What Islamic finance brings to climate resilience

Muhammad Al Jasser :

As ministers representing the 57 member countries of the Islamic Development Bank Group gather in Algiers for the IsDB’s 51st annual meeting, the devastating effects of climate change are impossible to ignore. Wildfires consuming entire communities, floods displacing millions of people, and heat waves claiming hundreds of thousands of lives.

Such extreme weather events are no longer anomalies; they are the new normal, threatening lives and livelihoods in the world’s most climate-vulnerable regions – especially in the Global South.

With traditional responses proving inadequate to this escalating threat, innovative finance must take center stage. According to the Intergovernmental Panel on Climate Change, as many as 3.6 billion people currently live in regions that are highly vulnerable to climate change. Between 2010 and 2020, deaths caused by floods, droughts, and storms in those areas were 15 times more frequent than in low-vulnerability regions, underscoring the severe and unequal toll of the climate crisis.

Conventional wisdom holds that for resource-dependent economies, climate action is a matter of economic survival, while for developing economies, it offers a pathway to sustainable growth and development. But many economies fall into both categories – developing and resource-dependent – compounding the challenge of designing and implementing effective climate strategies.

While a comprehensive strategy for building climate resilience is essential to strengthening developing economies’ ability to withstand shocks, resilience and adaptation must go hand in hand. For vulnerable countries, this may involve reinforcing infrastructure to protect against flooding, investing in drought-resistant crops, and diversifying income sources to reduce dependence on climate-sensitive sectors.

But conventional modes of resilience financing remain constrained, both in terms of sources and delivery mechanisms. As a result, vital social safeguards and support systems are often underfunded or insufficient. The problem is made worse by growing uncertainty over the availability of concessional financing from developed countries.

Given this reality, financial innovation must become a central pillar of climate resilience. To that end, financial institutions, governments, and other stakeholders must work together to develop new financing mechanisms aimed at protecting climate-vulnerable regions.

Encouragingly, several innovative financing funds and mechanisms have emerged to support resilience and adaptation efforts.

These include the Green Climate Fund, which provides financial assistance to developing countries; the Climate Bonds Initiative, which promotes the growth of the climate bond market; climate insurance, which helps manage and reduce climate-related risks; community-based adaptation, which enables local communities to design and implement their own adaptation strategies; and nature-based solutions, which focus on restoring and protecting natural ecosystems. Even so, such financing falls far short of demand.

Multilateral development banks play a pivotal role in delivering the financing necessary for vulnerable countries to reduce emissions and invest in adaptation projects. According to the most recent Joint Report on Multilateral Development Banks’ Climate Finance, MDBs provided a record $125 billion in public climate finance in 2023. Notably, 60% of that total – $74.7 billion – was directed to low- and middle-income countries, highlighting MDBs’ commitment to supporting those most exposed to climate risks.

The IsDB is a notable example. In November 2024, the IsDB approved $1.15 billion in financing to bolster food and water security in Kazakhstan by sustainably irrigating 350,000 hectares of land. The project aims to boost average crop yields by 30%, thereby strengthening community resilience to climate-related disasters and improving the economic well-being of 1.3 million vulnerable people.

Like other MDBs, the IsDB is grappling with the challenge of strengthening climate resilience across its 57 member countries, more than half of which are more vulnerable to climate change than the global average.

Addressing such vulnerabilities requires an estimated $75-90 billion annually through 2030 for sustainable agriculture, water, and infrastructure projects. Adaptation-related financial flows to these countries average $23.9 billion per year, leaving a 68% funding gap that the IsDB is actively working to close.

The growing supply of adaptation financing illustrates MDBs’ indispensable contribution to global climate efforts. But success should not be measured only by the amount of money disbursed; instead, it must be judged by tangible, real-world outcomes. While climate finance is growing, its effectiveness hinges on rigorous monitoring and impact assessment.

Establishing robust reporting frameworks is therefore critical to building stakeholders’ confidence and channeling more financing toward adaptation projects. To enhance their impact, MDBs should also adopt targeted results-based and policy-based financing models.
Beyond bolstering borrowers’ institutional capacity and expanding targeted financing, MDBs also have an opportunity to boost resource mobilization by attracting capital from non-conventional sources.

The IsDB’s sustainability framework is a prime example. Under this scheme, the IsDB has mobilized more than $6 billion by issuing Islamic bonds (Sukuk), attracting both Muslim and non-Muslim investors.

Rooted in asset-backing and risk-sharing, Islamic finance is inherently aligned with sustainability principles. In recent years, instruments like cooperative insurance (takaful), charitable endowments (waqf), and faith-based crowdfunding platforms have emerged as alternative sources of climate financing across the Muslim world.

Recognizing the need for targeted climate-funding solutions, the IsDB has actively promoted and supported these mechanisms. By tapping into the $4.5 trillion Islamic finance industry and adopting its asset-backed, risk-sharing model, other MDBs could expand and diversify their funding sources, enabling them to support adaptation and mitigation initiatives in the world’s most vulnerable regions.

But the time for pilot projects and piecemeal interventions is over. To build a sustainable, climate-resilient future, MDBs must urgently scale high-impact solutions, embrace financial innovation, and foster global cooperation. Drawing on more than a half-century of experience, the IsDB is ready to do its part.

(Muhammad Al Jasser is Chairman of the Islamic Development Bank Group. Courtesy: countercurrents.org).