1. INTRODUCTION

With the centuries-long human activities turning towards a production model with high carbon emissions after the industrial revolution, serious deterioration has occurred in the balance of the world we live in. Negative developments such as global warming, climate change and ongoing violations of fundamental human rights pose a great danger to the existence of a habitable world. This situation can only be prevented through internationally coordinated and concerted joint efforts based on universal science. In this context, internationally accepted environmental, social and governance criteria (ESG criteria) have been produced, especially for measuring the impacts of the activities of private sector organizations and mitigating their negative impacts on life. A number of international organizations, notably the European Union, and especially creditors, demand and require reports and action plans from companies on the extent to which they have internalized these ESG standards, the extent to which they have harmonized their activities with ESG standards, and how the risks associated with these criteria are managed.

Environmental, social and governance (ESG) criteria simply refer to a set of standards of corporate behavior used by socially conscious investors to evaluate potential investments. Environmental considerations capture how a company protects the environment and how its activities impact the environment, including corporate policies to address climate change. Social considerations examine how companies manage their relationships with their employees, suppliers, customers and the communities in which they operate, and how they maintain their rights and obligations in relation to them. Governance considerations, on the other hand, ensure that a company's executive selection and remuneration, audit and internal control results are shared with stakeholders in a transparent and accurate manner in line with

While making investment decisions in the finance sector, creditors take into account the environmental or social impacts of the company or project to be financed, and compliance with ESG criteria enables the borrowers longer-term and favorable conditional investments in sustainable economic activities and projects. In order to access sustainable finance, companies should transform their activities in a compatible way with ESG considerations and should prepare risk and action plans to mitigate or address negative impacts on the environment. In that regard, integrating ESG considerations into business strategies is becoming a strategic necessity for companies seeking to thrive in a changing economic and social environment.

2. DEVELOPMENTS

2.1. Accession to Paris Agreement:

Adopted in 2015, the Paris Agreement is the largest international agreement to date, covering climate change mitigation, adaptation and financing, and setting concrete targets. The overall goal of the Paris Agreement is to "keep the increase in global average temperature below 2°C above pre-industrial levels" and "limit the temperature increase to 1.5°C above pre-industrial levels as much as possible. This goal requires a gradual reduction in the use of fossil fuels (oil, coal, natural gas) by all components of any economy and a shift towards renewable energy.

Türkiye signed the Paris Agreement on April 22, 2016, and the Agreement was ratified by the Presidential Decree on October 7, 2021.

Pursuant to the Agreement, Türkiye committed to reduce its greenhouse gas emissions by 21% by 2030 according to the baseline scenario (the amount of emissions in 2012 as a reference) in its first Nationally Determined Contribution (NDC) submitted to the UNFCC Secretariat. It subsequently revised its NDC to a 41% reduction in 2030 compared to the baseline year.

2.2. EU Green Deal Action Plan

In order to combat climate change and ensure sustainable development, the European Union announced the European Green Deal on December 11, 2019 as a comprehensive roadmap and set of actions. With the Green Deal, the EU has set the goal of becoming the first climate-neutral continent by 2050 and is shaping all its policies around climate change by adopting a new growth strategy to achieve this ambitious goal. The Green Deal envisages comprehensive changes in EU policies in a range of areas from industry to finance, energy, transportation and agriculture.

Pursuant to the Presidential Circular No. 2021/15 published in the Official Gazette dated July 16, 2021, the "Green Deal Action Plan" was prepared with the participation of the public and private sectors under the leadership of the Ministry of Trade in order to contribute to Türkiye's transition to a sustainable, resource-efficient and green economy and to ensure compliance with the changes envisaged by the European Green Deal in a way to preserve and further advance the integration achieved under the Türkiye-EU Customs Union.1

The Action Plan sets 32 targets and 81 actions under the following 9 main headings:

1. Carbon Regulations at the Border, 2. A Green and Circular Economy, 3. Green Finance, 4. Clean, Affordable and Secure Energy Supply, 5. Sustainable Agriculture, 6. Sustainable Smart Transport, 7. Combating Climate Change, 8. Diplomacy, 9. European Green Deal Information and Awareness Raising Activities.

