MESSAGES FROM TRASTA ESG

ÖZGÜN ÇINAR, CEO

While ESG is increasing its importance, a continuous change in the regulations governing the field draws attention. In early May, the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) published “joint interoperability” guidance. This arrangement has been awaited for a long time. The guidance provides an important resource for companies that need to report in accordance with both ISSB and ESRS standards. In the near future, it seems that we will see more of these kinds of consolidations and simplifications. We will continue to monitor changes and notify you via our newsletters. Stay sustainable…

SUSTAINABLE FINANCE

The main objective of the financial sector is to support the economy and thus social welfare through growth and employment by funding of the economic activities. Growing concerns about sustainability; the importance of legal and administrative regulations on a global scale in order to promote environmental, economic and social sustainability naturally brings the financial aspect of the issue to the agenda. In general, investment decisions were based on a number of criteria that focused on short-term and profitability, and criteria related to environmental and social issues could be ignored because the risks were spread over the long term. The understanding that increased sensitivity to long-term sustainability makes economic sense and does not necessarily lead to lower returns and profitability for investors is slowly gaining acceptance. The spread of this understanding and the encouragement of states have brought the concept of “sustainable finance” to our agenda. Sustainable finance refers to the consideration of environmental and social factors in investment decisions and the process of supporting the financing of investments in sustainable activities. The basis of sustainable finance is the “Environmental, social and governance” criteria (ESG-ESG).

Instruments Used in Sustainable Finance

There have been significant developments in the variety of financial instruments used to support environmentally and socially responsible projects in sustainable finance. The most commonly used tools can be listed as follows:

Green Bonds: These are bonds issued to provide funding for projects with environmental benefits such as renewable energy, energy efficiency, clean transportation and sustainable water management. Bond revenues are solely allocated to the respective projects, and the use of funds in line with their purpose is monitored during the investment period. The issuer is also required to regularly report on the environmental impacts of the project.

Social Bonds: These bonds are issued to provide funding for projects that aim to enable broad segments of the population to access affordable housing, healthcare services, education and employment opportunities. The revenues are used to finance these projects and the issuer provides reports on the social outcomes achieved.

Sustainability Bonds: These bonds allow issuers to finance projects that offer both environmental and social benefits. The revenues generated can be used for various projects contributing to sustainability.

Green Loans: These loans are provided to finance green projects. The loan conditions include requirements for the borrower to use the funds for environmentally beneficial projects and provide reports on the environmental impact throughout the loan period.

Sustainability-Linked Loans: These are performance-linked loans realized against specific sustainability goals. For example, if the borrower achieves goals such as reducing carbon emissions or improving social practices, the interest rate applied to the loan decreases within the framework of promoting sustainable practices.

Green and Sustainability-Linked Bonds: These are bonds in which the issuer commits to achieving specific sustainability goals. If the goals are not met, the coupon rate of the bond increases. This type of financial instruments incentivize the issuer to improve their sustainability performance.

Green and Sustainable Investment and Exchange-Traded Funds (ETFs): These are investment funds that focus on companies or projects with strong ESG (Environmental, Social and Governance) performance. They allow investors to invest in a diversified portfolio consisting of sustainable investments.

As investors and financial institutions recognize the need to align their investments with sustainability goals to reduce risks associated with climate change, resource depletion and social inequality and to seize opportunities in transitioning to a more sustainable economy, the importance of sustainable finance will continue to grow as governments develop incentivizing policies in this direction.

European Union’s Sustainable Finance Regulations

It is evident that the European Union plays a pioneering role in sustainable finance regulations. The regulation called the EU Taxonomy forms the cornerstone of the EU’s sustainable finance framework. The EU Taxonomy is a classification system that assists companies and investors in identifying “environmentally sustainable” economic activities to make sustainable investment decisions.

