Green Finance: Definition, Types, Benefits and Status in Turkey
Increasing consumption and destruction of the planet’s resources affect not only today’s living conditions but also tomorrows. Global warming, damage to ecosystems on land and in the seas, and many other environmental disasters are causing social and economic problems. Many strategies are being developed globally to combat this situation. Green financing is one of these strategies.
What is Green Financing?
Green financing is a financial support that gives advantages to environmental and economic activities. To put it more clearly and simply, green financing is loans and investments that support the purchase of environmentally friendly products and services and the creation of environmentally friendly infrastructure. The historical development of green finance is as follows:
- 1997 – Kyoto Protocol
- 2015 – UN Sustainable Development Principles
- 2015 – Paris Climate Agreement (Carbon Regulatory Mechanism at the Border)
- 2019 – European Green Deal
- July 2021 – 55 Compliance Package (Five priority sectors: aluminum, cement, iron and steel, fertilizer, electricity)
- October 2021 – Ratification of the Paris Climate Agreement
What are the Types of Green Finance?
The types of green finance can be listed as follows:
- Green bonds,
- Green mortgages,
- Green banks,
- Green loans.
The projects supported under green bonds can be listed as follows:
- Energy efficiency,
- Climate change adaptation,
- Eco-efficient products,
- Renewable energy,
- Clean transportation,
- Pollution prevention and control,
- Sustainable water management,
- Fisheries and forestry,
- Biodiversity.
Sustainable Development Goals and Green Finance
Encouraging transparency and long-term thinking about investments towards environmental goals, green finance is a support that incorporates each of the sustainable development criteria set out in the UN Sustainable Development Goals.
At the center of the current global economic system, capital is allocated by banks and investors to different sectors. Future ecosystems, production and consumption patterns are also shaped by this allocated capital. In this context, the existence of green finance is closely related to all dimensions of environmental sustainability (environmental, social, governance).
The UN Environment Program (UNEP) aims to achieve the UN Sustainable Development Goals by aligning financial support for environmental development with the 2030 sustainable development agenda. To this end, it works with countries, financial regulators and the financial sector to guide financial flows.
Some of the projects supported by green finance can be listed as follows:
- Prevention and control of environmental pollution,
- Renewable energy and energy efficiency,
- Biodiversity conservation,
- Sustainable use of natural resources and land,
- Circular economy initiatives.
The main objective of these and similar projects is to generate comprehensive, effective and market-oriented solutions to environmental problems.
Incentives for green finance and current areas of work can be listed as follows;
- Non-involvement in wealth transfer,
- Not distorting the market mechanism,
- Differentiation according to carbon emission reduction,
- Supporting the public sector to create an enabling environment,
- Capacity building of community enterprises on microcredit,
- Support public-private partners on various financing mechanisms such as green bonds.
Benefits and Challenges of Green Finance
The benefits of green finance, which provides economic, social and environmental advantages, can be listed as follows:
- Businesses can increase the value of their company/brand by increasing their participation in green finance and advertising it. This can attract more environmentally concerned investors and customers.
- Governments that support green finance can provide high employment potential by creating local markets for renewable energy. This can also help them protect their communities from resource scarcity.
- Green finance encourages the diffusion of technologies and the development of environmentally friendly infrastructure in developing countries. This increases the competitiveness of the country.
- Green finance offers a competitive advantage in the long run. Environmental regulations will change from voluntary to mandatory.
In parallel to its advantages and opportunities, green finance also has some challenges. These challenges can be listed as follows:
- Capital mobilization for green investments can be constrained by a number of microeconomic barriers (maturity mismatches, etc.).
- Financial and environmental policy approaches are not always compatible.
- The definition of green finance needs to be clear and unambiguous to avoid greenwashing (when a company uses marketing strategies to appear more environmentally friendly than it actually is in terms of environmental sustainability).
- There is a need for more education and awareness among investors and finance professionals on the importance and benefits of sustainable finance.
- There needs to be more transparency and standardization in ESG (Environmental Management System) reports.
According to Mark Carney, one of the well-known governors of the Bank of England, the risks that may affect the financial system due to climate change can be listed as follows:
- Physical Risks: Natural events such as hurricanes, floods, cyclones, heat waves, and water shortages damage individuals, homes, and organizations, disrupting supply chains. This leads to reduced agricultural productivity and threatens food security.
- Transition Risks: Several legal arrangements are made that will lead to low emissions and less environmental pollution. As a result of these regulations, the value of some goods and services may change. For example, sustainable energy.
- Legal Risks: The increase in environmental disasters due to climate change leads to an increase in legal processes for individuals, organizations and financial institutions. This may increase the likelihood of companies facing compensation risks.
Status of Green Finance in Turkey
Banks in Turkey have started to provide financial support to environmentally friendly projects since 2012. Using European funds, banks started to offer monthly interest rates at 1%. They started to offer green financing support for environmentally friendly projects by extending loan terms up to 15 years.
Various foreign banks and funds offer long-term and low-interest financial support to environmentally friendly initiatives through Turkish banks. Some of these can be listed as follows:
- European Investment Bank,
- Council of Europe Development Bank,
- European Bank for Reconstruction and Development,
- Proparco, the French Development Bank,
- JBIC,
- German Industrialization Fund.
The Turkish Sustainable Energy Finance Facility (TURSEFF) is one of the organizations that has found financial support for renewable energy from many foreign sources. This program provides financial support to environmentally friendly projects with interest rates starting from 1% for up to 60 months.
In addition to TURSEFF, there are many organizations that have provided support in the field of renewable energy. These organizations can be listed as follows:
- Vakıfbank,
- Industrial Development Bank of Turkey,
- Turkish Economy Bank,
- Denizbank,
- Isbank.
The current state of green finance in Turkey is as follows:
- In Turkey, all studies in this field are still in their infancy,
- Macroeconomic conditions are the biggest obstacle in this area,
- There is a huge appetite for this area and it is developing rapidly,
- Resources provided by green credit and capital market instruments are limited.
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