Berk Cin
Can Ergün
Regulatory and supervisory authorities in Türkiye continue to take significant steps in financial policies without slowing down, within the scope of the fight against climate change. In recent days, the Banking Regulation and Supervision Agency (“BRSA”) publicly announced the Draft Guidelines on the Effective Management of Climate-Related Financial Risks by Banks[1] (“Draft Guidelines”) following the Draft Communiqué on Green Asset Ratio[2] (“Draft Communiqué”), with the aim of achieving the targets outlined in the Sustainable Banking Strategic Plan (“Strategic Plan”).
BRSA has recently published the Draft Communiqué with the objective of assessing how the banks contribute to sustainable finance in their banking activities, and explicitly stated its intention to introduce certain regulations for banks in parallel with the “Green Asset Ratio” set forth by the European Banking Authority. Furthermore, the BRSA prepared Draft Guidelines for banks, based on the “Principles for the Effective Management and Supervision of Climate-related Financial Risks” issued by the Basel Banking Supervision Committee, to achieve another target provided by the Strategic Plan.
What Does the Draft Communiqué Introduce?
Under the Draft Communiqué, the “Green Asset Ratio” emerges as a fundamental performance indicator and can be determined through the calculation of taxonomy-aligned assets divided by the ineligible assets on banks’ non-consolidated balance sheets.
To determine the Green Asset Ratio, a clear distinction is made between ‘taxonomy-aligned asset’ and ‘eligible asset’, and certain pre-requisites are set forth to define financial support and investments as a “taxonomy-aligned asset”. According to the Draft Communiqué, a taxonomy-aligned asset must possess all of the following attributes: (i) making a material contribution to one or more environmental targets, (ii) not causing significant damage to other environmental targets, and (iii) complying with minimum safety measures defined under the Draft Communiqué.
Whilst the BRSA introduces its own regulations for the eligible assets through the Draft Communiqué, it also stipulates that the assets complying with the criteria specified in the European Union Taxonomy will also fall into the scope of the Draft Communiqué,to ensure compliance with the European Union regulations.
Under the Draft Communiqué, banks will be obligated to categorize the assets used in its calculation, to establish monitoring and control process, to institute internal and external policies concerning these assets, to make the necessary adjustments in asset databases, and set up a reporting system in accordance with these requirements. The Draft Communiqué, however, does not specify the frequency of periodical reports, and leave this to the BRSA to determine.
The Draft Communiqué grants extensive authority to the BRSA, including the authority to determine the minimum thresholds for the Green Asset Ratio and to introduce additional key performance indicators, to differentiate those thresholds on a bank-by-bank basis, and to take necessary measures, such as imposing additional capital requirements against the banks that do not comply with the specified thresholds. The “minimum threshold” for the Green Asset Ratio will require the banks to secure sustainable and climate-friendly financing. Furthermore, by imposing a reporting obligation on banks, the BRSA ensures a control mechanism to assess whether banks are in compliance with these thresholds. On the other hand, the kind of policy the BRSA will adopt and the measures it will take against banks that contrary to the obligations outlined in the Draft Communiqué, are not explicitly stated.
What Does the Draft Guidelines Introduce?
With Draft Guidelines, the BRSA outlines a roadmap and fundamental principles for banks to manage climate-related risk factors. According to the Draft Guidelines, banks are required to establish a process and strategic plan to comprehend and evaluate the potential effects of climate-related risks on banking activities, and diligently implement them. With this regulation, the BRSA also encourages compliance with the international regulatory frameworks to banks.
Draft Guidelines regulates the following principles for reducing climate-risk, regular monitoring, and their integration into banking activities:
Corporate Governance:
Developing a process to assess and analyze the potential effects of climate-related risk factors
Incorporating climate-related risks into the risk management frameworks and business strategies
Determination of the responsibilities of the board members, senior management, and/ or relevant committees of banks regarding climate-related financial risks
Internal Systems:
Incorporating into the internal control system to identify, measure, and reduce significant climate related financial risks
Capital and Liquidity Adequacy:
Defining and quantifying financial climate-related risks, and incorporating the internal capital and liquidity adequacy assessment processes
Risk Management Process:
Assessing, monitoring and managing climate-related risks that can significantly affect the financial positions of banks.
Establishing an approach for assessing, measuring and managing all significant financial risks related to climate exposure or potential exposure.
Monitoring and Reporting:
Developing an effective system for collecting risk data related to climate-related financial risks, and an internal reporting system for the regular monitoring of these risks
Comprehensive Management of Credit Risk:
Monitoring the effects of climate-related risk factors on credit risk and considering significant financial climate-related risks in credit risk management.
Comprehensive Management of Market Risk, Liquidity Risk, Operational Risk, and Other Risks:
Analyzing the effects of climate-related risk factors on market risk and incorporating these risks into market risk management systems and processes.
Analyzing the effects of climate-related risk factors on liquidity risk and incorporating these risks into liquidity risk management systems and processes.
Analyzing the effects of climate-related risk factors on liquidity risk and incorporating these risks into liquidity risk management systems and processes.
Analyzing the effects of climate-related risk factors on operational risk and incorporating these significant risks into risk management systems and processes.
Analyzing the effects of climate-related risk factors on other risks and taking the necessary measures against these significant risks.
Scenario Analysis:
Evaluating the resilience of business models and strategies in the context of potential climate-related developments and conducting scenario analysis subject to the effect of climate-related risk factors on general risk profiles.
Conclusion
Given the prominent role banks consistently hold in Turkish financial markets, guiding them toward green financing through the Draft Communiqué and Draft Guidelines will also direct real sector participants toward green financing. We also anticipate that this emerging approach will not solely impact the financial sector but will also compel the real sector to undergo a green transformation. In this context, we foresee that real sector entities seeking favorable financing terms and financial institutions wishing to mitigate additional liabilities will align with the trend of environmental transformation and integrate into this novel framework.
Moreover, in the absence of such an evolution, the consequences will not be limited to the real sector but could potentially result in the gradual phasing out of specific financial sector business lines.While the Draft Communiqué and Draft Guidelines introduce a series of new regulations and best practices for banks, varying according to their size, we believe that Turkish banks, accustomed to adhering to EU and Basel principles for an extended period, will successfully acclimate to this new framework. Nevertheless, given that compliance with these processes necessitates significant changes for banks, the BRSA has indicated that these regulations are set to become effective in 2024.
[1] Please find the Draft Communiqué at “https://www.bddk.gov.tr/Mevzuat/DokumanGetir/1195” (available only in Turkish).
[2] Please find the Draft Guideline at “https://www.bddk.org.tr/Mevzuat/DokumanGetir/1194” (available only in Turkish).