Green Finance: Definition, Types, Benefits, and Its Status in Turkey

The depletion and destruction of resources on the planet day by day affect not only today\'s living conditions but also tomorrow. Global warming, damage to land and marine ecosystems, and many other environmental disasters cause social and economic problems as well. To combat this situation, many strategies are being developed globally. Green finance is one of them.

What is Green Finance?

Green finance is a financial support that benefits environmental and economic activities. Put more clearly and simply, green finance refers to loans and investments that support the purchase of environmentally friendly products and services and the creation of an 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 Border Adjustment Mechanism)

• 2019 – European Green Deal

• 2021 July – Fit for 55 Package (Five priority sectors: aluminum, cement, iron and steel, fertilizer, electricity)

• 2021 October – 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.

Projects supported under the green bond category 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 regarding investments in environmental goals, green finance is a support that encompasses each sustainable development criterion set under the UN Sustainable Development Goals.

At the core of today\'s global economic system, capital is allocated to different sectors by banks and investors. The ecosystems of the future, production and consumption patterns are also shaped by this allocated capital. In this context, the existence of green finance is closely related to environmental sustainability in all its dimensions (environmental, social, governance).

The UN Environment Programme (UNEP) aims to achieve the UN Sustainable Development Goals by aligning financial supports for environmental development with the 2030 sustainable development agenda. Towards this goal, it redirects financial flows by working together with countries, financial regulators, and the financial sector.

Some of the projects supported by green finance can be listed as follows:

• Pollution prevention and control,

• Renewable energy and energy efficiency,

• Conservation of biological diversity,

• Sustainable use of natural resources and land,

• Circular economy initiatives.

The main goal of these and similar projects is to produce comprehensive, effective, and at the same time market-oriented solutions to environmental challenges.

 Incentives and current fields of study for green finance can be listed as follows;

• Not being involved in wealth transfer,

• Not disrupting the market mechanism,

• Differentiation based on carbon emission reduction,

• Supporting the public sector to create an enabling environment,

• Community enterprises building capacity in microcredit,

• Supporting 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 companies/brands by increasing their participation in green finance and advertising it. In this way, they can attract more environmentally conscious investors and customers.

• Governments supporting green finance can provide high employment potential by creating local markets for renewable energy. This can also help protect their communities from resource scarcity.

• Green finance promotes the dissemination of technologies and the development of environmentally friendly infrastructure in developing countries. Thus, the country\'s competitiveness also increases.

• Green finance offers a competitive advantage in the long term. In a world where environmental regulations will turn from voluntary to mandatory, expanding green finance ensures being one step ahead in tomorrow\'s world.

Along with its advantages and opportunities, green finance also has some challenges. These challenges can be listed as follows:

• Capital mobilization for green investments may be constrained by certain microeconomic barriers (maturity mismatches, etc.).

• Financial and environmental policy approaches are not always aligned with each other.

• To avoid greenwashing (a company using marketing strategies to appear more environmentally friendly than it actually is in terms of environmental sustainability), the definition of green finance needs to be clear and precise.

• There is a need for more education and awareness among investors and finance professionals regarding the importance and benefits of sustainable finance.

• There needs to be greater transparency and standardization in ESG (Environmental Management System) reports.

Risks that could affect the financial system due to climate change can be listed as follows, according to Mark Carney, one of the well-known governors of the Bank of England:

Physical Risks: Damage to individuals, homes, and organizations from natural events such as hurricanes, floods, cyclones, heatwaves, and water scarcity causes disruptions in supply chains. This situation leads to a decrease in agricultural productivity and threatens food security.

Transition Risks: Certain legal regulations are made to lead to low emissions and less environmental pollution. As a result of these regulations, changes in the value of some goods and services may be observed. For example, when vehicles with sustainable energy sources are incentivized or additional regulations related to emission production are introduced, the value of fossil fuel vehicles that cause high emissions may decrease. The impact of legal regulations and changes in consumer behavior can cause assets to decrease or increase in value.

Legal Risks: The increase in environmental disasters due to climate change causes an increase in the legal processes of individuals, organizations, and financial institutions. This situation may increase the probability of companies facing liability risks.

The State of Green Finance in Turkey

In Turkey, banks started providing financial support to nature-friendly projects from 2012 onwards. Banks using European-sourced funds started their monthly interest rates from 1%. By extending loan maturities up to 15 years, they began to offer green finance support for environmentally friendly projects.

Various foreign banks and funds offer long-term and low-interest financial support to environmentally friendly initiatives through Turkish banks. We can list some of them as follows:

• European Investment Bank,

• Council of Europe Development Bank,

• European Bank for Reconstruction and Development,

• French Development Agency Proparco,

• JBIC,

• German Industrialization Fund.

The Turkey Sustainable Energy Financing Program (TURSEFF) is one of the institutions that finds financial support in the field of renewable energy from many foreign sources. This program provides financial support to eco-friendly projects with interest rates starting from 1% 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,

• İş Bankası.

The state of green finance in Turkey is as follows:

• All activities in this area in Turkey are still in the initial stages,

• Macroeconomic conditions are the biggest obstacle in this area,

• There is an extreme appetite for this area and it is developing rapidly,

• Resources provided through green loans and capital market instruments are limited.

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