Green Sukuk and Capital Adequacy in Islamic Banks: The Role of ESG Risk Management

Abstract : This paper will identify the impact of Green Sukuk practices and ESG risk management on the strength of capital adequacy in the Islamic banks within Iraq. The research is founded on a quantitative survey design with a sample of 250 respondents in departments related with risk management, credit, investment, Shariah supervision, compliance, internal audit, finance, treasury and governance. The research model will be comprised of three independent variables which are Green Sukuk awareness and adoption preparedness, Green Sukuk governance and Shariah compliance, and ESG risk management practices. The dependent variable is the capital adequacy strength. These findings confirm that the questionnaire is highly valid and reliable because the overall KMO value was 0.914 and the 0.901 Cronbach Alpha of the overall instrument. Descriptive results indicate high levels of Green Sukuk readiness, Shariah governance, ESG risk management and capital adequacy strength. The regression result shows that all the independent variables have strong and positive impact on the capital adequacy strength with the strongest impact made by the ESG risk management practices. These conclusions imply that Islamic banks can enhance their capital adequacy, not only by using customary prudential instruments, but also by being sustainable finance ready, good Sukuk governance, and systematic ESG risk integration. This is in line with the recent Islamic finance evidence that indicates that Green Sukuk are becoming an important sustainable finance instrument, and that the Islamic banking sector remains reliant on strong capital buffers, regulatory soundness and effective risk governance.