Green Sukuk: Sustainable Fixed Income in the Gulf

An Asset-Based Fixed-Income Instrument

Sukuk are a category of fixed-income financial instrument structured around ownership of, or entitlement to, an underlying tangible asset, pool of assets, or business activity, with investor returns generated by the performance of that underlying asset — rental income, profit-sharing, or an asset-sale-and-repurchase arrangement — rather than by a straightforward interest-bearing debt claim of the kind found in a conventional bond. This masterclass treats sukuk purely as a financial and legal structure: how proceeds are raised, how returns are generated and paid, and how the instrument functions within global capital markets. That structural distinction — return generated from an underlying asset or activity rather than from interest on a loan — is the defining mechanical feature that separates a sukuk from a conventional bond, and it is the reason sukuk require a certificate structure built around a specific underlying asset rather than a general corporate promise to repay.

In practical market terms, a sukuk functions similarly to a bond from an investor's perspective: it is issued with a defined tenor, pays periodic distributions to certificate holders (economically comparable to a bond's coupon), is typically rated by the major credit rating agencies, and is tradable in secondary markets. The structural difference sits in the legal and financial architecture beneath the instrument, not in how an investor experiences holding it.

Because a sukuk certificate represents beneficial ownership of, or entitlement to, a defined underlying asset or activity rather than a general unsecured debt claim, sukuk issuances typically require a special-purpose vehicle to hold or manage that underlying asset pool on behalf of certificate holders, and the transaction documentation must clearly define the asset, the mechanism generating investor returns, and the arrangement for the asset's treatment at maturity. This is standard, well-established structuring practice across global sukuk markets, with legal and structuring conventions that have matured substantially since the market's early development, giving issuers and investors a well-understood template rather than bespoke structuring for every transaction.

What Makes a Sukuk "Green"

A green sukuk applies the same asset-based sukuk structure described above, but restricts the use of proceeds specifically to eligible green projects — renewable energy generation, energy efficiency, clean transportation, sustainable water and waste management, and similar categories recognised under established green-finance taxonomies. It is, functionally, the sukuk-market equivalent of a green bond: the underlying financial mechanics of the sukuk structure are unchanged, but the issuer commits contractually to directing raised proceeds toward a defined pool of green-eligible assets or projects, and to reporting on that use of proceeds over the life of the instrument.

This means green sukuk sit at the intersection of two existing, well-established frameworks rather than requiring an entirely new one: the sukuk structuring conventions that govern the underlying asset and returns mechanism, and the green-finance disclosure conventions — most influentially the Green Bond Principles, published by the International Capital Market Association — that govern use-of-proceeds tracking, project evaluation, and reporting, applied to a sukuk wrapper instead of a conventional bond wrapper.

Green Bond Principles Applied to Sukuk

The Green Bond Principles set out four core components that a credible green-labelled fixed-income instrument should satisfy, and green sukuk issuances are structured to meet the same four components:

1. Use of proceeds — proceeds must be allocated to clearly defined eligible green project categories, disclosed at issuance.
2. Process for project evaluation and selection — the issuer must describe how it identifies and qualifies eligible projects against its stated green criteria, including environmental sustainability objectives and any exclusion criteria.
3. Management of proceeds — proceeds must be tracked, typically through a sub-account or formal internal process, so investors can verify that funds raised are genuinely being directed to the stated eligible projects rather than general corporate purposes.
4. Reporting — issuers commit to regular reporting on both allocation of proceeds and, where feasible, the environmental impact of funded projects (for example, renewable energy capacity added or estimated emissions avoided).

Because these four components sit at the level of proceeds management and reporting rather than the sukuk's underlying legal structure, they map onto a sukuk cleanly, which is a significant reason green sukuk issuance has grown quickly once the market pattern was established — issuers did not need to invent a new instrument type, only apply an existing disclosure standard to an existing structuring convention.

Common Structuring Approaches

Sukuk are built around a small number of recognised underlying structures, each defining a different mechanical relationship between the certificate holder and the underlying asset or activity:

• Lease-based structures, where certificate holders hold a beneficial interest in a specific tangible asset, and their return is generated from lease payments made for the use of that asset over the sukuk's term, with the asset typically transferred back to the originator at maturity.
• Partnership-based structures, where proceeds fund a project or business activity directly, and certificate holders receive a return calculated as a share of the underlying activity's actual profit, rather than a fixed periodic payment — a structure that ties investor returns more directly to project performance.
• Agency-based structures, where a special-purpose vehicle appoints an agent to manage a pool of underlying assets or investments on behalf of certificate holders, distributing the resulting returns to them.

