Following the UNFCCC and the Kyoto Protocol, the Republic of Turkey has also become a party to the Paris Agreement, and this agreement entered into force on 10.11.2021. With the entry into force of the Paris Agreement, international obligations regarding the solution of climate change and environmental problems have come to the fore again. On the other hand, the guide on the issuance of green debt instruments, which is in the process of preparation and a draft of which has been published by the Capital Markets Board (Board), constitutes the necessary legal infrastructure for financing projects related to climate change and environmental problems in Turkey.
1. The Problem of Climate Change and International Agreements on the Issue
Greenhouse gas emissions from human activities cause climate change by worsening the greenhouse effect. Since climate change is a threat that closely affects the whole world, countries need to act in agreement. As a matter of fact, all countries are trying to take an active role in combating climate change with the help of international agreements such as the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and the Paris Agreement.
UNFCCC, which is considerably formed by the First Assessment Report (FAR) prepared during the Intergovernmental Panel on Climate Change (IPCC) in 1990, entered into force on 21.03.1994 and has been ratified by 197 countries today. Within the scope of UNFCCC, the party countries are classified as Annex-1 and Annex-2 countries and developing countries, and the obligations of the countries are shaped according to this classification. There are 40 countries in total, including Turkey, in Annex -1 countries, which cover industrialized and transitional economies, and their main obligation is to adopt new policies and take the necessary measures in order to reduce their greenhouse gas emission levels to the level of 1990.
There are 23 countries in total in Annex -2 countries that are required to provide financial resources to enable developing countries to undertake emissions reduction activities under the Convention and to help Annex 1 countries adapt to adverse effects of climate change. In this context, a grant and loan system managed by the Global Environment Facility (GEF) was established through the UNFCCC.
Developing countries are not obliged to reduce their greenhouse gas emission levels unless developed countries provide funds and technology. The reason why developing countries are not subject to any obligations in this context is the thought that the main source of such an increase in the amount of greenhouse gas emissions in the past and present is the industrialized countries, and for this reason, the industrialized countries should make more efforts to reduce the amount of greenhouse gas emissions.
It should also be noted that since no sanctions have been determined under the UNFCCC, the parties have only supported UNFCCC in good faith.
b) Kyoto Protocol
Countries that signed the Kyoto Protocol (Protocol), which entered into force in February 2015 within the scope of UNFCCC and to which 191 countries are the party, have committed to reducing the emission of gases that cause global warming and climate change, and if they cannot do this, to increase their rights regarding gas emissions through “carbon trading”. The concept of carbon trading, which emerged for the first time within the scope of the Protocol, is based on the certification of greenhouse gas emissions reduced by countries and the trading of these certificates in carbon markets. A carbon credit (certificate) traded in carbon markets corresponds to the emission of a mass equivalent to one tonne of carbon dioxide or another greenhouse gas.
Within the scope of the Protocol, countries are divided into Annex-1 and Annex-2 groups. Turkey has been counted in the Annex-1 list only since 2001. However, our country has no commitment to reduce or limit digitized greenhouse gas emissions within the scope of the Protocol. Within the scope of the Protocol, legally binding quotas have been granted to 37 developed and industrialized countries, which are priority parties, to reduce greenhouse gas emissions, and these countries will only be able to emit greenhouse gas emissions in the amount allowed to them.
Today, carbon credits are granted under mandatory markets such as European Union (EU) Emission Trading Scheme (EU ETS/ EU ETS), European Climate Exchange (ECX), European Energy Exchange (EEX), Nord Pool, Climex, Blunext, and in voluntary markets such as the Chicago Climate Exchange (CCX), and carbon markets are becoming a rapidly growing market.
Within the scope of the protocol, basically, three market mechanisms are envisaged:
1- Clean Development Mechanism (CDM)
2- Joint Implementation (JI)
3- Emission Trading Scheme (ETS)
The most-traded system among these mechanisms is the ETS. The biggest example of ETS today is the EU ETS (European Union Emission Trading Scheme / EU ETS), which has been operating since 2005 and currently operates in 31 countries (27 EU member states, as well as Iceland, Liechtenstein, Norway, and the United Kingdom).
