Green Sukuk, Islamic Green Financing: A Lesson Learned From Indonesia

Background

Indonesia is home to 10% of the world's tropical forests and 36% of the world's tropical peatlands. As the largest archipelagic country in the world consisting of more than 17,508 islands that has various natural resources and high diversity, Indonesia has great potential to be influenced by the negative impacts of climate change. Climate change presents significant risks to health, livelihoods, food security, water supply, energy, human security and economic growth. Furthermore, Indonesia’s position close to the global ocean conveyor system makes it particularly vulnerable to natural disasters that will likely to be exacerbated by climate change.

Therefore, Indonesia considers climate mitigation and adaptation efforts as an integrated concept that is essential for building resilience in safeguarding food, water, and energy resources. Its extensive tropical landscape and seascape with high biodiversity, high carbon stock values, and energy and mineral resources are all contributing factors for this country to be at the forefront of climate action and environmental protection. As one of the first to ratify the Paris Agreement and has shown ambition in putting forward its Nationally Determined Contribution (NDC), by 2030, Indonesia pledges to reduce greenhouse gases emissions 29% up to 41% and to improve its climate resilience.

Absolutely, Indonesia is facing challenges in maintaining its status as one of the megadiverse countries in the world due to threats such as deforestation. Indonesia’s strong commitment to the environment and climate change issues, as well as biodiversity, could be achieved through comprehensive and coherent policy development, institutional strengthening, technology innovation, social-cultural approaches, and improved financial and funding mechanisms. Muktiyanto (2019), Buana and Musari (2020), Musari (2020a) admitted that there is a financial gap between the funding needs and funding sources currently available to support the Government of Indonesia (GoI) commitment to finance climate change activities.

Globally, UN ESCAP (2014), Tamura and Yu (2015), Yu (2016), Puig, Olhoff, Bee, Dickson, and Alverson (Eds.) (2016), SC & World Bank (2019) highlighted also that a goal for climate change adaptation represents a challenge with local, national, and international dimensions. Developing countries have to find strategies to scale up domestic climate finance through alternative financial sources that can bridge the finance gaps and to strengthen market incentives and financing access for sustainable energy investments and climate mitigation and adaptation. The financial sector has an integral role to play given the scale of the financial resources required to support climate mitigation and adaptation initiatives. Given the strain on government budgets, both public and private sector finance have to be involved through innovative instruments to ensure that finance corresponds to the priorities and needs of recipient countries and communities, and results in sustainable outcomes.

In order to tackle climate change and greenhouse gas emissions, one of the instruments issued by the GoI is green sukuk. Moghul and Safar-Aly (2014), Alam, Duygun, and Ariss (2016), Morea and Poggi (2017), World Bank (2017), Ramadhan and Wirdyanigsih (2020), Wahab and Naim (2020), Musari (2020d) recognized that green sukuk as investment instrument for sustainable development have become increasingly popular in the recent past as part of socially responsible or impact investment strategies of countries and companies alike. Referring to IMF (2015), sukuk might fulfil the funding gap for infrastructure. Sukuk is considered as suitabled to finance the infrastructure because of their risk-sharing features, therewith supporting to fill financing gaps in developing countries.