For a green sukuk, the eligible green project or asset pool typically sits inside whichever of these structures the issuer selects — a lease-based sukuk backed by a portfolio of solar assets, for example, or a partnership-based sukuk funding a renewable energy project's construction and operation. The choice of structure is driven by the issuer's asset base, jurisdiction, and investor-base preferences, and is largely independent of the green-eligibility question, which is layered on top through the use-of-proceeds and reporting commitments described above.

Market Growth: Gulf and Southeast Asia Lead

Green and broader sustainable sukuk issuance has grown into a genuinely significant segment of the global sustainable fixed-income market, with the Gulf and Southeast Asia established as the two leading regional markets — a natural pattern, since these are also the two regions with the deepest and most established conventional sukuk markets overall, giving issuers, underwriters, legal counsel, and investors in both regions existing structuring expertise to build on.

Within the Gulf specifically, the United Arab Emirates and Saudi Arabia have been particularly active, with both sovereign and corporate issuers bringing green and sustainability-linked sukuk to market as part of broader national sustainable-finance strategies. Malaysia and Indonesia anchor the Southeast Asian side of the market, with Indonesia notably among the earliest sovereign issuers of green sukuk globally, helping establish early market conventions that later issuers across both regions have built on.

The overall growth trend reflects a broader pattern in global sustainable finance: investor demand for green-labelled fixed income has grown consistently, and issuers in sukuk-active markets have responded by applying green-finance disclosure standards to an instrument type their domestic and regional investor base already understands well, rather than needing to introduce conventional green bonds as a wholly new asset class to those markets.

What it means for your organisation: if your organisation already has sukuk-issuance capability or relationships (Gulf or Southeast Asian corporates, financial institutions, or government-related entities), a green sukuk is very often a lower-incremental-effort route to sustainable-finance market access than establishing a green bond program from scratch, since the core legal structuring work is already familiar territory.

Notable Issuance Trends

Several patterns are now well established in the green and sustainable sukuk market:

• Sovereign leadership. National governments across both leading regions have issued sovereign green or sustainability sukuk, often explicitly designed to fund national climate and sustainability strategies and to establish a domestic pricing benchmark that corporate issuers can reference for their own subsequent issuances.
• Financial-institution issuance. Banks and other financial institutions across the Gulf and Southeast Asia have been active green sukuk issuers, in several cases using proceeds to build dedicated green financing and lending portfolios rather than funding a single discrete project.
• Renewable energy as the leading use-of-proceeds category. Solar and other renewable generation capacity has been the most common eligible-project category across green sukuk issuances to date, reflecting the broader global pattern in green-labelled fixed income generally.
• Sustainability-linked structures alongside pure green sukuk. A related and growing category ties the sukuk's financial terms to the issuer's achievement of predefined sustainability performance targets, rather than restricting proceeds to a defined green project pool — a structural approach that broadens sustainable-sukuk market participation to issuers without a specific eligible-project pipeline to finance.

Investor Base and Secondary-Market Liquidity

A distinctive feature of the green sukuk market is that it draws on two overlapping but distinct investor pools: conventional fixed-income investors evaluating the instrument on standard credit and yield criteria, plus a dedicated sukuk-focused investor base — regional and international — for whom the sukuk structure itself is a portfolio requirement, not simply a preference. A green label adds a third, further-overlapping pool: dedicated green and sustainable-fixed-income investors and funds with mandates specifically requiring verified green-labelled instruments. This layered demand is one reason well-structured green sukuk issuances have generally found deep enough investor interest to support meaningful order-book oversubscription, a standard indicator of pricing efficiency and secondary-market depth.

Secondary-market liquidity for green sukuk has developed alongside the growth of dedicated sustainable and green-instrument listing segments on regional exchanges, which improve price transparency and trading visibility relative to instruments held to maturity without active secondary trading. Deeper secondary-market liquidity in turn supports more efficient primary-market pricing for subsequent issuances, reinforcing the sovereign-benchmark dynamic described above.

What it means for your organisation: if you are structuring a green sukuk issuance, engage both conventional and sukuk-specialist distribution channels from the outset, and consider a dedicated sustainable-instrument listing segment where available — both materially affect achievable pricing and post-issuance liquidity.

Verification and Second-Party Opinions

Because a green label is a claim that needs independent credibility, green sukuk issuances — like green bonds — typically obtain a second-party opinion (SPO) from an independent environmental, social, and governance research provider, assessing whether the issuance's green framework genuinely aligns with recognised standards such as the Green Bond Principles and relevant green taxonomies. The SPO provider reviews the issuer's use-of-proceeds criteria, project evaluation and selection process, and proceeds-management approach, and publishes an independent assessment that investors can rely on rather than accepting the issuer's own green claims unverified.

