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Turkey Fast-Tracks Sustainable Finance

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Capital Markets
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The Ministry of Treasury and Finance (“Ministry”) published the Sustainable Finance Framework (“Framework“) setting the standards for green, social and sustainable transactions in financial markets on its website on November 12, 2021.

What Does the Framework Mean?

The Framework regulates the standards for sustainable financing instruments (including all green, social or sustainability bonds, sukuks, loans and other debt instruments) and eligible green and/or eligible social projects.

The Framework is prepared in line with the International Capital Markets Association’s (“ICMA”) and the Loan Markets Association’s (“LMA”) guidelines and principles regarding green and/or social financing instruments in accordance with the guidance provided by ING and Standard Chartered Bank. The Ministry also published a second party opinion of an international evaluation company (Sustainalytics) along with the Framework on its website. This opinion confirms the reliability and effectiveness of the Framework as well as its compliance with the ICMA’s principles.

As of November 12, 2021, the Framework will apply to any sustainable finance instrument issued by the Republic of Turkey and the standards regulated under the Framework will apply to these sustainable finance instruments until their redemption.

Financing Instruments Regulated Under the Framework

The Framework regulates three types of financing instruments:

  1. Green Financing Instruments: Instruments where the net proceeds of the issuance will be exclusively used to (re)finance eligible expenditures falling within the eligible green project categories.
  2. Social Financing Instruments: Instruments where the net proceeds of the issuance will be exclusively used to (re)finance eligible expenditures falling within the eligible social project categories.
  3. Sustainability Financing Instruments: Instruments where the net proceeds of the issuance will be exclusively used to (re)finance eligible expenditures falling within both eligible green and social project categories.

Eligible Green and Social Projects

While the Framework sets the eligibility criteria for eligible green and social projects, it categorizes projects according to the United Nations Sustainable Development Goals.
Certain examples of eligible green projects categories under the Framework:

  1. renewable energy;
  2. energy efficiency;
  3. sustainable water and wastewater management;
  4. pollution prevention and control;
  5. clean transportation;
  6. circular economy adapted products, production technologies; and
  7. green buildings.

Certain examples of eligible social projects categories under the Framework:

  1. access to essential services (healthcare, emergency relief and education services);
  2. socioeconomic advancement and empowerment; and
  3. affordable basic infrastructure and housing.

The Framework also lists the activities (e.g. manufacturing of petrochemicals, nuclear power generation) that will be exempted from eligible green and social projects.

Framework’s Core Compounds

The Framework stipulates four core components of sustainable financing instruments.

(a) Use of Proceeds

The net proceeds of the sustainable financing instruments must be fully or partially allocated to (re)finance eligible green projects and eligible social projects that meet the criteria described below.

Furthermore, eligible projects are limited to those that have been initiated in the three years preceding the issuance.

(b) Project Evaluation and Selection Process

The Ministry, together with the working group consisting of the Presidency of Strategy and Budget and other ministries (e.g. Ministry of Energy and Natural Resources, Ministry of Commerce), will review potential green, social and sustainable projects in terms of the eligibility criteria in the Framework and decide whether they are eligible.

Projects approved by the Ministry will have access to the proceeds of the sustainable financing instruments to be issued in accordance with the Framework.

The Ministry will continue to monitor these projects until it concludes that all of the amount equal to the net proceeds from the issuance of sustainable financing instruments is used for the re(financing) of eligible green and social projects.

(c) Management of Proceeds

The net proceeds from the issuance of sustainable financing instruments will be transferred to the Ministry’s account with the Central Bank of the Republic of Turkey. The relevant ministries within the working group will monitor the allocation and tracking.

(d) Disclosure

The Ministry will prepare annual reports on the allocation of net proceeds to sustainable projects, starting from the first year after the issuance of sustainable financing instruments, until all of the net proceeds are spent on eligible green or social projects. The Ministry will also make any necessary disclosures in the event of any material changes regarding these projects.

The environmental and social contributions of Sustainable Financing Instruments will be included in these reports.

The Ministry will publish the reports on its website for investors.

Conclusion

The last one year witnessed huge legislation activity in terms of sustainability. Most recently, the Capital Markets Board has prepared the Draft Guidelines on Green Debt Instruments and Green Lease Certificates, mentioned in our Legal Alert dated November 9, 2021.

The Ministry intends to increase Turkey’s activities in international finance markets by taking the steps on sustainability delineated in the Framework. Thanks to the Framework, Turkey’s transformation into sustainability accelerates and it paves the way for improved access to international finance.

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