On the other hand, the fact that the Action Plan was instructed by the Presidential Circular and that the public and private sectors were included in the Action Plan preparation process shows that there is a high degree of ownership and broad participation. ESG criteria, particularly the environment, have been taken into account in the Action Plan targets and actions.

2.3. Guideline on Credit Allocation and Monitoring Processes

The Banking Regulation and Supervision Agency (BRSA) published "Guideline on Credit Allocation and Monitoring Processes" to explain the best practices expected from banks regarding credit risk management.2 In addition to the classical financing stages such as the provision of the loan and subsequent utilization, repayment and collaterals, the Guideline also provides a number of advices to the banks in terms of ESG criteria.

The Guideline defines environmentally sustainable lending in terms of ESG criteria as loans (equity, securities, guarantees or any other financial instrument, including a risk management tool) used to finance environmentally sustainable economic activities. In addition to financial requirements, banks should develop a credit risk culture that considers impacts under sustainability and related ESG considerations.

The Guideline encourages banks to develop environmentally and socially responsible loan products in terms of sustainable financing when setting their lending policies. It imposes a duty on banks to investigate clients' preparation for ESG criteria, the ESG implications and risks of the project for which the loan will be used, and the measures they will take to mitigate these risks.

2.4. Strategic Plan for Sustainable Banking

BRSA adopted the '2022-2025 Strategic Plan for Sustainable Banking '. 3 The plan aims to ensure that the Turkish banking sector takes into account more of the ESG criteria included in global investment strategies under the sustainability heading, and thus utilizes foreign green finance markets to a greater extent.

The Strategic Plan is basically includes activities:

  • To establish a financial sector that can effectively manage climate-related risks and opportunities under the Paris Agreement and provide the necessary financing for sustainable investments and projects under favorable conditions,
  • To ensure the necessary harmonisation of the Turkish banking sector with the EU Border Carbon Regulation Mechanism before the year 2026,
  • Measuring, analyzing and taking actions to manage the physical risks related to climate change to which the financial system is increasingly exposed and the transition risks related to the transition to a low carbon economy.

Strategic Plan categorizes the ESG related risks as follows:

  • Operational risks that have impacts such as damage to the physical assets of financial institutions due to climate events, interruption of services and supply chain,
  • Indirect risks arising in the form of liquidity, credit, market and compensation risks due to the risks to which customers and investors of financial institutions are exposed,
  • The main risks in the form of intensive recourse by loss-stricken firms and households to their savings in financial institutions and insurance companies; an increase in non-performing loans as borrowers lose their ability to repay; and a decline in collateral values, equity, debt instrument and commodity prices.

The Plan also considers the emerging new markets, products and instruments, especially the carbon emission market, additional funding and liquidity opportunities that can be accessed through special products to be designed for environmentally and socially sensitive client segments, and possible incentives and support that can be provided by the public sector as opportunities for the financial sector.

Nevertheless, it states that sustainable finance is not sufficiently developed in Türkiye and that the obstacles to its development can be categorized into two main categories: structural and institutional.

Structural problems are identified as uncertainties in the macroeconomic environment, low national savings rate and short-term funding structure of the banking sector. The lack of a green classification (taxonomy) for economic activities is also identified as institutional problems.

The goals and targets of the sustainable banking strategy are as follows:

Goal 1 - Effective Management of Financial Risks Faced in the Climate Change Process
Goal 2 - Enhancing Sustainable Finance
Goal 3 - Enhancing Cooperation with Related Parties in the Field of Sustainable Finance

2.5. Corporate Governance Communiqué Issued by Capital Markets Board (CMB)

The CMB issued the Communiqué on Corporate Governance in 2014.

According to the Communiqué, companies within the scope of ESG criteria should implement the following principles:

General Assembly: Convening the General Assembly, informing the shareholders to the widest extent, and effective supervision and monitoring of the company's activities by the General Assembly.

Board of Management: Determination of the board of management and the rationale for the election of members, having independent members, establishing an "Audit Committee" (except for banks), "Early Detection of Risk Committee" (except for banks), "Corporate Governance Committee", "Nomination Committee", "Remuneration Committee" (except for banks) to ensure that the board of management fulfils its duties and responsibilities in a healthy manner, and determining the duties, working principles and procedures of these committees and the financial and social rights of board members.

