnerable groups facing climate-related challenges.
In conclusion, the discussions and agreements forged at COP29 reinforce the imperative for innovative financing solutions to confront climate change, particularly in developing economies. Islamic finance, with its ethical frameworks and alignment with sustainability, presents a unique opportunity to fund initiatives that drive resilience and adaptation in the face of ongoing environmental challenges. By leveraging these financial instruments and fostering collaboration, we can pave the way for a sustainable future that empowers communities and enhances their resilience to climate impacts. As we continue to confront the realities of climate change, integrating Islamic finance into broader climate strategies holds promise for creating a more equitable and sustainable world.
The author is the Managing Director & CEO of National Bank Limited. He is a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also a post-graduate diploma from the Institute of Islamic Banking & Insurance (IIBI), United Kingdom.
Messenger/EHM