The taxonomy sets out six climate and environmental objectives: Mitigation of climate change impacts, adaptation to climate change, sustainable use and protection of water and marine resources, transition to a circular economy, prevention and control of pollution, conservation and restoration of biodiversity and ecosystems. Sustainable economic activities are defined as activities that “substantially contribute to at least one of the EU’s climate and environmental objectives while not significantly harming any of these objectives and meeting minimum safeguards.”

The regulation also specifies the steps that an economic activity must take to contribute significantly to one of these objectives or avoid significant harm in order to be classified under sustainable finance.

By creating a secure environment for investors through the taxonomy, the aim is to increase sustainable investments in the EU by helping companies become more climate-friendly while protecting private investors from greenwashing, which refers to making false or misleading claims about the environmental benefits of a product or practice. Furthermore, in February 2024, the European Council and European Parliament reached an agreement on a regulation concerning environmental, social, and governance (ESG) rating activities, with the goal of boosting investor confidence in sustainable products.

ESG ratings provide insights into a company’s or financial instrument’s exposure to sustainability risks and its impact on society and the environment, thereby assessing its sustainability profile. ESG ratings are increasingly influential in the functioning of capital markets and investor confidence in sustainable products.

The new rules agreed upon by the EU aim to enhance the transparency, integrity, reliability, and comparability of ESG ratings by improving the activities of ESG rating providers and preventing potential conflicts of interest. Concerns arising from “greenwashing” or the excessive exaggeration of companies’ sustainability profiles can be largely addressed. As part of this, ESG rating providers that were previously not subject to regulation will need to be authorized and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, particularly regarding methodologies and data sources.

Efforts Towards Regulation of Sustainable Finance in Türkiye

As stated in the BDDK’s 2022-2025 Sustainable Banking Strategic Plan, it can be observed that sustainable finance in Türkiye has not progressed in parallel with the sector’s level of advancement, diversity and importance. There are two main obstacles to development: Structural and institutional.

Structural problems primarily include uncertainties in the macroeconomic environment, low national savings rate, and the short-term funding structure of the banking sector. These problems significantly limit banks’ ability to build corporate capacity for sustainability, access long-term funds and consequently, provide essential long-term financing for sustainable investments.

Among the institutional problems, the lack of a green taxonomy for economic activities stands out. The absence of such classification prevents the labelling of assets, liabilities, and financial instruments in terms of green/sustainable, hampers consistent and reliable data production in the field of sustainability, makes evaluation and policy-making challenging.

Another issue in the field of sustainable finance is the underdeveloped verification system. The lack of widespread, reliable (accredited), and accessible third-party verification providers that confirm the reporting by real sector and financial sector entities based on a national green classification system reduces the system’s functioning and the comparability and acceptability of practices at the international level.

The absence of a regulatory and supervisory framework for sustainability prevents the formation of a minimum standard in applications, increases uncertainties and information asymmetry and enables approaches that can be called “greenwashing”.

The development of sustainable finance in our country requires various actions to ensure sufficient funding from international financial markets under favourable conditions and redirecting funds towards the right investment projects.

In conclusion, it is clear that there is a need for significant efforts and measures to regulate and promote sustainable finance in our country. By addressing structural and institutional obstacles and establishing a comprehensive framework for sustainability, we can foster the development of this important field and contribute to a more sustainable future.

The National Classification (taxonomy) regulation should be implemented as soon as possible.

A legal framework should be established to verify reporting based on the national green classification system.

Investments in sustainable areas should be encouraged and the investment processes of projects exceeding a certain size should be regularly audited by independent auditing institutions to ensure that incentivized resources are directed to the right areas and that impact analyses of projects are conducted accurately.

