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Environmental Investments and Sustainability in Integration with Green Finance

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Definition of green financing framework… Green bonds are special bonds that aim to promote sustainability and support climate-related or other special environmental projects. In other words; It is all kinds of debt instruments traded on the Stock Exchange where the funds to be obtained from its issuance will be used exclusively for financing or refinancing new and/or existing green projects in accordance with the definition of new and/or existing green projects. International framework of green finance; It is based on goals such as the Paris Climate Agreement, the UN 2030 Sustainable Development Goals and the EU Green Consensus. These purposes; for example, reducing global warming to less than 2 degrees Celsius by 2030 or zeroing net greenhouse gas emissions by 2050.

 

Opportunities provided by green financing… Many advantages and opportunities can be mentioned with green financing. For example; Companies can create new production lines at the point of new business areas and related investment resources that will occur in the transformation process of the global economy. Accordingly, renewable energy projects and related funding opportunities can be used to reduce carbon emissions. Funding sources; There may be private sector actors with environmental and social sensitivity, there may also be public and international resources. If we consider the depletion of fossil fuel resources and the current supply chain disruption; It is clear that overcoming the export bottleneck and the constraints on supply was through renewable energy sources. Moreover, in terms of environmental sustainability, it is necessary to avoid catastrophic events such as climate change or depletion of water resources. This situation also reveals the necessity of expanding financial opportunities at the global level and establishing a new economic order.

 

Projects that may be the subject of green financing, basic principles and standards… To exemplify projects that may be subject to green financing;

 

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·        Renewable energy

·        Energy efficiency

·        Pollution prevention and control

·        Environmentally sustainable management of living natural resources and land use

·        Conservation of biodiversity on land and in the sea

·        Clean transportation

·        Sustainable water and wastewater management

·        Adaptation to climate change

·        Eco-efficient and/or adapted products, production technologies and processes

·        Green buildings that meet the requirements of regional, national or internationally accepted standards or certificates

 

Nuclear energy production, fossil energy production, alcohol and cigarette production, and the betting industry are areas where green bond issuance is not possible.

 

Environmental, social and governance criteria… Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen for potential investments. Environmental criteria consider how a company is performing as a guardian of nature. ESG criteria can also help investors avoid companies that could pose greater financial risk due to their environmental or other practices. Recently, many funds have been considering ESG certification.

 

To give an example;

 

Environmental: Disposal of hazardous waste, reduction of toxic emissions, compliance with environmental regulations, carbon emissions and sustainability, limitation of harmful pollutants and chemicals, reduction of greenhouse gas emissions, use of renewable energy sources…

Social: Working with suppliers with environmental norms and values, an ethical supply chain, donating a percentage of the profits to social responsibility projects, encouraging employees to volunteer in social responsibility projects, working conditions of the company, giving importance to the health and safety of its employees, studies on sexual abuse and discrimination, fair wage policy…

Governance: Accurate and transparent accounting methods, adoption of diversity in boards (gender etc.), corporate transparency, appointing a CEO independent from the Chairman of the Board…

 

Average Weight of Criteria and Climate Change Scores in the MSCI ESG Ratings Methodology… The table above shows the sectoral average weight for each climate-risk and climate-opportunity key issue score in the MSCI ESG Ratings methodology… Source: MSCI

 

Conclusion? With environmental sensitivity and transformation, the need for quality environmental financing of institutions will increase. Renewable energy investments will increase within the scope of reducing carbon emissions. ESG investments represent a growing portion of general capital market investments. In order not to lag behind the new economic norms, companies will strive to become ESG compliant. Fixed income ESG criteria tend to improve as integration gains ground. While the main criteria in bonds are maturity and interest, nowadays more portfolio managers include ESG criteria in their analysis.

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