Sustainable Banking and Green Finance
When analysing the issue of sustainable banking and green finance, it is first necessary to address the concept of “sustainability”. To briefly explain sustainability, one of the most accurate definitions that can be made is; “Considering the benefits of society and future generations by taking into account environmental and social factors, the impacts and risks of these factors, as well as economic and financial criteria in business and investment decisions”. However, the negative changes in the world today and the various environmental problems we are facing have led the concept of “sustainability” to gain more and more importance and many definitions of this concept have been made. Although different definitions have been made, the basic principle that all definitions have in common is not to harm the ability of future generations to provide for their needs while providing for our own needs and not to forget the principle that resources are limited under any circumstances. The Brundtland Report, which was published in 1987 and which has been leading the sustainability journey in which the whole world is involved today, defined “sustainable development” as “meeting the needs and demands of today without compromising the ability of future generations to be able to meet their own needs.
What is Sustainable Finance?
In our world, especially in the recent period, unseasonal temperature averages, forest fires, serious negative changes on ecosystems, floods, droughts, the rate of natural resource depletion and spreading diseases are gradually increasing. Due to climate change, we face water shortages more than ever, degradation in soil quality and low yields in agricultural products decrease economic activities and consequently the welfare level of the society. For these reasons, the way in which resources are utilised today needs to be meticulously evaluated, taking into account the long-term consequences for the future.
The mutual effects of the current financial system on the environment and the mutual effects of changes in the ecosystem on economic activities have accelerated the efforts to make the financial sector sustainable on a global scale, especially after the Paris Climate Agreement. As is known, the Paris Agreement aims to keep the global temperature increase below two degrees Celsius, reduce carbon emissions by 50% worldwide by 2030, and even reduce them to zero by 2050. The European Union continues to take important steps in the field of sustainability in line with the strategies developed within the framework of the “Sustainable Finance Action Plan Framework” published in 2018, the EU Taxonomy implemented in 2020 and the “Corporate Sustainability Reporting Directive” that has been published.
The past economic model, which was not taking environmental risks into account, has created a huge pressure on economic resources. Due to the increasing consumption of resources, problems such as increased greenhouse gas emissions and waste, chronic inflation, increased air and water pollution and decreased biodiversity are emerging, and the risk of future generations facing a shortage of access to the economic resources is no longer a risk, but a very likely foresight. Unless the necessary steps are taken to make economic models sustainable, it is thought that the economic dimension of the damages that will occur until 2030 due to environmental problems and climate change-related disasters will reach 290 to 580 billion dollars.
The concept of “sustainable finance”, which gains importance at this point, defines situations where risks and opportunities in ESG (environmental, social and governance) criteria are taken into account and integrated into investment management processes. ESG (Environmental, Social and Governance) criteria, also known as sustainability criteria, provide guidance to investors in order to ensure transformation to a sustainable economy and aim to implement investments by considering risks and opportunities.
In this new system, investments are now made by considering not only financial returns but also environmental or social impacts. It is possible to evaluate all these activities carried out in the field of economy and finance within the scope of “sustainable finance and sustainable banking” in order to minimise the damage to nature and to develop solutions against the negativities caused and that will continue to be caused by industry and trade in the world with the aim of creating a more livable world and community life.
What is Green Finance?
Green finance is a system that encourages the transformation of the economy into a sustainable model using low-carbon and environmentally friendly methods and produces solutions to protect the environment. There are differences in scope between green finance and sustainable finance. Although sustainable finance has a wider scope, both concepts are based on the principle of transforming the world into a more livable place for future generations. Within the scope of sustainable finance, as mentioned above, ESG criteria, social and governance dimensions and risks in these dimensions are also included in the evaluation; whereas in green finance, only environmental risks are taken into account in general terms, and it is aimed to produce some solutions for collecting the financial resources needed to combat climate and environmental problems and to manage financial risks. Green finance, which differs from sustainable finance at such points, may be defined generally as a set of financial activities formed with the aim of leaving a positive impact on the environment. In this context, green finance covers a wide range of financial products and services such as investment, banking and insurance products.
In order to ensure green transformation in Turkey in accordance with various international agreements, it is necessary to develop green financing activities, to take the necessary steps for the economic transformation and to carry out various infrastructure works in order to access international green financial markets.
Why Should Companies Give İmportance to Sustainable Finance?
As explained in detail above, the loss of biodiversity, global warming, rapid depletion of natural resources, rapid population growth and other environmental problems that we face on a global scale are posing significant risks for both present and future generations. Such problems have pushed humanity to search for a new order or to find some developments that will stop the increase of these problems. In terms of companies, it is now necessary to take actions by considering social and environmental dimensions in addition to the development of their own finances. In the financial field, approaches based on environmental problems have become increasingly widespread. It is no longer sufficient for companies to achieve financial success only with their services or sales, since investors now prefer companies that adopt environmentally friendly principles and are based on the principle of sustainability. Therefore, it is possible to say that companies that carry out their activities within the framework of sustainable finance and sustainable banking can find investors more easily and meet their cash needs more easily.
Companies that give importance to sustainable finance also increase their ESG score, which is a measure that reveals their social, environmental and managerial performance, and many positive feedbacks can be obtained by means of this measure, which shows the sensitive approaches of the company. In addition, companies set an example for their peers in their sectors and thus, the adoption of sustainable finance in the sector becomes more possible.
The main advantages of sustainability for companies are as follows;
- Increasing the rate of preference by investors and meeting cash needs more easily,
- Reduction of costs in the long term,
- Contributing to the integration of new investment instruments (green bonds, etc.), new credit instruments, and new concepts such as smart cities and low-carbon transport into our lives,
- Increase in corporate reputation and consumer demands, increase in ESG score,
- Being more open to new opportunities and the chance to enter emerging markets,
- Competitive advantage,
- Increase in brand value,
- Adapting to legal sanctions that may occur in the future and taking precautions,
- Setting an example for other companies in the sector to adopt sustainability,
- Extending the life of the company.
Conclusion
In conclusion, when it comes to sustainability, every segment of the society, including companies, individuals, institutions and organisations, has the obligation to do their best for future generations and to act with the principle of protecting the environment. On a country basis, Turkey, which is in the category of developing countries, needs to switch to a low-emission economic model without wasting time in order to achieve the target it has committed within the framework of the Paris Climate Agreement and not to be adversely affected by the regulations set out within the scope of the European Green Deal. In this context, it is clear that Turkey should direct its existing resources towards sustainable projects. In order to place the Turkish financial system on sustainable foundations, Turkey should closely follow the developments in the European Union and implement similar regulations as soon as possible.
It is now considered as a certainty rather than a possibility that companies that do not adopt the principle of sustainability will suffer damages and financial losses in the future, while companies that adopt sustainability are thought to provide great benefits to both their companies and our planet.
If you think that you have not yet taken any steps in this regard, you can take the first steps towards adopting and implementing the principle of sustainability, starting with introducing a number of new practices that will minimise your damage to the environment on behalf of the sustainability of your company. You can receive consultancy service from our team on issues requiring legal expertise within the scope of sustainable and green finance and various related issues.