It has been an interesting, fruitful, and innovative year for the Turkish financial sector. Most importantly and possibly surprisingly, the Turkish financial regulatory authorities are at full speed in implementing a legal framework to support a more sustainable Turkey.
Turkish Banking Sector Transition to the Circular Economy
Throughout 2021, the Banking Regulatory and Supervision Authority (BRSA) and the Capital Markets Authority (CMA) recognized the global trends surrounding sustainability and the need to raise awareness of, and be in compliance with, ESG principles and a move to digitalization.
As the climate crisis expanded and as the effects of COVID-19 became more apparent, the potential and importance of green finance and its instruments became a focal point in Turkey. Following a sector-specific approach to legislation and after the Capital Markets Board of Turkey published its sustainability compliance framework in late 2020, which set out ESG and sustainability principles for specific companies, in July 2021, the Turkish Ministry of Trade published the Green Deal Action Plan to harmonize Turkey’s efforts with the EU’s actual and planned policy changes, specifically the EU Green Deal. The Green Deal Action Plan targets various sectors by the adoption of compliant roadmaps for foreign trade. Following this, in October 2021 Turkey then finally ratified the Paris Agreement ahead of COP26. These significant steps have initiated an approach that actively raises awareness of the critical role of financial regulatory institutions in the transition to a circular economy.
In addition, various other steps were taken. Turkish banks are prioritizing projects that limit the effects of climate change, such as renewable energy projects, by providing local funding for such projects utilizing sustainable finance acquired from abroad. The BRSA also regulated the procedures and principles for banks conducting identity verification processes remotely and executing agreements electronically.
Looking Ahead – What’s Next?
Looking forward, the head of the BRSA signaled that it would continue implementing measures to meet Turkey’s sustainability goals. The introduction of a green taxonomy, in line with the European Union’s Green Taxonomy, has also been agreed to by related ministerial and agency authorities, which will heavily affect the financial sector. In the scope of digitalization, the BRSA also published a draft regulation specifying the general rules and principles of branchless banking, which it believes will provide faster and more efficient banking services for SMEs, which will eventually help them conduct businesses sustainably. Lastly, the BRSA is expected to share its sustainable banking strategy paper by the end of 2021.
Turkish Capital Markets – Crowdfunding and ESG Drive
2021 was also an exciting and exhausting year for those keeping abreast of new CMA legislation. The CMA started the year with a heavy schedule to firstly establish a bond guarantee fund – unfortunately yet to be realized – which will guarantee that investors can partially collect their investment in the event of default, and secondly to further regulate crowdfunding and incentivize investments in green bonds. After the CMA published its resolution in October 2021 on the types of campaigns in which share-based crowdfunding platforms may not participate and the partnerships with which such platforms may be affiliated, the CMA approved several platforms for the first time in its history. Then, in October 2021, the CMA published a communique regulating crowdfunding platforms, platforms’ activities, investment limits, and other principles and procedures for share-based and debt-based crowdfunding.
Naturally, the BRSA was not the only financial regulatory authority to act on Turkey’s ESG agenda. After organizing a workshop last July on green bonds and green lease certificates in collaboration with the World Bank, the CMA published its draft guide on green debt instruments and green lease certificates, prepared in line with the Green Bond Principles of the International Capital Market Association, aimed at increasing the issuance of green investment instruments, enhancing investor confidence via transparency and external evaluation, and diversifying investment opportunities in projects contributing to sustainable development.
Looking Ahead – What’s Next?
In any case, after a year focused on sustainability, it can be observed that Turkey has prioritized financial sector regulation and facilitation to advance Turkey’s ESG agenda, and we expect further regulation, financial products, and incentives in 2022 on the way to a more sustainable and greener Turkey.
By Alaz Eker Undar and Hulya Kemahli, Partners, CMS Turkey