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The UNFCCC, Kyoto Protocol and the Paris Agreement have been signed by the Republic of Turkey. This agreement entered effect on 10.11.2021. The Paris Agreement has brought international obligations to address climate change and other environmental issues back to the forefront. The Capital Markets Board published a draft guide on the issuance and use of green debt instruments. (Board)It provides the legal infrastructure necessary to finance projects related to climate change or environmental problems in Turkey.
1. The Problem of Climate Change and International Agreements on the Issue
The greenhouse effect is worsened by greenhouse gas emissions caused by human activities. Countries must agree to address climate change as it is a serious threat to the entire world. All countries are trying to play an active role in fighting climate change, with the help international agreements such the United Nations Framework Convention on Climate Change (UNFCCC)The Kyoto Protocol and the Paris Agreement.
a) UNFCCC
UNFCCC is a significant part of 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. The UNFCCC defines the parties as Annex-1, Annex-2, and developing countries. This classification determines the obligations of the countries. There are 40 countries (including Turkey) in Annex-1 countries. They cover industrialized as well as transitional economies. Their main obligation is to adopt new policies, and take the necessary actions to reduce their greenhouse gases emissions to 1990 levels.
Annex -2 countries include 23 countries that must provide financial resources to Annex 1 countries to allow them to reduce their emissions under the Convention. The UNFCCC established a grant-and-loan system that manages the Global Environment Facility (GEF).
Developed countries can provide technology and funds to help developing countries reduce their greenhouse gas emissions, but they are not required to do so. This is because developing countries are not required to reduce their greenhouse gas emission levels unless developed countries provide technology and funds.
It is important to note that UNFCCC sanctions have not been imposed on the parties. They have supported UNFCCC only in good faith.
b) Kyoto Protocol
The Kyoto Protocol was signed by all countries (Protocol)The UNFCCC Protocol entered into force on February 15, 2015. 191 countries are parties to the Protocol. They have pledged to reduce the emissions of gases that cause climate change and global warming. If they fail to do so, they can increase their rights to carbon trading. The Protocol’s first concept of carbon trading is based on the certification by countries of greenhouse gas emissions that have been reduced and the trading of these certificates on carbon markets. A carbon credit (or certificate) is a carbon emission equivalent to one tonne carbon dioxide or another greenhouse gases. It can be traded on carbon markets.
The Protocol divides countries into Annex-1 or Annex-2 groups. Since 2001, Turkey has been included in the Annex-1 List. Our country does not have any commitment to reduce or limit digitized emissions of greenhouse gasses within the Protocol’s scope. To reduce greenhouse gas emissions, 37 industrialized and developed countries have been given legally binding quotas. These countries are priority parties and will only be allowed to emit the maximum amount of greenhouse gas emissions.
Carbon credits can be granted today under mandatory markets such the European Union (EU) Emission Trading Scheme (EU ETS/EU ETS), European Climate Exchange, European Energy Exchange, (EEX), European Climate Exchange, Nord Pool, Climex and Blunext. There are also voluntary markets like the Chicago Climate Exchange, (CCX) and carbon markets that are rapidly growing.
The protocol covers three market mechanisms:
1- Clean Development Mechanism (CDM).
2- Joint Implementation (JI).
3- Emission Trading Schemes (ETS).
ETS is the most popular of all these mechanisms. The EU ETS, or European Union Emission Trading Scheme / EU ETS, is the most popular ETS. It was established in 2005 and operates in 31 countries (27 EU member nations, Iceland, Liechtenstein, Norway and the United Kingdom).
Countries that have not signed the Protocol may reduce their greenhouse gas emissions by selling carbon certificates or credits on voluntary carbon markets.
c) Paris Agreement
The Paris Agreement, which was approved by 195 countries at the UNFCCC Conference of the Parties (December 2015), is also an important part of the global fight against climate change. The Paris Agreement draws attention on the peak in greenhouse gas emission and the need to solve climate problems by the second half century. It also sets out a global action plan that should quickly be implemented.
