Banks and Carbon Markets

Certain clients serviced by Turkish banks will either face exposure to emission reduction legislation or seek involvement in the operation of greenhouse gas mitigation projects that may offer the benefits of selling carbon offsets. Banks are in a position to offer specialised services aimed at helping existing and new clients to manage the risks and exploit the opportunities created by both the international and domestic carbon markets.

Figure: Role of banks in the carbon markets

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Source: Climate Focus and GAIA, 2021

T he consultancy under MidSEFF seeks to strengthen partner banks’ capacities across the following three areas:

1. Exploring carbon market services

A number of Turkish banks already finance renewable energy and energy efficiency projects registered under a carbon standard. As such, partner banks are in a position to act as the intermediary party between carbon project sponsors and developers. The consultancy advises partner banks on:

• exploring opportunities in the carbon market: Project sponsors are interested in investigating opportunities offered by the carbon markets and will look for ways to apply carbon financing. The consultancy supports banks with tailoring the types of carbon market services that can be of relevance to clients, including carbon project origination, project finance, securitisation and trading support
• managing exposure to carbon risk: An increasing number of Turkish corporations are active in the European market and are thereby directly or indirectly affected by the cap-and-trade legislation imposed by the EU ETS. Banks can help these clients understand, anticipate and manage exposure through advisory and trading. In support of this, the consultancy has developed an emissions trading simulation model allowing partner banks to get insight into the type of events that can influence carbon pricing

For further details about of the types of carbon market services available to partner banks, please click here .

2. Support with legal and regulatory oversight of carbon market services

Activities of banks are strictly regulated to limit exposure to non-core activities. To support selected partner banks with integrating carbon market services within their portfolio of services, the consultancy supports banks with understanding the applicable legal and regulatory framework relating to these activities. The support extends to the following areas of work:

• assisting Turkish partner banks with clarifying the regulatory oversight on carbon market services: It remains unclear how Turkish banks can provide carbon market services in the context of the current Turkish legal and regulatory framework. A study outlining the ‘legal and regulatory review of carbon market services for banks in Turkey’ was prepared by the consultant in March 2013 and identifies the current gaps that exist on the regulatory side, and what can be done to overcome them
• assisting Turkish regulators with providing clarification to Turkish partner banks on regulatory oversight of carbon market services. To clarify oversight of carbon market services, Turkish partner banks are seeking clarification from relevant regulatory bodies. These include the Banking Regulation and Supervision Agency (BDDK), the Capital Markets Board (CMB) and the Energy Markets Regulatory Authority (EMRA). The consultancy provides assistance to these regulators in providing clarification and guidance. This support includes providing insights on how carbon market regulation is managed in other jurisdictions, the conclusions of which are published in the report ‘International experiences with carbon market oversight’ (November 2014)

For further details about of the regulatory review work conducted under this consultancy, please click here .

3. Carbon pricing and Climate Finance tracking

Increasingly more international financial institutions are adopting approaches to use carbon pricing to quantify the exposure associated with carbon intensive investments. The application of internal carbon pricing to investments can be a useful tool to generate internal data and know-how to enable financial institutions to:

• develop capacity to assess the risks and opportunities presented by climate change and climate policy to investment portfolios, and integrate, where appropriate, this information into investment decisions
• work with the companies in which they invest, or which they fund, to ensure adequate disclosure and management of risks and opportunities presented by climate change and evolving climate policy
• report on actions taken and progress booked by financial institutions in addressing climate risk and investing in areas such as renewable energy, energy efficiency and climate change adaptation
• track climate finance to facilitate access to green funding from capital markets and channel to renewable energy and renewable energy investments

The consultancy assists partner banks with:

• the determination of a methodology for the application of carbon prices for the investment appraisal and portfolio monitoring of investments in the banks’ projects and the application of the methodology on a number of select business cases
• the definition of climate finance in the banks’ investments and giving advice on the methods and processes to track climate finance in their portfolio in a cost efficient way

For further details about of Internal Carbon Pricing and Climate Finance Tracking for banks, please click here .

MRV in Turkey: implications and opportunities for Turkish Financial Institutions

The momentum for climate action is strengthening across the financial sector, with banks, insurance companies, and asset managers starting to embed climate change impacts into mainstream finance activities and investment decisions. Managing exposure to the various risks associated with climate change is a key motivation for financial institutions to adopt strategies, programmes and operations that prioritise climate. These include both physical risks associated with climate change, but also exposure to regulatory developments that pose both risks and opportunities for financial institutions:

Financial institutions in Turkey are closely following international and domestic developments in the area of climate policy and regulation, and are evaluating available approaches to scrutinise their portfolio exposures to climate risks, reallocate assets to more climate-friendly investments, divest from assets at risk of becoming stranded, and introduce tools such as internal carbon pricing to inform future investment decision making. Examples of leading efforts enabling financial institutions to achieve climate alignment and set targets include:

• Task Force on Climate-related Financial Disclosures’ (TCFD) Paris Aligned Investing Initiative
• Partnership for Carbon Accounting Financials (PCAF)
• Science-Based Targets (SBT) for Financial Institutions
• 2-degrees Investing Initiative’s PACTA tool

The foundation for implementing these various strategies effectively is the adoption of robust monitoring and reporting procedures at the institutional level so that financial institutions are able to map the carbon footprint of its operations and financed portfolios.

The consultant prepared a note presenting a roadmap to assist banks with the implementation of MRV at the institutional level. The objective of this roadmap is primarily to support the decision-making process by structuring the rationale for engagement in MRV and outlining the activities that need to be realised to achieve the desired outputs. As such, the framework serves to kick-start internal discussions within the bank and can act as a management tool to help guide the implementation process across various departments within a bank. It can also assist in the formulation of risk management processes linked to the bank’s traditional risk categories, including credit risk, liquidity risk and operational risk.

Figure: Roadmap for application of MRV within financial institutions

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Source: Climate Focus and Gaia, 2021