The Banking Regulatory and Supervisory Authority (“BRSA“) presented the Draft Communiqué on Green Asset Ratio (“Draft Communiqué“) on the procedures and principles regarding the calculation and reporting of the green asset ratio and other key performance indicators determined for the calculation of banks’ contribution to the financing of environmentally sustainable economic activities to the finance sector for comments and opinions. Within the scope of the Draft Communiqué, banks will be obliged to report their green asset ratio to the BRSA at certain intervals. You can access the Draft Communiqué here.
What’s new under the Draft Communiqué?
1.Primary key performance indicator
According to the Draft Communiqué, the primary key performance indicator for the determination of Turkish banks’ contribution to environmental sustainability is the green asset ratio.
The green asset ratio is calculated by dividing the compliant assets in banks’ unconsolidated balance sheets by the eligible assets. Therefore, the concept of compliant assets and eligible assets are crucial in calculating the green asset ratio.
1.1 Compliant assets
Compliant assets are calculated by summing the gross amount of on-balance sheet financial assets measured at amortized cost that are related to economic activities and meet all three criteria below at the same time.
a. Contribute significantly to one or more of the environmental objectives
To be considered a compliant asset, a financial asset must serve the objectives under the European Union Taxonomy classification system for activities considered environmentally sustainable by the European Union (“EU Taxonomy“), which are as follows:
i.Climate change mitigation
ii.Adaptation to climate change
iii.Transition to a circular economy
iv.Sustainable use and conservation of water and marine resources
v.Prevention and control of pollution
vi.Preservation and restoration of biodiversity and ecosystems
Accordingly, financial assets are required to contribute significantly to at least one of the above environmental objectives. However, pursuant to Provisional Article 1 of the Draft Communiqué, only environmental targets numbered (i) and (ii) will be taken into account in the calculation of the green asset ratio until other environmental targets are taken into scope by the BRSA.
b. No significant harm to other environmental objectives
Financial assets that qualify as compliant assets must contribute to one or more of the environmental objectives listed above, while not causing significant harm to any of the remaining environmental objectives. In determining whether an activity meets the criterion of not causing significant harm to the environment, the following five criteria enclosed to the Draft Communiqué will be taken into account:
i.Violation of the condition of no significant harm to the environment
ii.Climate risk vulnerability assessment
iii.Sustainable use and conservation of water and marine resources
iv.Pollution prevention and control related to the use and presence of chemicals
v.Biodiversity and ecosystem restoration and protection.
c. Providing minimum social security measures
Activities related to compliant assets and related parties will be required to provide the minimum security measures set out in the Draft Communiqué. To be classified as compliant under the Draft Communiqué, the activity must not be contrary to human and labor rights, corruption, tax and competition laws, and the business carrying out the activity must comply with the responsible business conduct standards in the OECD Guidelines for Multinational Enterprises, the eight fundamental conventions defined in the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work, the UN Guiding Principles on Business and Human Rights and the International Bill of Human Rights.
Within the framework of the specified standards and principles, the compliance of an enterprise or an activity with minimum security measures will be assessed according to respect for human, labor and consumer rights, combating bribery and corruption, compliance with tax regulations and compliance with fair competition regulations.
1.2. Eligible assets
Eligible assets will be calculated by summing up the gross amount of on-balance sheet financial assets measured at amortized cost for all economic activities identified in the EU Taxonomy technical screening criteria, regardless of whether they meet the technical screening criteria set out in the Draft Communiqué.
2. Additional key performance indicators
According to the Draft Communiqué, additional key performance indicators for Turkish banks’ contribution to environmental sustainability are “compliant assets/gross assets” and “eligible assets/gross assets” ratios.
Gross assets will be calculated as the sum of the gross amounts measured at amortized cost of the remaining on-balance sheet assets after subtracting receivables from central governments, central banks and multilateral investment banks and development institutions, as well as assets held for trading from total financial assets.
The Draft Communiqué, which takes into account local regulations and bank practices but relies heavily on the EU Taxonomy framework, is significant as it plans to introduce a mandatory measurement of banks’ contribution to the financing of environmentally sustainable economic activities and requires long-term structural reforms for banks.