Climate challenges & potential of Green Sukuk

The Sukuk market has evolved from a specialist segment of Islamic finance into a major component of global capital markets, combining Shariah principles with sovereign, infrastructure and corporate financing. Sukuk differ conceptually from conventional interest bearing bonds because investors participate through rights linked to assets, usufruct, services or permissible financing arrangements, while returns are generated through Shariah acceptable structures such as Ijarah.

The green Sukuk model adds a second discipline by requiring proceeds to be directed toward projects with identifiable environmental benefits. This combination is increasingly relevant for sovereign borrowers seeking to broaden their investor base by financing climate adaptation, renewable energy and resilient infrastructure.

The global Sukuk market surpassed USD 1.015 trillion in outstanding instruments in 2025, but total issuance during that year reached USD 262.9 billion. Sovereign issuers accounted for USD 137.5 billion, or 52.3 percent, demonstrating that Sukuk have become a mainstream public financing instrument rather than a peripheral Islamic finance product.

The Pakistani Sukuk framework has developed over almost two decades. The Government of Pakistan Ijara Sukuk Rules, 2008 established the regulatory basis for sovereign Ijarah issuance, However, State Bank arrangements made these securities tradable, eligible for statutory liquidity requirements and available through the domestic financial system. The original framework allowed rental payments linked to market benchmarks and gave Islamic banks an important sovereign liquidity instrument.

The government has subsequently expanded maturities, structures and auction arrangements, including issuance through the Pakistan Stock Exchange. Islamic instruments represented 14 percent of total government debt securities by December 2025, compared with 12.6 percent in June 2025, indicating a gradual shift toward greater use of Islamic public financing.

The Sustainable Investment Sukuk Framework now extends this architecture to Green Sukuk, Social Sukuk and Sustainability Sukuk aligned with Pakistan’s National Adaptation Plan, National Climate Change Policy, Nationally Determined Contributions and National Climate Finance Strategy.

The inaugural transaction represented more than another government borrowing operation. Pakistan issued PKR 32 billion of three year listed Variable Rental Rate Government of Pakistan Ijarah Green Sukuk under the Sustainable Investment Sukuk Framework. The auction was conducted on 16 May 2025 with settlement on 19 May 2025 and maturity on 19 May 2028. The government initially targeted PKR 30 billion, but bids reached approximately PKR 161.74 billion, more than five times the target, showing substantial investor appetite for a sovereign Islamic instrument carrying an environmental mandate.

The importance of this response should not be overstated as proof of a distinct green pricing advantage, because demand for sovereign Sukuk in Pakistan is already strong, but it does demonstrate that environmental designation did not impair marketability and could support a larger sustainable finance program.

The allocation strategy concentrates the proceeds in three infrastructure projects distributed across Balochistan, Sindh and Gilgit Baltistan. The Garuk Storage Dam in Kharan is designed to improve water storage, irrigation, water availability and drought resilience in an arid region. Physical completion stood at 81.68 percent when the report was prepared.

The Naigaj Dam in Sindh combines water infrastructure with 4.2 MW of hydropower, flood mitigation, improved water quality in Manchar Lake and biodiversity protection, but physical progress was only 48.30 percent and the current fiscal year disbursement remained pending.

The 26 MW Shagarthang Hydropower Project in Skardu is a run of river renewable energy scheme intended to reduce fossil fuel dependence and improve electricity access in mountainous areas. Its physical progress was 32.11 percent, with completion targeted for October 2027.

The expenditure classification also demonstrates that the portfolio is not simply labelled green at an aggregate level. Garuk is classified primarily under water resource management with climate adaptation as an additional category.

Naigaj is primarily a water resource management project with renewable energy as a secondary category and biodiversity and adaptation benefits. Shagarthang is primarily a renewable energy project with water resource management as its secondary classification.

The structure is important because green finance credibility increasingly depends on demonstrating a traceable relationship between financing and eligible expenditure. The report states that the Sukuk finances eligible portions of government expenditure rather than the entire cost of each project, and allocations may relate to expenditure incurred during either the current or preceding fiscal year. This is internationally accepted in use of proceeds financing, although the government should distinguish clearly between refinancing existing expenditure and generating genuinely additional investment.

The most important financial finding is that only PKR 11.256 billion of the PKR 32 billion issuance had been allocated through cumulative eligible expenditure for fiscal year (FY) 2024 to 2025 and FY 2025 to 2026 at the reporting date. This represents approximately 35% of the issuance, leaving PKR 20.744 billion, or approximately 64.8 percent, still to be allocated.

