The climate crisis has moved past the point where financial systems can stay neutral. As temperatures rise and communities are pushed to their limits, capital allocation is now a moral question, not just a technical one. Addressing this scale of harm requires more than sustainability. It calls for active divestment from the industries driving the harm and active reinvestment in alternatives.
According to LSEG’s Islamic Finance Development Report, the industry now manages around USD 5 trillion in global assets, with this figure projected to reach USD 6.7 trillion by 2027. This growth matters because it represents a major pool of capital that could be directed toward climate solutions. We are living through a moment of deep alignment between Islamic principles and modern conservation of the planet.
Where the path of Shari’ah principles meets that of climate action is where we have a roadmap into the future, which involves moving away from high-carbon assets, such as coal, to a Tayyib-inspired investment paradigm.
Moving beyond compliance
Islamic finance is built on principles of fairness, compassion, and responsibility to protect life, preserve wealth, and safeguard the environment. Throughout history, Islamic finance has adapted its ethical standards when evidence showed clear harm to people or the planet. When scientific evidence on tobacco’s impacts became overwhelming, with 8 million deaths annually according to the WHO, Islamic scholars made a clear moral choice: continuing to invest in tobacco could not align with Shariah principles. Tobacco was excluded from Islamic finance portfolios.
Coal presents an even greater ethical challenge! According to the “Reassessing coal in Islamic Finance: ethical imperatives for divestment and sustainability” paper, air pollution causes about 6.7 million premature deaths each year, with coal a principal contributor. The ethical dilemma is both simple and profound: if tobacco were ruled haram for its harm to human health, how can coal, which harms both life and the environment on a greater scale, remain permissible when alternatives are readily available?
By financing coal-related industries, financial institutions risk violating the principle of Hifz al Nafs. This is why coal divestment constitutes the modern application of the prohibition of harm, shifting Islamic finance from Halal compliance toward a Tayyib framework.
Beyond this ethical imperative, coal divestment also reflects a growing economic reality.
The economic case has already turned
Coal divestment is not only ethically defensible but also increasingly financially obvious. The World Bank estimates that pollution-related damages already exceed USD 8 trillion annually worldwide, when healthcare costs, lost productivity, and infrastructure damage are accounted for. Carbon Tracker analysis suggests roughly USD 1 trillion in global coal infrastructure is at risk of becoming stranded as renewables become cost-competitive and regulatory pressure tightens.
The customer signal is just as clear, as a UKIFC consumer survey found that 90% of Islamic bank customers want products aligned with the Sustainable Development Goals, and 87% would pay a premium for them. The institutional signal points in the same direction: 78% of Islamic banks say they want to finance renewables, but only 12% have actually done so. The intent is there, but there is a clean gap in implementation.
Closing that gap is a significant opportunity for capital mobilisation. Redirecting even 5 percent of Islamic finance assets toward climate and nature solutions would unlock roughly USD 400 billion annually by 2030. Green sukuk can fund clean transport, sustainable agriculture, and utility-scale renewable energy with strict accountability across the project lifecycle. Islamic social finance instruments, including green zakat and green waqf, can channel resources directly to the communities most affected by climate change.
As an example, CIMB has already set a precedent as the first Islamic financial institution to adopt a formal coal exit policy, showing that the path exists and that others can follow it.
Toward a Just transition: an Islamic perspective
The Islamic approach to climate action is ultimately rooted in the principle of Adl or justice. It dictates that divestment from coal be implemented in a way that does not affect or destroy the people whose livelihoods depend on the industry.
In the context of Islamic finance, a just transition necessitates investments in renewable energy projects in the same regions or communities affected by the coal industry. Furthermore, social justice, which is at the forefront of Islamic finance, ensures that adopting a green economic approach does not increase inequality between the Global North and South, aligning with the fundamental principle of zakat as an aspect of the circulation of wealth. This intersection is indicative of the deep connection to the basic concept of Khilafah or stewardship. Ultimately, by leading coal divestment today, Islamic financial institutions are doing more than protecting their portfolios; they are honoring a sacred trust to preserve the Earth for generations to come.