Countries that have not yet signed the Protocol can voluntarily reduce their greenhouse gas emissions and sell these credits/carbon certificates in voluntary carbon markets.
c) Paris Agreement
The Paris Agreement, which was accepted with the approval of 195 countries at the UNFCCC Conference of the Parties in December 2015, also has an important position in the fight against climate change on a global scale. The Paris Agreement, drawing attention to the peak of greenhouse gas emissions and the need to solve the climate problem in the second half of the century, sets out a concrete global action plan that should be implemented as soon as possible.
Within the framework of the Paris Agreement, the parties will come together at “global situation assessment summits” every five years starting from 2023. In addition, the parties are obliged to draw up a transparent framework of responsibility, including the monitoring of greenhouse gas inventories and national developments every two years.
d) Current Situation in the European Union
With the European Green Agreement announced by the EU in December 2019, it is aimed to make the environmental targets in the Paris Agreement more concrete and to reduce carbon emissions by 2030 and then to zero by 2050 – the goal of a climate-neutral continent. In this direction, within the scope of the “Fit For 55” proposal package, it aims to make EU climate, energy, transport, and taxation policies suitable for reducing greenhouse gas emissions by 55% by 2030 compared to 1990 levels. In this context, the EU Climate Law was rearranged and entered into force by being published in the Official Journal of the EU (Regulation of the EU 2021/1119) dated 9 July 2021. Thus, the commitment of the European Green Deal to reduce greenhouse gas emissions by 55% by 2030 and to be climate neutral by 2050 has turned into a binding obligation.
e) Current Situation in Turkey
Since Turkey has not yet signed the Kyoto Protocol in the 2008-2012 period, which is the first obligation period of the Protocol, our country has not been able to benefit from the mechanisms in the compulsory carbon markets. Turkish public institutions and companies carry out their carbon market projects in voluntary carbon markets, which are developed independently from/ of the mechanisms in the Protocol and created in accordance with the principle of environmental and social responsibility. Projects implemented through the voluntary market in Turkey are carried out within the scope of the “Voluntary Carbon Market Project Registration Communiqué” (Communiqué) that came into force in 2013 and are registered by the Ministry of Environment, Urbanization and Climate Change (Ministry). According to the Communiqué, project owners who obtain carbon certificates within the scope of Voluntary Carbon Markets in Turkey are required to register with the Ministry and submit the project design document, approval report and verification reports of their projects to the Ministry within 30 days after the project’s carbon certificate is obtained. In addition, the preparatory work for the electronic registration system required for the registration of the projects in question has been completed and the registration system has been included in the Environmental Information System of the Ministry. In this respect, the registration of the project owners and their projects should also be carried out through this system.
Currently, there are 308 projects traded in the Voluntary Carbon Market in our country. It is expected that these projects will reduce greenhouse gas emissions of more than 20 million tons of CO2 equivalent annually. The distribution of the mentioned projects by project type is shown in the table below.
The sectoral distribution of these projects as of 2018 is as follows:
Carbon transactions in Turkey are carried out based on voluntary projects and there is no organized compulsory market. However, there is an improvement in the volume of volunteer projects every year. Therefore, voluntary projects pave the way for the formation of an organized market at some point. All of the buyers in emission projects in Turkey are foreigners. Energy companies, on the other hand, sell carbon certificates. Based on all these, it should be stated that it is important to establish a compulsory market in Turkey. In this context, the Partnership of Market Readiness/PMR, which is carried out in partnership with the Ministry and the World Bank, is important as one of the current studies on the transition process of our country to carbon markets. Although the Voluntary Carbon Market of Turkey has a small percentage in the world market, it offers a great opportunity for Turkey to participate in the carbon markets in the future. Besides contributing to the strengthening of Turkey’s technical infrastructure, the carbon market; makes clean technologies attractive to investors.