In direct connection with ESG criteria, it should also be recorded in the annual reports whether the sustainability principles are applied or not, and if not, a justified explanation about this, and an explanation about the effects on environmental and social risk management due to not fully complying with these principles. However, the Communiqué notes that the implementation of sustainability principles is voluntary and does not foresee any sanction measures for the non-implementation of the principles other than the mandatory ones among the Corporate Governance Principles. Nevertheless, it encourages the implementation of sustainability principles that express ESG criteria.

2.6. Borsa Istanbul Corporate Governance Index

Borsa Istanbul has been publishing the BIST Corporate Governance Index (XKURY) since 31.08.2007 by including the share values of companies that implement the Corporate Governance Principles4 published by the Capital Markets Board.

In a nutshell the principles address the following:

  1. Within the scope of shareholders, facilitation of the exercise of shareholders' rights, the right to obtain and review information, the right to participate in the general assembly, the right to vote, minority rights, dividend rights and the rights to transfer shares,
  2. Within the scope of public disclosure and transparency, public disclosure principles and tools, establishment of a website and active use of the website, preparation, announcement and sharing of the annual report,
  3. Within the scope of stakeholders (persons, institutions or interest groups such as employees, creditors, customers, suppliers, trade unions, various non-governmental organisations, etc. who have an interest in the achievement of the company's objectives or activities), the company policy on stakeholders, the support of stakeholders' participation in the company management, the company's human resources policy (especially the principle of providing equal opportunities to persons with equal conditions, relations with customers and suppliers, ethical rules and social responsibilities,
  4. Within the scope of the boards of management of companies, the function of the board of management, the operating principles of the board of management, the structure of the board of management, the form of board meetings, the composition and scope of the committees established within the board of management, and the financial rights provided to board members and senior executives.

Companies included in the index should present information in their annual reports on corporate social responsibility activities related to employees' social rights, vocational training and other corporate activities that have social and environmental impacts. These companies must be sensitive to social issues and comply with regulations and ethical rules regarding the environment, consumers, public health. They are supposed to support and respect human rights. They should also fight against all forms of corruption, including extortion and bribery.

2.7. Borsa Istanbul - Sustainability Guideline for Companies

Borsa Istanbul prepared the "Sustainability Guideline for Companies" with the contributions of all stakeholders in order to provide information to companies on sustainability and to guide them to gain a share from global investment flows. The Guideline aims to integrate sustainability activities into the business processes of companies and to enlighten all stakeholders, especially investors, and the public by reporting the results.

Companies that do not give due importance to sustainability are considered more risky by financing institutions and investors. Financing institutions and investors, while evaluating the companies they lend or invest in, take into account the extent to which they have internalized ESG issues, the impact of their activities on the physical and social environment and the extent to which they are active in eliminating their negative impacts on environment and society. The Guideline becomes even more meaningful with the announcement of the world's largest funds that they will not invest in companies that do not provide information on ESG issues, are not sensitive to these issues or do not take the necessary actions.

The Guideline especially emphasizes that it is important to include ESG criteria in their reporting for the following group of companies:

  • Companies operating in industries sensitive to environmental and social risks,
  • Companies operating in industries that produce pollutants,
  • Companies that use natural resources intensively,
  • Companies that are part of a supply chain where final customers, suppliers and contractors demand responsible behavior.

The Guideline endeavors to assist companies in their reporting by asking the following questions from environmental and social perspectives: :

Explanations on Environmental Indicators:

Q1 Management's climate approach: Q.1.1 Does the board or senior management assess climate-related risks?

Q2 Environmental activities: Ç2.1 Does the company have an environmental policy? Q2.2 Does the company implement waste, water, energy and/or recycling processes? Q2.3 Does the company use an energy management system?

Q3 Greenhouse gas emissions: Q3.1 What is the total amount of Scope 1 gases, in CO2 equivalents? Q3.2 What is the total amount of Scope 2 gases, in CO2 equivalent? Q3.3 What is the total amount of Scope 3 gases, in CO2 equivalent?