Sinan Şahin, TRASTA Consultancy Managing Partner- Banking

ESG NEWS

  • South Africa is considering lodging a formal complaint at the World Trade Organization against the European Union’s “protectionist” carbon border levy, Trade Minister Ebrahim Patel said on Wednesday. DETAIL
  • A sophisticated joint European-Japanese satellite has launched to measure how clouds influence the climate. Some low-level clouds are known to cool the planet, others at high altitude will act as a blanket. The Earthcare mission will use a laser and a radar to probe the atmosphere to see precisely where the balance lies. It’s one of the great uncertainties in the computer models used to forecast how the climate will respond to increasing levels of greenhouse gases. DETAIL
  • The International Aerospace Environmental Group (IAEG) recently formed a new consortium of leading aerospace companies to study the impact of 100% sustainable aviation fuel (SAF) on airplane and engine systems and evaluate technical issues. GE Aerospace is also takes place in the aforementioned consortium. DETAIL
  • The seemingly “never-ending” rain last autumn and winter in the UK and Ireland was made 10 times more likely and 20% wetter by human-caused global heating, a study has found. More than a dozen storms battered the region in quick succession between October and March, which was the second-wettest such period in nearly two centuries of records. The downpour led to severe floods, at least 20 deaths, severe damage to homes and infrastructure, power blackouts, travel cancellations, and heavy losses of crops and livestock. DETAIL
  • The potential for creating value is the top reason corporations pursue sustainability, according to “Sustainable Signals: Understanding Corporates’ Sustainability Priorities and Challenges,” a new Morgan Stanley Institute for Sustainable Investing report. Regulatory compliance and a company’s moral responsibilities round out the top three motivations for adopting a sustainability strategy. DETAIL

GREEN COLUMN

SUSTAINABLE SIGNALS

In the previous newsletter, we shared the important findings of the 2024 Z and Y Generation study conducted by Deloitte Touche with our readers on Green Column. As mentioned in the preface, while regulations are rapidly changing, research on sustainability continues unabated. In this context, we have brought up the “Sustainable Signals” report prepared by Morgan Stanley in this newsletter.

The report was prepared under the leadership of the Morgan Stanley Institute for Sustainable Investing and it is stated at the beginning that this is the first edition. Therefore, it would not be wrong to think that this report will be updated and repeated every year.

The data for the report was collected between 27th February and 19th March 2024. 303 “sustainability decision-makers” from public sector organizations and private companies with annual revenues of over $100 million in North America, Europe and APAC regions provided the data that led to the creation of the report. It is also worth noting that the responses from regions were equally weighted.

The key findings highlighted by the report are as follows:

  • Value Creation Opportunity: 85% of companies see sustainability strategies as an opportunity for value creation.
  • Investment Barriers: Companies consider high investment requirements as a barrier to implementing sustainability strategies.
  • Impact of Climate Change: Nearly 90% of companies expect their business models to be affected by climate change by 2050.
  • Cost and Financial Effects: Companies believe that sustainability strategies may create cost pressures in the next five years but can also strengthen cash flows, profitability and revenue growth.

The findings of the report point to an important issue. ESG strategies are still seen as a “value creation” tool. We don’t fundamentally object to this notion, but the reduction of the disruptive effects of climate change, a phenomenon we experience every day, and adaptation to this change should not be overlooked as a motivation. In our opinion, value creation should be a result that naturally occurs after achieving this fundamental goal. The emphasis on the “high investment requirement” as a prerequisite for the implementation of sustainability strategies highlights a well-known reality. It would be appropriate to take action on this matter without further delay. Otherwise, it is evident that significant progress will not be possible. Undoubtedly, investments to be made mean additional costs for companies, and these costs will need to be reflected in prices. However, it is also inevitable to share the costs that will arise globally in one way or another. Reducing the effects of climate change, which will affect 90% of business models by 2050, seems somewhat challenging in any other way.

Özgün Çınar, CEO

IMPORTANT CONCEPTS

CARBON FOOTPRINT CALCULATION AND EMISSION FACTORS

Carbon footprint calculation refers to calculating the total carbon dioxide (CO2) and other greenhouse gas emissions emitted directly and indirectly by an individual, organization or product. The carbon footprint is usually expressed in terms of CO2 equivalent.

After identifying the emission sources for measurement, the data collected from these sources is multiplied by emission factors and the results for each source are added up to calculate the total carbon footprint. Emission factors indicate how much CO2 and other greenhouse gases are emitted per unit of a specific activity or type of energy.

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