Turkey has had a long-standing ambition to build a more sustainable economy. Despite proactive efforts by public and private sector organisations, however, there remain significant challenges in Turkey’s journey to its 2050 net zero carbon emission targets, and aim to create a more equal and inclusive society, including reliance on fossil fuels and high emissions, poor air quality in cities and industrial centres, and exposure to climate change impact. Sustainable finance, which brings money and purpose together, will play a major role in addressing these challenges and building a more sustainable future for the country, its businesses and citizens.
Turkey’s sustainability ambitions are two-fold. Firstly, public and private organisations are motivated to improve the environment and societies in which they operate. Secondly, Turkish companies are key to many global supply chains. As these companies’ major buyers increase their demands around sustainability, the ability to meet these demands will be key to maintaining and expanding competitive advantage. The scale of this challenge should not be underestimated. CDP research published in March 2021 reveals that financial impact amongst 8,000 suppliers to 154 major buyers resulting from environmental risks (climate change, deforestation and water insecurity) could reach $1.26 trillion in the next five years.
The country is already making significant progress. In October 2020, the Capital Markets Board (CMB) in Turkey indicated that publicly listed companies in Turkey were required to report on their compliance with the Board’s Framework for Compliance with Sustainability Principles (“Framework”) in their annual reports. This marks a significant step forward in enhancing the country’s governance model in sustainability terms, and establishes a platform for companies across all industries to structure and enhance their sustainability credentials.
Sustainable Financing in Turkey
Meeting these sustainability ambitions will require strategy, priority, creativity and financing. Green bonds and the wider sustainable debt market, supporting both environmental and social priorities, is not new in Turkey. The first green Eurobond from a Turkish issuer was done in 2016 and led by Standard Chartered. In March 2021, the Turkish government announced a Bonds Guarantee Fund to encourage the issuance of green bonds and incentivise investors. At the same time, a new legal framework aims to make it easier for companies to finance investment in clean energy, reduced carbon emissions and clean water.
The syndicated loan market in Turkey is undergoing a transformation towards ESG-linked loans, led by both Turkish and international banks as they seek to embed their own sustainability ambitions into their customer offerings. Many borrowers have already developed sophisticated capabilities to measure the sustainability of their activities, assisted by some of the emerging initiatives highlighted below. With reliable and consistent access to data, they have been able to build the necessary key performance indicators (KPIs) to issue sustainability-linked loan transactions (SLLs). While this is a trend consistent with other regions, Turkish borrowers – and lenders – have been at the forefront.
This is highlighted in the latest round of eight ground-breaking sustainability-linked loans (SLLs) in the Turkish banking sector since April 2021. Acting individually or jointly, Standard Chartered led as Sustainability Coordinator on seven of these transactions for the Turkey FI market, raising $1.7bn and €2.6bn for the country’s ESG goals. Each transaction has integrated between two and three sustainability KPIs into the pricing structure. All transactions included at least one environmental KPI focused on decarbonisation. This theme has been a focus for investors and lenders for many years now, with KPIs including the reduction of GHG emissions, restriction of coal financing, and increases in the proportion of electricity from renewable sources for branches and headquarter buildings. In line with the overall sustainable finance market recently focusing more on social issues, we have seen five out of the eight transactions including a social KPI, with the majority focusing on gender equality and a reduction of the gender pay gap. One of the lenders used a new innovative social KPI looking at an increase in the proportion of disabled-friendly ATMs within the borrower’s network. Three banks implemented an increase in the proportion of sustainable financing or support to SMEs as another KPI.
There have been major structural shifts in the green, social and sustainability bond markets over the past two years, which in turn is having an impact on corporate and institutional borrowers and investors in Turkey. There have been four sustainable bond issues in Turkey since December 2020, of which Standard Chartered has been involved in three, with issuance between $350m and $750m. Sustainability and social use of proceeds bonds have taken a greater share of the global market and new structures such as transition and sustainability-linked bonds (SLBs) have emerged rapidly.
Some industries that are keen to invest in sustainability find it difficult to issue use of proceeds bonds as the value of individual projects may not be sufficient. In these instances, however, SLBs could present a valuable opportunity. The SLB supply reached over $80bn during the first half of 2021, representing c.7 per cent of the overall volume of environmental, social and governance (ESG) labelled bond issuance (source: Bloomberg New Energy Financing). These instruments offer more flexibility to borrowers as they do not need to be tied to specific projects, such as green buildings or renewable energy. They also offer opportunities for industries in transition, such as energy and chemical companies, whose activities may seem contrary to the aims of sustainable financing, to invest in more strategic changes to their business activities.
