Understanding Financed Emissions Risks in Turkey’s Financial System
By Blake Goud and Dr. Eman Tabet
Summary
In October 2021, Turkey became the final G20 country to ratify the Paris Climate Agreement ahead of the COP 26 Summit in November in Glasgow, United Kingdom. The delay was indicative of Turkey’s generally conflicted relationship with some elements of global climate action. It was particularly unhappy that under the Kyoto Protocol, Turkey was included in the nations that are expected to ultimately contribute to developing countries’ climate action despite being an emerging economy and contributing a small share of global emissions.
Late ratification of the Paris Agreement didn’t mean Turkey wasn’t taking action on climate change or pursuing funding from external sources in the meantime. But it does face tensions between investments in afforestation projects and renewable energy and other national strategies to promote short-term growth and raising electricity supply with new coal-fired power plants.
These tensions between environmental issues and short-term economic growth create significant uncertainty for investors and financial institutions as Turkey’s economy is highly dependent upon exports. In particular, exports to the European Union are susceptible to being made less competitive under a carbon border adjustment tariff designed to equalize Europe’s domestic and imported carbon costs.
Therefore, it is important for Turkey’s financial sector, and especially banks, to evaluate the sources of greenhouse gas (GHG) emissions that it finances, directly and indirectly. In Turkey, the direct sources of emissions are concentrated in the electricity-generating sector. Other emissions are spread across a diverse range of sectors. With the uncertain trajectory of future emissions relating to electricity generation, banks will have to more closely monitor the relationship between their directly and indirectly financed emissions.
Most indirect emissions important to the financial sector relate to the emissions embedded in sources of demand for electricity, transportation and waste by the companies they finance. Different companies in different parts of Turkey will have different embedded emissions depending on the local sources of generating capacity. Banks providing companies and households with financing will have to factor in the full economic cost of these indirect emissions whatever their cause (border adjustment tariffs, reputational concerns, or increased regulation of high GHG emitting sectors).
The structure of the Paris Agreement included a ratchet mechanism to encourage increased ambition over time towards the 2030 goals. This has been materialized through the immediate actions taken ahead of the COP 26 Summit. The next steps will come with strengthening of national targets in 2022 followed by the Global Stocktake in 2023. These will provide input as countries set their final round of climate targets under the Paris Agreement in 2025.
Companies, investors and financial institutions have a very near-term opportunity to assess and mitigate sources of direct and indirect financed emissions risk. In doing so, they will have to consider a range of possible scenarios requiring data inputs that are not always centrally collected. As a result, ‘order of magnitude estimates’ such as those presented in this report can provide an indication of where risks are located, and how they are aligned when compared with the economy as a whole. This provides the starting elements of what is required in order for financial institutions, investors and companies to take action.
Recommendations
Financed emissions risk identification and mitigation
Financial institutions and investors with significant customer bases among exporters facing a border adjustment tariff such as the European Union should evaluate its potential impact on their customers’ ability to repay financing
Banks and others who have used afforestation projects to offset carbon emissions must evaluate their reputational risk exposures if forest fires impair the reserves of carbon sequestration projects
Financial institutions should track the impact of localised electricity generation pathways to account for different trajectories of the electricity generation mix
Policy support for responsible finance
• Borsa Istanbul should encourage listed companies to more fully disclose their greenhouse gas emissions & follow TCFD recommendations
The Banking Regulatory Authority (BDDK) of Turkey should announce a time-frame during which it will conduct a stress test of the climate-related financial risks facing the banking sector and other financial institutions
The Capital Markets Board of Turkey should consider establishing a grant scheme to cover the additional issuance costs of green, sustainability and transition bonds & sukuk so as to incentivize more rapid adoption by issuers
Opportunities
Financial institutions should use their improvements in financed emissions measurement systems to pursue funding via new green and transition bond & sukuk issuances to tap new investor bases
Banks, especially participation banks, should focus on how they can transform their vehicle financing to lower their overall and relative GHG. They should look into electric vehicle financing to take advantage of a transition towards financing ‘mobility’ solutions
Banks should improve their tracking capabilities to measure how their financing performs based on its emissions footprint in order to build data that would be needed before regulators consider allowing any green supporting factor
Download the report
When you click “Download”, you will receive a copy of the report. If you clicked the box to subscribe to our email newsletter, you will be added to our mailing list. You can easily unsubscribe at any time using the unsubscribe link included with every newsletter. See our privacy policy for more information.