Sukuk and green bonds in the context of sustainable finance: an empirical analysis

Abstract

As the climate crisis intensifies, the transition toward a sustainable economy has become increasingly urgent. This study investigates the dynamic interconnections between Islamic financial instruments, specifically sukuk differentiated by credit ratings, and sustainable finance assets, namely green bonds and clean energy indices. It aims to assess the degree of convergence between Islamic finance and sustainable finance frameworks and to evaluate whether sukuk can contribute to environmental objectives while offering diversification benefits to investors. This study uses an empirical framework based on daily data covering the period from April 30, 2015, to May 1, 2025. The Quantile-on-Quantile (QonQ) methodology is used to capture heterogeneous dependence structures across different market conditions, allowing for the identification of nonlinear and asymmetric relationships across the entire conditional distribution. Sukuk are classified according to credit ratings (AAA, AA, A and BBB) to examine heterogeneous linkages with green bonds and clean energy markets. The results are further illustrated using three-dimensional surface plots. The empirical results show that highly rated sukuk (AAA and AA) exhibit weak and nonlinear dependence with green bonds, indicating limited integration across market conditions. In contrast, lower-rated sukuk (A and BBB) display relatively stronger and more state-dependent relationships, suggesting higher sensitivity to developments in sustainable finance markets. The interactions with clean energy indices remain generally weak and unstable, reflecting limited and heterogeneous integration. Overall, the findings suggest a partial and asymmetric convergence between Islamic finance and sustainable finance systems. The results provide relevant insights for investors, policymakers, regulators and Islamic financial institutions. Investors may benefit from including sukuk particularly lower-rated instruments in diversified portfolios alongside sustainable assets to enhance risk-adjusted returns. Policymakers and regulators may use these findings to promote deeper financial integration and support the development of sustainable Islamic finance instruments such as green sukuk. Islamic financial institutions and issuers can leverage these insights to design innovative Shariah-compliant products aligned with sustainability objectives. This study provides novel empirical evidence on the nonlinear and asymmetric relationships between sukuk, green bonds and clean energy markets using the QonQ approach. It contributes to the literature by incorporating credit rating heterogeneity and highlighting the conditional nature of interdependence across market states. The results advance the understanding of the convergence between Islamic finance and sustainable finance frameworks.