The flexibility of SLBs may be advantageous to issuers, but potentially more problematic to investors. For example, as SLBs are not linked to use of proceeds, investors need to assess exactly what impact they make. The ability to customise KPIs could also make it easier for issuers to ‘green wash’ their activities, which is obviously contrary to investors’ objectives. In addition, the coupon step-up feature of standard SLBs means that issuers face an increase in interest payments in the event that they do not meet predefined sustainability objectives. This creates a moral dilemma for investors committed to ESG, who may not wish to be seen to be profiting from sustainability failures.
These potential limitations are reflected in the pricing for these instruments. While green bonds may price at a so-called “greenium” (i.e. additional premium to reflect the instrument’s sustainable credentials and investor demand) this is not reflected in the pricing of SLBs.
Labelled SLBs have not yet been issued in Turkey; however, the flexibility of SLBs combined with the experience of Turkish issuers in setting rigorous KPIs, means that these bonds should become increasingly attractive. Maintaining credibility of KPIs is essential to a robust sustainable financing market: these need to be meaningful for the business, realistic, consistent and ideally independently monitored.
With nearly 400 initiatives relating to climate-related disclosures alone, selecting, measuring and monitoring an appropriate set of KPIs has been a minefield for banks, corporations and investors alike. However, we are now seeing a variety of initiatives emerge which complement and build on the work already undertaken with a view to creating a more universal framework. These initiatives have the potential to further increase confidence and transparency in Turkey and beyond.
Banks’ Climate Risk Obligations
Banks have a major role to play in facilitating and monitoring sustainability performance of their assets and the clients they support, and measuring climate risk, driven by both regulatory and shareholder priorities. Formed in 2015, the Financial Stability Board (FSB)’s Task Force on Climate-Related Financial Disclosures (TCFD) provides recommendations for large financial and non-financial institutions and their investors in areas such as governance, strategy, risk management, and metrics and targets. TCFD recommendations have been adopted into the Turkish banking system, with leading banks now reporting against them. They are also included in the Standard & Poors Global Ratings, creating a significant compliance incentive.
Banks such as Standard Chartered are also participating in the Bank of England’s Climate Biennial Exploratory Scenario (CBES) which was launched in June 2021. This aims to measure the financial exposure of participants and the wider financial system to climate-related risks, understand the challenges to existing business models that result from these risks, assess the impact of possible responses, and help improve climate risk management. This is a highly ambitious undertaking, and potentially the most complex stress testing obligation that banks have taken on. The level of granularity required is unprecedented for the banking industry, but the insurance industry has already built up much of this expertise. Consequently, Standard Chartered is partnering with leading global insurance provider Munich Re to evaluate risk at an asset level. On the corporate side, the bank is partnering with leading management consultancy Baringa Partners to model climate risk scenarios.
These initiatives provide a standardised approach to climate risk reporting at an industry level, increase transparency, accountability and robustness of data around climate risk in order, and ultimately adding credibility and consistency for issuers, lenders and investors.
EU Taxonomy for Sustainable Activities
The EU Taxonomy, which was launched in March 2021, is a wide-ranging classification system for environmentally sustainable economic activities to create common definitions for companies, investors and policymakers, and increase confidence and transparency. It covers: climate change mitigation and adaptation; water and marine resources; transition to a circular economy; pollution, and biodiversity and ecosystems. Standard Chartered was one of the core banks involved in the working group to test the EU Taxonomy against banking and financing activities.
Capital Markets Board Framework for Compliance with Sustainability Principles
In Turkey, the CMB’s Framework covers not only environmental sustainability, but also general, social and governance principles. The aim is to create transparency and encourage better environmental, social and governance (ESG) performance; however, at present, the requirement is only to report on compliance or explain non-compliance, rather than companies having an obligation to comply. Even so, companies are likely to accelerate compliance wherever possible, both in order to obtain financing, and meet changing consumer, regulator and stakeholder expectations.
These initiatives are not mutually exclusive, but rather complementary. Many Turkish companies have international business activities and/ or will be seeking overseas investment, and therefore will need to report their activities against the EU Taxonomy to attract investment to fund sustainability initiatives. Although the additional data and reporting requirements are likely to prove substantial, requiring new or adapted technology, these new technologies, such as compliance dashboards, are already emerging, creating greater ESG visibility within businesses and amongst stakeholders. With improved access to consistent data, corporations and banks will be able to adapt their risk management models to take into account ESG risks, and build better counterparty relationships, whether with banks, investors or supply chain partners, based on trust and transparency, to finance more sustainable growth.
 A useful report on the TCFD and advice on implementation is published by sustainability disclosure organisation CDP, and can be found at https://info.carbon-clear.com/hubfs/Factsheets/TCFD%20eBook/An_introduction_to_the_recommendations_of_the_TCFD-eBook-EN.pdf