Q4 Emission intensity: Q4 What is the ratio of greenhouse gas emissions to various reference quantities?

Q5 Energy use: Q5.1 What is the total amount of energy used directly? Q5.2 What is the total amount of energy used indirectly?

Q6 Energy intensity: Q6 What is the ratio of direct energy use to various physical quantities?

Q7 Diversity of energy sources: Q7 What are the sources from which the energy used is obtained?

Q8 Water use: Q8.1 What is the total water consumption? Q8.2 What is the amount of reused water?

Q9 Proportion of inputs recycled: Q9 What is the percentage of recycled materials used as inputs in the production of primary products and services?

Q10 Amount of waste: Q10.1 What is the amount of hazardous waste? What are the disposal methods? Q10.2 What is the amount of non-hazardous waste? What are the disposal methods? Q10.3 What is the amount of non-hazardous waste recycled?

Explanations on Social Indicators:

Q1 Board of Management and employee diversity: Q1.1 What is the number and proportion of board members by various breakdowns? Q1.2 What is the number and proportion of employee categories by various breakdowns?

Q2 Proportion of new hires: Q2 What is the number and proportion of new hires by various breakdowns?

Q3 Employee turnover rate: Q3 Number and turnover rates of employees who left their jobs

Q4 Maternity leave rates: Q4.1 What is the rate of return to work after maternity leave by gender? Q4.2 What is the retention rate after maternity leave by gender?

Q5 Health and safety policy: Q5 Does the company have an occupational health and/or general health and safety policy?

Q6 Accident/occupational disease rates: Q6.1 What are the accident/occupational disease frequency rates? Q6.2 What is the lost day rate (accident severity rate)?

Q7 Training hours per employee: Q7.1 What is the average annual training hours per employee? Q7.2 What are the training hours per employee on ESG policies and practices?

Q8 Human rights: Q8.1 Does the company have a human rights policy? Q8.2 Does the policy cover suppliers and vendors?

Q9 Child labour and forced labour: Q9.1 Do company policies include provisions against child labour and forced labour? Q9.2 Does it cover suppliers and vendors?

Q10 Customer satisfaction and confidentiality: Q10.1 Does the company have a policy on the management and resolution of customer complaints? Q10.2 Does the company have a policy on confidentiality of personal data?

2.8. Guideline on Green Debt Instrument, Sustainable Debt Instrument, Green Lease Certificate, Sustainable Lease Certificate

The Capital Markets Board published the "Guideline on Green Debt Instrument, Sustainable Debt Instrument, Green Lease Certificate, Sustainable Lease Certificate" on 24.02.2022. This Guideline is based on the Green Bond Principles published by the International Capital Market Association (ICMA) and updated from time to time. It aims to ensure that the issuance of green debt instruments, sustainable debt instruments, green lease certificates and sustainable lease certificates are carried out in line with the best practices and standards in international financial markets, and to increase transparency, integrity, consistency and comparability in the financing of green projects that can contribute to environmental sustainability.

In order to encourage the issuance of green bonds and lease certificates, the CMB decided to reduce the fees to be applied in accordance with the capital markets legislation by 50% for the issuance of capital market instruments within the scope of this Guideline (in addition to the reduction provided by the Board Decision dated 24.06.2016 and numbered 20/710 for lease certificates).

The Guideline expects the issuer to provide the necessary comprehensive information on the scope of the bond to be issued. The issuer is required to undertake, report and monitor the compliance of the bond with the green bond principles.

The following four components of the Green Bond Principles are included in the Guideline:

  1. Use of Funds Raised from Issuance: The projects including but not limited to especially in the fields presented below are called green projects and the funds should be used in accordance with the purpose of the projects in these fields.
    • Renewable energy, Energy efficiency, Pollution prevention and control
    • Environmentally sustainable management of living natural resources and land use
    • Conservation of terrestrial and aquatic biodiversity, Sustainable water and wastewater management
    • Climate change adaptation, Clean transport, Green buildings.
    • Eco-efficient and/or circular economy-adapted products, production technologies
  2. Project Evaluation and Selection Process: The environmental and social risks of the selected project and the road map to be determined for the management of these risks
  3. Management of the Funds Obtained from the Issuance: Keeping the fund in a separate account to monitor its utilization in green projects or in a portfolio account opened for green projects.
  4. Reporting: A report on the use of all relevant funds in green projects, a brief description of the projects, the amount utilized, the estimated impact of the projects and any significant developments.

