We think we all know what finance is and what uses it offers. The concept of “sustainability,” which was first coined in 80s, focuses on the continuity of production and diversity, along with providing a future in which humankind will live in health and peace. What we call sustainability is preventing the exhaustion of existing resources and transferring such resources to future generations. In this sense, the main goal of sustainability efforts is to leave a world to new generations where environmental and social conditions can be reasonably sustained.
If these two terms were combined five or ten years ago, we suppose we would probably have called it “an oxymoron”[1] and asked “what’s the relevance?” When we spoke of the term finance, and project finance in particular, we used to think of it as financing mega infrastructure and energy projects that may have substantial negative impacts on the environment or, at least, whose environmental impacts are controversial. Many projects, such as bridges, highways, railways, airports, hospitals, dams and power plants that further expand our carbon footprint, were financed in the last decade and, in the meantime, project finance experienced its golden age in Türkiye.
So, what happened to turn the tables? The financial sector, which was seen as a barrier to sustainability, especially environmental sustainability, has become the driving force and pioneer of it. In parallel to the awakening in the modern world, concerns about global warming and climate change and their impact on the survival of living beings have rapidly grown and become much more vocal in Türkiye. Renewable energy, clean energy and energy efficiency have been increasingly emphasized. All this awareness led to the emergence of a low carbon economy.[2] [3] The emergence of an “economy” with respect to a particular area also brings with it the “need for financing.” Thus, with banks and other financial institutions taking the lead and the government taking the necessary legislative steps, the concept of “sustainable finance” began to emerge and gain meaning in Türkiye. This rendered the joint use of the concepts of “finance” and “sustainability,” no longer an “oxymoron.”
Though it is a concept that emerged as a result of increased environmental sensitivity, we may broadly define sustainable finance as financing that is sensitive to environmental, social and corporate governance principles.
In fact, it is quite natural for the financial sector to become a pioneer in achieving sustainability goals and raising awareness in the field of sustainability, regardless of the oxymoron formed when these terms are used together. It may be hard to admit, but most of us are too lazy or at least not as willing to step out of our comfort zone and take on a new challenge that is laborious or costly, even if the results could be rewarding. Most of us need someone to encourage (or even push) us to try something new. This applies not only to us, but also to companies and other players in the economy. Most players are not eager to make a new investment and reduce their negative impact on the environment, to contribute socially to the community in which they live, to change their corporate governance, to be more transparent and fair, and to create a fairer and more dignified life in their ecosystem. However, there is also the reality that most enterprises do not have enough capital to realize or expand their economic activity and most enterprises need external resources (financing) to do so. At that stage, the fact that external resource providers use the fulfilment of sustainability-related obligations as an incentive in terms of sourcing, or at least in the pricing of sourcing, encourages enterprises to take positive steps towards sustainability, albeit reluctantly at first. With each new sustainable finance transaction, awareness becomes more widespread and internalized. Therefore, the financial sector provides a great incentive and, in some cases, a compelling force in opening perceptions about sustainability, raising awareness and, most importantly, ensuring sustainability.
The financial sector has begun to play this role much more strongly in Türkiye over the last few years. Not so long has it been since the first green bond issued by Türkiye Sınai Kalkınma Bankası (Industrial Development Bank of Türkiye) in 2016 and the first Turkish sustainability-linked loan facility in 2019. Yet, we have witnessed a large number of sustainability-focused financing transactions, in loans, bonds and other debt instruments as well. Numerous Turkish financial institutions and other enterprises have raised substantial financing from Türkiye and abroad, promising to fulfill a wide range of sustainability-related commitments. A report published by Amundi and the International Finance Corporation (IFC) analyzing sustainable financing developments in emerging markets suggests that Türkiye’s sustainable financing potential is expected to increase with sustainable energy investments. Türkiye aims to decrease its primary energy consumption by 14% thanks to investments amounting to USD 10.9 billion, which it aims to make by 2023, according to the National Energy Efficiency Action Plan approved on 1 January 2018. This means that Türkiye needs to emphasize sustainable financing to fulfil its environmental commitments, while also achieving economic growth targets and ensuring that sustainable financing investments will grow in volume in the medium term.
The public authority has begun to establish the necessary legislative infrastructure, while the financial sector and the private sector in general have resumed their pioneer efforts in sustainability. The first step in this regard was taken by the Capital Markets Board (the “CMB”). The CMB amended the Corporate Governance Communiqué in October 2020 and determined the sustainability principles to be applied to publicly traded companies to ensure that public companies take concrete steps to ensure sustainability, and thus published the Sustainability Principles Compliance Framework. Although publicly traded companies’ compliance with these principles is still voluntary, the fact that compliance with these principles will be reported and disclosed publicly will enable these companies to use sustainability as a tool to enhance their corporate reputation and this, in turn, will allow sustainability to be seen as an incentive.
