Sukuk and environmental challenges: evaluating the impact of climate policy uncertainty on major sukuk indices

Purpose This paper aims to investigate the dynamic interaction between global sukuk markets and climate policy uncertainty (CPU), examining how Islamic financial instruments respond to climate-related policy shifts. It explores the potential of Islamic finance to support sustainability-linked investment and contribute to ecological resilience by analyzing sukuk performance in the context of evolving environmental policies. As a result, it is aligned with the Sustainable Development Goals (SDGs), specifically SDG 13 (Climate Action), SDG 9 (Industry, Innovation, Infrastructure) and SDG 17 (Partnerships for the Goals). Design/methodology/approach The analysis uses continuous wavelet transform methods to examine time–frequency relationships between CPU and 15 sukuk indices across diverse regions from 2010 to 2024. This technique captures both short- and long-term comovement patterns, which allows an in-depth understanding of the market response to evolving policy dynamics. The results reveal nuanced responses of sukuk markets to crisis-driven events and global climate policy signals. Findings The results reveal that sukuk markets exhibit heightened sensitivity to climate policy shifts, particularly during global environmental events such as conference of the parties (COP) summits and the COVID-19 pandemic. Sukuk are especially responsive over longer time horizons, suggesting they can absorb and reflect structural sustainability concerns and are well positioned to advance sustainable finance. These findings suggest that sukuk serve as asset-backed, adaptable instruments that promote intergenerational equity, one of the principles of sustainable development described by the United Nations. Practical implications Global and regional sukuk have the potential to act as effective hedging instruments during periods of heightened climate policy uncertainty, especially as environmental awareness grows and green sukuk markets expand. These findings are particularly relevant for countries aiming to integrate sukuk into their sustainable development strategies, notably those facing high climate vulnerability. To support this, regulatory bodies should ensure that sukuk issuance and investment practices align with established environmental, social and governance standards. Social implications The findings offer valuable insights for ethical and faith-based investors who seek to align their portfolios with environmental sustainability and social responsibility. It reinforces the role of Islamic finance in advancing inclusive, values-driven investment practices. Originality/value This study presents a novel analysis of the relationship between CPU and major sukuk markets. It fills a critical gap in the sustainable finance literature by demonstrating how sukuk can serve as a bridge between Islamic finance and climate-aligned investment. In doing so, the study offers a credible pathway toward inclusive and resilient financial systems grounded in the principles of the Islamic Moral Economy framework. The paper provides original insights into how Islamic financial instruments directly contribute to achieving SDG 13, SDG 9 and SDG 17.