The Role of Islamic Green Finance in Accelerating the Green Economic Transition in Indonesia

A Comprehensive Analysis of Instruments, Regulations, and Ecological Justice.

Abstract

Climate change and the need for a transition to a green economy require the mobilization of large-scale financing, while Indonesia’s conventional fiscal capacity has limitations in meeting the funding needs for mitigation and adaptation. In this context, Islamic Green Finance (IGF) holds strategic potential because it integrates the principles of environmental sustainability, social justice, and Sharia values. This study aims to comprehensively analyze the role of IGF in accelerating the green economic transition in Indonesia by examining the development of financing instruments, regulations, sectoral allocation mechanisms, and dimensions of ecological justice. The study employs a mixed-methods approach through a Systematic Literature Review (SLR) following the PRISMA 2020 protocol, conceptual bibliometric analysis, and a synthesis using the Analytic Network Process–Benefits, Opportunities, Costs, and Risks (ANP-BOCR) framework.

The study’s findings indicate that Indonesia’s IGF ecosystem is developing through three main pillars: Sovereign Green Sukuk, sukuk-based corporate financing, and Islamic social finance instruments such as Cash Waqf-Linked Sukuk (CWLS) and Green Zakat. These instruments play a role in mobilizing capital for sustainable development while strengthening the dimensions of social inclusion and equity. However, the study also identified an allocation paradox, particularly the high concentration of Sovereign Green Sukuk in the sustainable transportation sector, while financing for the renewable energy and decarbonization sectors remains very limited. From an institutional perspective, the TKBI and its harmonization with the ASEAN Taxonomy for Sustainable Finance strengthen governance and mitigate the risk of greenwashing, while MUI Fatwa No. 86 of 2023 provides ethical and religious legitimacy for climate change mitigation efforts. These findings indicate that IGF has the potential to serve as a catalyst for Indonesia’s green economic transition toward Net Zero Emissions by 2060; however, its effectiveness requires diversification of the sukuk portfolio, strengthening of Islamic blended finance, increased financing for renewable energy, and reinforcement of mechanisms for monitoring climate impact and climate justice.