2.9. Republic of Türkiye Sustainable Financing Framework

The Ministry of Treasury and Finance, together with relevant ministries and institutions, prepared the 'Republic of Türkiye Sustainable Financing Framework" for access to sustainable finance and published it in November 2021 to be announced to the international public, creditors, investors and stakeholders.

The Framework document refers to Türkiye's international commitments in combatting climate change, its alignment with the Sustainable Development Goals, environmental and social projects in its 10th and 11th national development plans, special emphasis on the energy sector such as renewable energy and energy efficiency, national programs on forestry, combating desertification, and Türkiye's commitments to social development through the Green Deal Action Plan, Türkiye Green Transformation Program, Türkiye's Reform Action Plans.

Türkiye has developed this Framework Document to support its sustainability commitments and to set out how it intends to create green, social and sustainable Financing Instruments and to contribute to the development of the sustainable financing market both domestically and internationally. It aims to use the Framework as a basis for the issuance of Green, Social or Sustainability Bonds, Sukuks, Loans and other debt instruments ("Sustainable Finance Instruments").

Türkiye plans to use three different types of financing instruments through this Framework Document:

  • Green Financing Instruments where an amount equal to net funds will be used exclusively to (re)finance eligible expenditure falling within the categories of Eligible Green Projects
  • Social Financing Instruments, where an amount equal to net funds will be used exclusively to (re)finance eligible expenditure falling within the categories of Eligible Social Projects
  • Sustainability Financing Instruments, where an amount equal to net funds will be used exclusively to (re)finance eligible expenditure that falls into both the Eligible Green and Social Project categories

In the preparation of the Framework Document, in addition to the above-mentioned sources, the following sources are utilized as reference

  • International Capital Market Association Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines
  • The Credit Market Association Green Credit Principles and Social Credit Principles

It is also stated that a Working Group consisting of relevant ministries and public authorities will be established to ensure participation and identify the right projects/activities.

The Framework Document commits to the implementation of practices to reduce environmental risks, mitigate social risks, information on how funds will be managed and reporting on the use of funds.

The Ministry of Treasury and Finance issued a green bond in 2023 in light of the Framework Document. The bond is worth USD 2.5 billion and maturity is 13 July 2030. This green bond is the first ESG bond issued by the Turkish Treasury in international capital markets.

3. CONCLUSION

Türkiye is a developing country with an upper-middle income level according to the World Bank's classification. 5 As one of the emerging economies, Türkiye needs a high level of infrastructure investments as a requirement of its development process. Therefore, it is of great importance that such massive investments are designed wisely and realized in a way that is sensitive to the physical and social environment.

In Türkiye, the impacts of climate change are manifested in the increasing number and intensity of floods, heat waves, forest fires, droughts, decreases in agricultural yields and significant economic losses. In Türkiye, sensitivity on environmental and social issues has developed in recent years and a number of institutional steps have been taken. The most ambitious efforts in Türkiye are in the banking and finance sector, especially in terms of access to sustainable finance.

Footnotes

1. https://ticaret.gov.tr/data/60f1200013b876eb28421b23/MUTABAKAT%20YE%C5%9E%C4%B0L.pdf Erişim tarihi: 14.07.2023.

2. https://www.bddk.org.tr/KurumHakkinda/EkGetir/18?ekId=123 Erişim tarihi: 14.07.2023.

3. https://www.bddk.org.tr/KurumHakkinda/EkGetir/18?ekId=122 Erişim tarihi: 14.07.2023.

4. https://spk.gov.tr/data/61e87f0b1b41c611a4c53a90/2fb4947cb75a159d431a0ed205cdbc7c.pdf Erişim Tarihi: 11.07.2023.

5. https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups Erişim tarihi: 10.07.2023.

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