The second step regarding legislation on sustainability was also taken by the CMB. The CMB submitted the Draft Green Debt Instruments and Green Lease Certificates Guidelines for public consultation on 3 November 2021, which will regulate the principles regarding green debt instruments and lease certificates (Turkish sukuk) that can be issued to finance investments contributing to sustainability. The draft guidelines regulate the principles and their issuance processes for green debt instruments and green lease certificates based on the International Capital Markets Association’s Green Bond Principles, which have become the global standard in the field of green bonds. It also sets out the conditions that must be met for debt instruments and lease certificates to be labeled “green” as follows:
- In the framework document, the issuer will be required to undertake that the issuance will be carried out in accordance with the principles set out in the guidelines.
- Funds raised from issuance will be used for financing green projects or refinancing, as specified in the framework document.
- An external evaluator will need to confirm that the issuance complies with the guidelines.
The Ministry of Treasury and Finance recently joined the sustainability legislation mobilization. The ministry published the Sustainable Financing Framework Document on its website on 12 November 2021 to set standards for green, social and sustainable transactions in financial markets. The framework document sets out the standards for sustainable financing instruments to be issued by the public sector (including all green, social or sustainable bonds, loan and other debt instruments) and the green and social projects eligible for financing. The framework document was also issued in accordance with the guidelines and principles of the International Capital Markets Association and the Loan Markets Association on green and sustainable financing instruments, with guidance from ING and Standard Chartered Bank. The Ministry also published the second-party opinion of an international assessment company (Sustainalytics) on its website together with the framework document. The opinion confirms that the framework document is reliable, effective and in line with the principles of the International Capital Markets Association. The framework document will apply to all sustainable finance instruments issued by the Republic of Türkiye and the standards in the framework document will apply until the redemption date of these sustainable finance instruments. That being said, three types of financing instruments are regulated in the framework document:
- Green financing instruments: instruments where the net proceeds generated from the issuance will be used to finance (or refinance) eligible green project categories and eligible expenditures
- Social financing instruments: instruments where the net proceeds generated from the issuance will be used to finance (or refinance) eligible social project categories and eligible expenditures
- Sustainable financing instruments: instruments where the net proceeds generated from the issuance will be used to finance (or refinance) expenditures that fall into both the eligible green project and eligible social project categories and have eligible conditions
The framework document categorizes projects in line with the United Nations Sustainable Development Goals, while setting out eligibility criteria for green and social projects. Eligible green project categories under the framework document include renewable energy, energy efficiency, sustainable water and wastewater management, prevention and control of pollution, clean transportation, products and production technologies, and green construction projects eligible for the circular economy. Eligible social project categories include access to basic services (health, emergency relief and education), socioeconomic progress and empowerment, and affordable basic infrastructure services and housing projects.
As we mentioned above, in recent years, both the private sector’s interest in sustainability and the public sector prioritizing sustainability in financing transactions, including financing that will be provided by the public sector itself, has shone the spotlight on sustainability and the decisive role of finance in the field of sustainability in Türkiye. Although awareness of sustainability is mostly focused on environmental sustainability, the perception of sustainability in terms of social and corporate governance is also emerging. The “Public-Private Partnership” that emerged of its own accord in the field of sustainability with all these efforts is admirable. However, sustainability initiatives now need to reach an integrated accession. The legislative work being carried out by separate branches of the public sector, such as the CMB and the Ministry of Treasury and Finance, must be transformed into a process where all legal aspects of sustainability, including taxation, are addressed as a whole. In addition, legal regulations must be legislated in such a way that it is a necessity/obligation in various respects to abide by sustainability, instead of it being merely an incentive or a reward, if achieved.
[1] The use of two contradictory or completely opposite concepts together and an expression formed in this way.
[2] Low carbon economy is a model that provides the necessary energy in all economic activities that occur in the production-consumption chain in an economy in a manner that leads to the lowest level of carbon emissions.
[3] Various countries have introduced “carbon tax” which is levied on carbon emissions. Accordingly, they set a price that emitters must pay for each ton of greenhouse gas emissions they emit. Businesses and consumers will take steps, such as switching fuels or adopting new technologies, to reduce their emissions to avoid paying this tax. Turkey has not adopted it yet.