Beyond the pre-issuance SPO, ongoing verification through post-issuance reporting review, and in some cases through the assurance mechanisms discussed in this platform's sustainability-disclosure masterclass, provides investors with continuing confidence that proceeds are being used and reported as originally committed, over the life of the instrument rather than only at issuance.

What it means for your organisation: budget for an independent second-party opinion and ongoing reporting verification as a standard cost of a credible green sukuk program, not an optional extra — institutional investors in this asset class increasingly treat an unverified green label as a material red flag rather than simply a missing nice-to-have.

Why This Instrument Matters for the Region's Energy Transition

The Gulf region's energy transition — large-scale solar deployment, nuclear generation capacity, green hydrogen production capability, grid modernisation, and water and waste infrastructure upgrades — requires capital at a scale that domestic bank lending and government budgets alone are not best positioned to provide efficiently. Deep, liquid capital markets are a more efficient mechanism for financing infrastructure at this scale, and green sukuk give regional issuers a way to access that capital specifically earmarked for eligible green projects, using an instrument type their domestic and regional investor base already understands and actively demands.

Because sukuk markets are already deep and well established across the Gulf, green sukuk also give the region a distinctive advantage relative to other emerging sustainable-finance markets: the legal, regulatory, and investor infrastructure does not need to be built from nothing — it needs the green disclosure layer added to an existing, mature instrument type. This positions Gulf capital markets to scale green and sustainable fixed-income issuance quickly relative to markets without comparable existing sukuk infrastructure, directly supporting the pace of energy-transition capital deployment the region's stated national strategies call for.

What it means for your organisation: if you are a Gulf-based infrastructure developer, utility, or financial institution planning energy-transition capital raising, evaluate green sukuk alongside conventional green bond and green loan structures from the outset — for many regional issuers it is the structurally natural, not merely alternative, financing route.

This same logic extends to project developers seeking financing for utility-scale solar, clean hydrogen, and grid-modernisation projects across the region: because the sukuk investor base is already deep and the green disclosure layer is a well-understood addition rather than a novel requirement, a green sukuk structure can often be brought to market on a shorter timeline than an equivalent green bond program in a market without comparable existing fixed-income depth. That speed-to-market advantage matters directly for capital-intensive infrastructure with defined construction timelines, where financing delays carry a real opportunity cost.

Market and Institutional Landscape

• International Capital Market Association (ICMA) — publishes and maintains the Green Bond Principles that green sukuk issuances are structured to satisfy.
• National and regional sukuk regulatory bodies — set the legal and structuring standards governing sukuk issuance in each jurisdiction, which green sukuk must satisfy alongside the green-finance overlay.
• Second-party opinion providers — the independent ESG research firms verifying green sukuk frameworks against recognised standards.
• Sovereign and corporate issuers across the Gulf and Southeast Asia — the two leading regional markets, providing both issuance volume and structuring precedent for the broader global market.
• Regional exchanges — increasingly offer dedicated sustainable and green-instrument listing segments, improving visibility and secondary-market liquidity for green sukuk alongside green bonds.

Three Scenarios → 2050

🟢 Best path: Green sukuk becomes a mainstream, deeply liquid segment of Gulf and Southeast Asian capital markets, with standardised second-party opinion practice and post-issuance reporting giving investors full confidence in the green label. The instrument channels capital at the scale the region's energy-transition strategies require, and Gulf sukuk-market depth becomes a globally referenced model for other emerging sustainable-finance markets.

🟡 Middle path: Green sukuk issuance continues growing steadily, concentrated among large sovereign and financial-institution issuers, while smaller corporate issuers face higher relative structuring and verification costs that limit broader market participation. Verification standards improve but remain inconsistent across jurisdictions.

🔴 Slow path: Green sukuk issuance growth stalls below the pace energy-transition financing needs require, verification and reporting practices remain inconsistent enough to raise investor concern about green-label credibility, and the instrument remains a niche complement to conventional financing rather than a primary transition-finance channel for the region.

What You Can Do

• If your organisation already issues conventional sukuk, evaluate a green or sustainability-linked sukuk framework as a natural extension rather than a new financing category.
• Budget for an independent second-party opinion and ongoing reporting verification from the outset of any green sukuk program.
• Track sovereign green sukuk issuances in your market as pricing and structuring benchmarks for planning your own issuance.
• If you are an investor, treat SPO quality and post-issuance reporting consistency as core due-diligence criteria, not secondary considerations.
• Compare green sukuk against green bond and green loan structures for any energy-transition capital raise — for Gulf-based issuers, it is frequently the structurally efficient default, not merely an alternative.