Within the framework of the Paris Agreement, the parties will come together at “global situation assessment summits” every five years starting from 2023. The parties are also required to create a transparent framework for responsibility, including monitoring greenhouse gas inventories and national developments, every two years.
d) Current Situation in Europe
The EU has announced the European Green Agreement, which was launched by them in December 2019. It is designed to make the Paris Agreement’s environment targets more concrete and reduce carbon emissions until 2030. 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 has been reorganized and entered into effect by being published in the Official Journal of the EU (Regulation for the EU 2021/1119) dated 9 July 2021. Therefore, the European Green Deal’s commitment that greenhouse gas emissions will be reduced by 55% by 2030 and that it will be climate neutral by 2050 is now a binding obligation.
e) Current Situation in Turkey
Turkey has not signed the Kyoto Protocol yet in the 2008-2012 time period, which is the first obligation of the Protocol. As such, it has not been able access the compulsory carbon markets. Turkish companies and public institutions carry out their carbon market project in voluntary carbon markets. These markets are independent from the Protocol’s mechanisms and are created in accordance to the principle of social and environmental 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. The Ministry has also completed the necessary preparatory work to create an electronic registration system for the registration of the project in question. This system should also be used for the registration of project owners and projects.
Currently, 308 projects are traded on the Voluntary carbon Market in our country. These projects are expected reduce greenhouse gas emissions by more that 20 million tons of CO2 equivalent each year. Below is the table that shows the breakdown of the projects.
As of 2018, the following is the sectoral distribution of these project:
Turkey does not have an organized market for carbon transactions. They are conducted based on voluntary projects. Every year, however there is an increase of volunteer projects. Voluntary projects open the door to the possibility of an organized market. All foreign buyers of emission projects in Turkey include energy companies. Energy companies sell carbon certificates. These facts are enough to show that a Turkish compulsory market is necessary. As part of the ongoing studies on the country’s transition from carbon markets to voluntary markets, the Partnership of Market Readiness/PMR (which is done in partnership between the Ministry and World Bank) is important. The Voluntary Carbon Market of Turkey is a small part of the global market, but it presents a great opportunity to Turkey to be part of the carbon markets in future. The carbon market not only strengthens Turkey’s technical infrastructure but also makes clean technologies attractive for investors.
Companies require financing/finance for the implementation and expansion of the above-mentioned emissions reduction projects. 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. Companies can also issue green bonds to finance projects that aim to combat climate change and protect the environment.
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, and how do you define it?
Companies today need cash to fulfill targeted purposes like making new investments or paying off debts. Companies have many options to obtain the cash they need to achieve these goals. These include borrowing money from credit institutions, a public offering of company shares or issuance of debt instruments. Market conditions will dictate.
Bonds are debt securities which are issued to meet companies’ cash-fund requirements. Companies can meet their fund needs by issuing bonds, but they must also pay a fixed amount at the end. This amount usually consists of principal as well as interest. Different qualities of bonds can also be determined by the company’s ability attract investors and its commercial conditions. To create a balance between risky and predictable investments in their portfolios, investors can choose bonds which are less risky and predictable than other instruments. This is because bonds promise a certain return over a set period.
Turkish law allows bonds to be issued by both public and private joint stock companies. To issue bonds, a decision must first be made by the company’s general assembly. However, the board can be authorized to issue bonds in accordance with the company’s articles of association. After the company makes its decision, the issue document is prepared. The Board is then authorized to approve the document. Bond issuance can be made once the Board approves it.
b) What are Green Bonds and How Do They Work?
In the classic sense, bonds are issued to meet cash requirements of companies. In return, investors receive profits at the end. Bonds can be issued for other purposes than generating returns to investors and meeting cash requirements. These purposes could include supporting projects that fight climate change and contribute to the preservation of the environment. In this context, green bonds can be described as debt instruments that are issued to finance projects which will preserve the environment and prevent climate disruption.