Companies require financing/ finance for the implementation of the above-mentioned emission reduction projects and, in a broader context, investments related to climate change and the environment. In this respect, unlike the transactions in carbon markets, the World Bank, the European Investment Bank, the International Finance Corporation, the European Bank for Reconstruction and Development issues “green” debt instruments (especially green bonds) in order to effectively implement the targets set within the scope of international agreements and EU regulations. In addition, by issuing green bonds, companies can provide advantageous financing for project investments aimed at protecting the environment and combating climate change.
In Turkey, studies are currently being carried out by the Board for “green” debt instruments and lease certificates to be issued by companies.
2. Green Debt Instruments – Especially Green Bonds
a) What is Bond?
Today, companies need cash in order to comprehend targeted purposes such as making a new investment or paying debts. In order to meet these targets, companies can resort to various methods such as obtaining loans from credit institutions, public offering of company shares, or issuance of debt instruments, depending on market conditions.
Bonds, on the other hand, are debt securities that are issued to meet the long and medium-term cash-fund requirements of companies. While companies meet their fund requirements thanks to the bonds they issue, they also undertake to pay a certain amount at the end of the period determined at the time of issue. This amount generally consists of principal and interest. Bonds may also have different qualities depending on the company’s ability to attract investors and its own commercial conditions. Investors can also choose bonds that are predictable and less risky compared to other instruments to create a balance with risky investments in their portfolios. Because the bonds provide this predictability by committing to obtain a certain return in the determined period.
In Turkish law, both public and non-public joint-stock companies can issue bonds. In order to issue bonds, a decision must be taken in the general assembly of the company, however, the board of directors can be authorized to issue bonds with the company’s articles of association. After the decision is taken in the company, an issue document is prepared and an application is made to the Board for approval of this document. With the approval of the Board, bond issuance will be possible.
b) What are Green Bonds?
In the classical sense, bonds are issued in order to meet the cash requirements of the companies, and in return, the investors get profits at the end of the determined maturity. However, bonds can be created for purposes other than meeting the cash requirements of companies and generating returns from investors. These purposes can be, for example, supporting projects that are against climate change and that will contribute to the protection of the environment. In this context, green bonds are debt instruments issued to finance projects that will protect the environment and prevent climate change.
Green bonds differ from conventional bonds in that they aim to finance a specific project. The purpose of green bonds is not to provide the company with an amount that the company can use freely, but to provide funds to be used only in the financing of projects that meet certain conditions related to climate change and environmental protection. In this context, it is possible to issue green bonds for the implementation of projects such as renewable energy, clean transportation, sustainable waste management, land use, water management, and adaptation to climate change.
Although the issuance of green bonds is not currently more advantageous for the issuer than conventional bonds in terms of costs, it can be said that green bonds are more demanded by investors in the market and this investor mass consists of a wide variety of groups. Therefore, companies have the opportunity to reach a wide and diverse investor base by issuing green bonds, and also create a significant demand for the bonds they issue.
c) Green Bonds in Turkish Law: The Board’s Guidelines to Green Bonds
“The CMB Green Debt Instrument and Green Lease Certificate Guidelines” (Guidelines) was published on 24.11.2021 regarding the rules to be regarded in domestic and international issuance of green lease certificates and green debt instruments, including green bonds. According to the Guidelines, renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, conservation of terrestrial and aquatic biodiversity, clean transportation, sustainable water, and wastewater management, climate change adaptation, eco-efficient and/or adapted products, production technologies and processes, and green buildings are considered “green projects”. A green debt instrument or green lease certificate can only be issued specifically for green projects.
The following conditions must be met for the issuance of green debt instruments, including green bonds:
- The issuer must confirm in the framework document that the issue will be carried out by the principles set out in the Guidelines.
- Proceeds from the issue, or a fund equivalent to this amount, should be used exclusively to finance or refinance, partially or wholly, new and/or existing green projects that meet the definition of green projects in the relevant section of these Guidelines, as specified in the framework document.