The detailed project table shows a combined federal share of PKR 70.023 billion, a FY 2025 to 2026 budget allocation of PKR 3.172 billion, actual FY 2025 to 2026 expenditure of PKR 1.860 billion and FY 2024 to 2025 expenditure of PKR 9.396 billion. These figures reveal the fundamental policy issue in the inaugural transaction like mobilizing capital proved easier than converting that capital into eligible expenditure at comparable speed.

The Garuk project records a federal share of PKR 4.669 billion, a FY 2025 to 2026 budget of PKR 1.672 billion, current year expenditure of PKR 913 million and previous year’s expenditure of PKR 4 billion. Its expected remaining funding requirement is approximately PKR 1.666 billion, with completion currently expected in June 2027.

The Naigaj project is substantially larger, with a federal share of PKR 46.980 billion, a current year budget of PKR 500 million and previous year expenditure of PKR 3.039 billion but recorded zero current year Sukuk eligible disbursement. Its remaining requirement is approximately PKR 22 billion and expected completion is June 2028, although the report expressly warns that the date may change because of low physical progress and the approval process for a revised PC 1.

The report however records PKR 182.777 million of bridge financed expenditure, comprising PKR 175.884 million from WAPDA Water Wing and PKR 6.893 million from other project receipts, which is intended for later PSDP reimbursement.

The Shagarthang project carries a federal share of PKR 18.374 billion, a FY 2025 to 2026 budget of PKR 1 billion, current year expenditure of PKR 947 million and previous year expenditure of PKR 2.357 billion, however, its remaining funding requirement is estimated at approximately PKR 12.570 billion. The composition of expenditure is also revealing.

Approximately 60 percent of Garuk spending relates to core infrastructure, including the main dam body, spillway, conveyance system and water supply to Kharan City, but 40 percent covers mobilization, escalation, consultancy, security, management and contingencies.

Naigaj allocates 82.68% to civil work and 17.32% to salaries, administration, overheads and consultancy. Shagarthang directs 94.02 percent toward principal project works and ancillary buildings, leaving only 5.98 percent for operating expenditure, consultancy and land compensation.

The development impact is potentially substantial if the projects reach completion and the expected benefits are independently verified. Garuk has a planned storage capacity of 65.41 million cubic metres, irrigation coverage of 5,059 hectares, direct benefits for 216,437 people, expected groundwater recharge of 9.14 million cubic metres annually and a Climate Resilience Index target between 50 and 60, classified in the report as the moderate resilience band.

Naigaj is expected to provide 4.2 MW of hydroelectric capacity and 17.67 GWh of annual clean electricity generation by supporting approximately 22,962 hectares of sustainable water management. Its environmental objectives also include reduced salinity through controlled diversion and improved management of aquatic and riparian ecosystems around Manchar Lake.

One reporting weakness should be corrected in future editions because the Sustainable Development Goals table cites 22,961 hectares whereas the detailed impact table cites 22,962 hectares.

The Shagarthang project provides the strongest quantified climate mitigation case in the portfolio. It is expected to add 26 MW of renewable generation capacity, produce 160.39 GWh of electricity annually, avoid approximately 82,000 tonnes of carbon dioxide equivalent emissions each year and provide electricity to around 40,000 households or consumers.

Approximately 300 people are expected to be employed during implementation, around 100 were already engaged when the report was prepared, and 100 permanent positions are expected after completion. Taken together, Naigaj and Shagarthang represent 30.2 MW of planned renewable capacity and approximately 178.06 GWh of expected annual clean generation. The combined water management area reported for Garuk and Naigaj is approximately 28,021 hectares when the detailed project indicators are aggregated.

The Sustainable Development Goal mapping adds a useful policy layer by linking the portfolio with SDG 6 on clean water and sanitation, SDG 7 on affordable and clean energy, SDG 2 on food security, SDG 13 on climate action and SDG 15 on terrestrial ecosystems. The difficulty is that most impact numbers remain expected values rather than realized outcomes.

The report itself repeatedly states that achievement will be assessed and confirmed after project completion. This distinction is fundamental. Green finance credibility depends not only on allocating money to environmentally relevant projects but on demonstrating measurable additional outcomes through consistent baselines, methodologies and independent verification. The undefined Manchar Lake water quality improvement index is a particular area where future reporting should establish a measurable baseline before claiming impact.