In that they are intended to finance a specific type of project, green bonds differ from other bonds. Green bonds are not designed to give the company unlimited access to funds, but only to finance projects that comply with certain conditions. It is possible to issue green bonds to finance projects related to renewable energy, clean transportation and sustainable waste management.
While green bonds are not more cost-effective than conventional bonds, investors demand green bonds more. This investor mass includes a wide range of investors. Issuers of green bonds have the potential to reach a broad investor base and create significant demand for their bonds.
c) Green Bonds under Turkish Law: The Board’s Guidelines on 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”. Only green projects can be granted a green lease certificate or green debt instrument.
For green debt instruments to be issued, including green bonds, the following conditions must be met:
- The framework document must be signed by the issuer confirming that the issue will follow the Guidelines.
- The proceeds of the issue or a fund equivalent should only be used to finance or refinance new or existing green projects that meet the criteria in the relevant section in these Guidelines.
- An institution providing external review services must verify that the green debt instrument is in compliance with the Guidelines.
Only after these conditions have been met, the issuer can use the term “green loan instrument/green lease certificate” to refer to the debt instrument that will be issued.
The green debt instrument has four components. These include information and documents that will help you determine which projects will receive the funds, how they will be used, and the selection and evaluation process.
- Use of Proceeds Obtained From the Issue
This component states the funds from the issuance and use of green debt instruments must go to green projects. Information about this must be included in documents related to the framework document for green debt instruments.
- Project Evaluation and Selection Process
Investors should be able to see the following information from green debt instrument issuers through a Green Debt Framework Document:
- Eligible green projects must meet environmental sustainability goals
- Information on how and why the issuer determined that the eligible projects are within the scope of the above-described green project types, and which types,
- Information about the processes used to identify and manage environmental and social risks related to green projects.
It is recommended that issuers include these elements in their Framework Document, in addition to the previously mentioned issues.
- The eligible green project’s place in the issuer’s inclusive objectives, strategy and policy related to environmental sustainability.
- Information about the label, taxonomy and standard on which the project selection was made.
Issuers are encouraged to identify strategies to mitigate any potential negative social or/and environmental effects of green projects.
- Management of proceeds arising from the issue
This component is responsible for the monitoring and managing the net funds derived from the issuance green debt instruments or an equivalent amount. Separate ledger accounts are opened and managed in a way that ensures secure records are kept.
The Board’s regulations regarding public disclosures of material events require that issuers publicly disclose all information on the use and condition of funds at least once per year. This is for issues with a maturity less than one year. Reporting should continue until all funds are exhausted. Additionally, issuers are required to make public any important developments.
Issue abroad
The framework document must be prepared in accordance with foreign green bond standards.
The Public Disclosure Platform must also be made public the framework document and external review. (KAP) and on the issuer’s website, in case the issuer is a member of the Public Disclosure Platform (KAP) Green bonds can be issued abroad. To be able to issue green bonds abroad, you must comply with the green-bond standards of the country to which they are issued.
The Board’s Guide does not address the issue of bonds. It focuses on how the proceeds will be used and how to supervise their 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, but without prejudice to the published Guide.
3. What’s in store for companies in the future?
Companies may find it advantageous to support environmentally friendly projects with green bonds. However, companies could face practices like Carbon Border Tax in future. These will impose significant financial burdens on their exports from EU member states, particularly if they don’t follow the Green Deal and Paris Agreement.
To help companies get financing at more affordable rates, they may need to meet certain environmental criteria. Credit institutions may also be required to allocate resources to green projects primarily or a portion of their resources to them. Companies could face unfeasible financing costs, or inability of accessing financing for projects that are harmful or even detrimental to the environment.
The ESG criteria (Environmental and Social Governance) criteria can also be mentioned in this context. These criteria make it easier for companies to obtain finance. The amount of finance available to companies that meet them has also increased in recent decades. Green financing is an alternative to traditional financing.
