Faced with the growing challenges of climate change, reducing carbon dioxide (CO2) emissions has become a global priority. Achieving this goal requires mobilizing green finance through instruments such as Green and Sustainable Sukuk (GSSs). This study aims to investigate the effect of the issuance of GSSs on CO2 emissions and examines how institutional quality moderates this relationship.
The study uses panel data from 12 countries that issued GSSs between 2017 and 2024. To examine the moderating effect, an interaction term is included in a dynamic panel model estimated using the two-step system Generalized Method of Moments. The moderation hypothesis is tested by adding a multiplicative term between the independent variable and the moderator to the regression specification.
Three main findings emerge from the analysis. First, the direct effect of GSS issuance on CO2 emissions is not statistically significant. Second, institutional quality, particularly Regulatory Quality and the Rule of Law, has a negative and significant effect, indicating that stronger institutional frameworks contribute to lower CO2 emissions. Third, the interaction between GSS issuance and institutional quality is positive and significant, suggesting that in countries with higher institutional quality, GSS issuance is associated with a slight increase in CO2 emissions rather than a reduction. This counterintuitive result may reflect rebound effects or the financing of projects that provide only partial or transitional environmental benefits.
The results indicate that GSSs are not an automatic mechanism for reducing CO2 emissions. Their environmental effectiveness depends on the quality of the institutional and regulatory framework. Therefore, policymakers should integrate clear environmental criteria into GSS design, strengthen monitoring and oversight mechanisms, and ensure alignment with national energy transition strategies.
The originality of this study lies in examining the relationship between green Islamic finance, particularly GSS issuance, and CO2 emissions, with a specific focus on the moderating role of institutional quality. To the best of the author’s knowledge, this is the first empirical study to directly link GSS issuance, institutional quality and carbon emissions. The study therefore provides new insights into how green Islamic finance instruments interact with institutional frameworks to influence environmental outcomes.