- The compliance of the green debt instrument with the Guidelines must be verified by an institution providing external review services.
Only if these conditions are met, the issuer will be able to use the term “green debt instrument/green lease certificate” for the debt instrument to be issued.
In this context, there are four basic components of the green debt instrument. These are information and documents on which projects the amount to be obtained from the issuance will be used, the project evaluation and selection process (information about the characteristics of the project), information on the management of the amount to be obtained from the issuance, and reports on the use of the fund.
- Use of Proceeds Obtained from the Issue
This component states that the funds obtained from the issuance of green debt instruments are required to be used for green projects and the information regarding this must be included in the documents related to the green debt instruments framework document.
- Project Evaluation and Selection Process
The green debt instrument issuer should disclose the following to investors through a Green Debt Instrument Framework Document:
- Environmental sustainability objectives of eligible green projects,
- Information on how the issuer has determined that eligible projects fall within the scope of the green project types defined above, and which types they are,
- Information of the processes implemented to identify and manage potential environmental and social risks associated with green projects.
In addition to the above-mentioned issues, it is recommended that issuers include the following elements in the Framework Document:
- The place of the eligible green project within the framework of the issuer’s inclusive objectives, strategy, policy, and/or processes related to environmental sustainability,
- Information on the label, certificate, taxonomy, standard, compliance, and exclusion criteria, if any, on which the project selection is based.
Issuers are advised to identify practices to mitigate significant risks, if any, known to result from potential negative social and/or environmental impacts of green projects.
- Management of Proceeds Obtained from the Issue
This component refers to the monitoring and management of the net fund obtained from the issuance of green debt instruments, or an amount equal to this net fund, by opening separate and private ledger accounts and in a way that ensures the secure follow-up of all records made.
Issuers must publicly disclose up-to-date information on the use of funds, once a year from the date of issue, on maturity for issues with a maturity of less than one year, within the framework of the Board’s regulations on public disclosure of material events. Reporting should be done until the full amount of funds is used up. In addition, issuers have an obligation to publicly disclose important developments in the same manner.
In the applications to be made for the issuance of green bonds abroad, the framework document is prepared in line with the foreign green bond standards to which the issue is made or to which it is subject and approved by the board of directors, and the external review regarding the compliance with the foreign standards based on issuance must be submitted to the Board.
In addition, this framework document and the external review, together with the issue document, are required to be announced on the Public Disclosure Platform (KAP) and on the issuer’s website, in case the issuer is a member of the Public Disclosure Platform (KAP) for the issuance of green bonds abroad. Therefore, for the issuance of green bonds abroad, in addition to the regulation expected to enter into force in Turkish law, compliance with the green bond standards of the place to which the issuance is sought.
The regulations in the Guide published by the Board are not mainly related to the issuance of bonds, but rather how the amount obtained with the issuance will be used and to supervise this use. Therefore, the issuance of green debt instruments, including green bonds, will be subject to the same procedures and conditions as the bond issuances stipulated in the Communiqué on Debt Instruments No. VII-128.8, without prejudice to the provisions in the published Guide.
3. What awaits Companies in the Future?
Although supporting environmentally friendly projects through green bonds seems to be an advantage for companies, in the future, companies may encounter practices such as Carbon Border Tax, which will impose a significant financial burden on their exports to EU member states, especially if the criteria brought by the Paris Agreement and the Green Deal are not followed.
However, in order for companies to reach financing with more affordable costs, it may be a condition to comply with certain criteria regarding the protection of the environment. Similarly, obligations may be imposed on credit institutions such as allocating resources primarily to green projects or allocating a certain part of their resources to green projects. As a result, companies may face consequences such as unbearable financing costs or the inability to access financing for projects that harm or even do not contribute to the protection of the environment.
The criteria called ESG (Environmental, Social, and Governance) criteria can also be mentioned in this context. The access to finance of companies that meet these criteria is made more advantageous than those that do not, and the amount of finance provided according to these criteria has been increasing in recent years. Therefore, companies should consider green financing as an alternative way of financing.