The international comparison shows both the opportunity, and the distance Pakistan still has to travel. Indonesia began sovereign green Sukuk issuance in 2018 with a USD 1.25 billion global transaction and subsequently developed international, domestic retail and domestic wholesale green Sukuk programs.

By the end of 2024 its cumulative global sovereign Green Sukuk issuance had reached USD 6.60 billion, domestic retail issuance approximately USD 2.78 billion and domestic wholesale issuance approximately USD 2.11 billion, giving a combined scale of about USD 11.49 billion. Malaysia has taken a different but equally instructive route by building a deep Sustainable and Responsible Investment Sukuk ecosystem that combines regulation, external review and incentives.

Outstanding Malaysian SRI Sukuk increased from approximately USD 1.3 billion in 2020 to USD 12.9 billion in 2025. Malaysia also allows eligible issuers to obtain support covering up to 90 percent of certain external review costs, subject to prescribed limits, strengthening verification rather than relying solely on issuer assertions.

The comparison suggests that Pakistan’s transaction has several economically relevant advantages without establishing that issuance alone constitutes policy success. Local currency financing reduces direct sovereign foreign exchange exposure, Shariah compatibility broadens the domestic institutional investor base, listing improves market visibility, and project linkage can strengthen public accountability.

The report also states that expenditure data were verified by Principal Accounting Officers and the Auditor General of Pakistan, which is an important governance safeguard. The principal concern is execution. Approximately 65% of proceeds remained unallocated at the reporting date, Naigaj had no current fiscal year disbursement under the reported allocation, two projects had physical progress below 50%, and most environmental outcomes remain prospective.

The government therefore has a promising financing mechanism, but its development value ultimately depends on project readiness, allocation speed, measurement quality and completion performance rather than issuance volume.

The policy options that most directly address these risks would begin with a stronger project readiness filter before future issuance. Projects should ideally possess approved PC 1 documentation, procurement readiness, land availability, environmental approvals, credible completion schedules and measurable impact baselines before entering the Green Sukuk pool.

An essential green project registry and systematic green budget tagging could create a larger pipeline spanning renewable energy, grid modernization, energy efficiency, urban transport, wastewater treatment, climate resilient agriculture, water conservation and flood protection.

Pakistan could also develop recurring three year, five year and ten year Green Sukuk benchmarks, combined with retail instruments similar to Indonesia, rather than treating sustainable Sukuk as occasional transactions. The government should publish the pricing difference between comparable Green Sukuk and ordinary government Sukuk so that policymakers can determine whether a measurable financing advantage is being achieved.

The reporting architecture should also be strengthened through annual independent environmental assurance in addition to financial audit verification. Each project should disclose baseline conditions, allocation dates, implementation milestones, revised costs, expected and realized emissions reductions, water outcomes, beneficiary methodology and any changes in project scope.

Proceeds that cannot be deployed within a shorter operational target should be temporarily managed under clearly disclosed treasury rules, but delayed projects should face predefined replacement triggers.

The report already confirms that the government may reallocate or replace a project during the Sukuk tenor when progress is delayed, and that the remaining PKR 20.744 billion must be allocated within 24 months of issuance. Pakistan could strengthen this mechanism by making reallocation criteria transparent before issuance and by favoring projects capable of absorbing financing without administrative delay.

Therefore, focus on converting an innovative financing instrument into a permanent climate finance platform. The inaugural PKR 32 billion Green Sukuk has exhibited strong market demand, regional project coverage, compatibility with Islamic finance and the capacity to connect sovereign borrowing with measurable development objectives.

The allocation report also exposes the issues that the next phase must solve, slow absorption, incomplete project readiness, concentration in only three projects, reliance on expected rather than realized impact, and uneven metric definition. Pakistan can draw from Indonesia’s recurring sovereign program and Malaysia’s regulatory and verification ecosystem by developing a model suited to its own domestic investor base and climate vulnerabilities.

The most consequential measure of success will not be how much Green Sukuk Pakistan issues, but how efficiently each rupee moves from investor capital into completed infrastructure that produces verified water security, renewable electricity, emissions reduction, resilience and economic value. Under that discipline, Green Sukuk can become an important component of Pakistan’s debt management and climate finance strategy rather than merely another sovereign borrowing label.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws.  He holds an LLD in tax laws with specialization in transfer pricing.

He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.

He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).

He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024),  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan.

His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer.

His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

The recent publication, coauthored by these writes with Huzaima Bukhari is:                       

Pakistan Tackling FATF: Challenges & Solutions, available at:

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35

https://www.amazon.com/dp/B08RXH8W46