FinTech in Turkey: Overview
Ekin İnal and Ecem Naz Boyacıoğlu provide an overview of FinTech in Turkey.
This article was originally prepared for Lexis®PSL.
In response to the Paris Agreement,1 governments and intra-governmental organisations launched a number of measures to promote sustainable finance. To date, these have focused on voluntary measures, relying on businesses and investors to self-monitor in this area. As the global move towards a more sustainable economy gathers pace, and the need to respond to the risks presented by climate change becomes more urgent, these measures are beginning to be transposed into legislation and regulation. While many financial institutions have already implemented internal systems for assessing and monitoring the sustainability of their businesses, the introduction of regulatory frameworks focused on sustainable finance should lead to standardisation in this diverse area, requiring financial institutions to assess and report on sustainability issues within their existing governance and risk management structures.
Sustainable finance2 refers to the integration of environmental, social and governance (ESG) criteria by financial institutions into business or investment decisions. Its origins lie in climate finance (referred to under the Paris Agreement3 as ‘finance to fund activities that reduce greenhouse gas emissions or help in adapting to the impact of climate change’), although the scope of sustainable finance is broader, and links also to the UN Sustainable Development Goals.4 In addition to environmental issues, such as reducing environmental impact, minimising waste and reducing greenhouse gas emissions, sustainable finance also includes social factors, such as working conditions, local communities, conflict and human rights, and governance matters, such as executive pay, bribery and corruption, board structure and tax strategy, within financial decision-making.
Investment criteria are often focused on short-term results. To properly assess environmental and social risk factors, which are more apparent only in the long-term, requires the finance sector to develop an investment framework that takes into account long-term risks. To encourage this shift towards a more resilient, longer-term view, governmental and inter-governmental initiatives are increasing, to encourage financial institutions to include sustainability issues in their governance and risk management functions.5
Initiatives have focused on risk disclosure, to provide greater transparency for investors. Financial institutions are encouraged to inform investors of the environmental impact of their investments, and to disclose their method of environmental risk assessments. Existing measures have concentrated on environmental, rather than social or governance-related risk disclosure, but this is likely to broaden, given the new proposals on the horizon. By encouraging financial institutions to implement sustainability risk disclosure initiatives, the aim of regulators has been to increase voluntary climate-friendly investing, reducing the need for legislative intervention in this area. The concern with this approach is that a lack of standardisation in risk assessment and labelling creates a system that is opaque to investors and regulators alike. This places the onus on the investor to satisfy themselves that a particular investment is sustainable and does not allow direct comparison between different investment opportunities. It has also not produced the increased flow of funds to sustainable investments, which is required if countries are to meet their Paris Agreement commitments.
The Financial Stability Board, an international body established by the G20, responsible for monitoring the global financial system, established the Task Force on Climate-related Financial Disclosure (TCFD), which published its final recommendations6 for effective disclosure of climate-related risks in June 2017.
The TCFD recommendations are applicable to financial-sector organisations, including banks, insurance companies, asset managers and asset owners. Although only a voluntary framework, the recommendations are drafted to be widely adoptable, to be useful to both investors and lenders. The recommendations include:
The Climate Disclosure Standards Board7 has outlined certain challenges in implementing such recommendations, including a lack of internal and investor engagement, a lack of education at board level, difficulty adapting to longer-term horizons and outdated risk management and financial modelling tools. As a result, the extent of implementation varies widely (from no engagement in Russia and Saudi Arabia to encoding into law in France) and while there has been an increase in regulatory guidance at the national level, the aim of the TCFD is to facilitate an approach driven by the private sector.
The United Nations is also providing guidance to the financial sector in transitioning to a green economy. In May 2019, the United Nations Environment Programme Finance Initiative (UNEP FI) published a report on a pilot project on TCFD8 adoption, together with a number of banks.
The UNEP FI has also published Principles for Responsible Banking,9 which includes a requirement to set targets to drive alignment with appropriate Sustainable Development Goals, the goals of the Paris Agreement, and other relevant international, national or regional frameworks.
Separately, the Sustainable Banking Network10 (SBN) is a global initiative comprising a voluntary community of regulatory agencies and banking associations, established to facilitate the collective learning of its members and to provide support in the development of initiatives aimed at promoting sustainable investing. In February 2018, the SBN published its Global Progress Report,11 evaluating sustainable finance policies in 34 member countries and suggesting practical indicators and tools that members can apply to their own domestic markets.
Linked to these initiatives are moves to develop sustainable finance focused products, including developing voluntary guidelines to encourage transparency and disclosure, and promote the development of the green products market. Increasingly products such as green bonds, green loans and Sustainability-linked loans. For more information regarding green bonds, please see our article on Green Bonds.
Committed to becoming a global leader in sustainable finance, the European Commission (Commission) established the High-Level Expert Group on Sustainable Finance (HLEG) in 2016, tasked with developing a comprehensive EU strategy on sustainable finance. In January 2018 the HLEG published its final report,12 detailing priority recommendations. The priority recommendations included:
These recommendations form the basis of the Commission’s action plan on sustainable finance13 adopted in March 2018, which has three main objectives:
In May 2018, the Commission adopted measures implementing some aspects of its action plan which include:
Measures are also proposed in relation to including ESG considerations into the advice that investment firms and distributors offer clients, and to clarify how asset managers, insurance companies, and investment or insurance advisors should integrate sustainability risks.
A Technical Expert Group (TEG)14 was established to assist in developing the Commission’s proposals and has published a number of reports:
In terms of next steps, the proposals are each being considered separately by the European Parliament and the Council. The co-legislators reached agreement on the Disclosures Regulation and the Regulation on low-carbon and positive carbon impact benchmarks in Q1 2019 and the final texts are expected to be published in Q4 2019 with the first requirements applying from Q1 2021. In the meantime, the Commission is mandated to develop and adopt delegated acts which will further specify presentation and content of the information to be disclosed. With regards to the Taxonomy regulation proposal, the co-legislators have yet to reach an agreement on the proposal meaning that the introduction of a unified EU classification system, intended to be in place July 2020, is likely to be delayed until at least Q3 2021.
On June 18, 2019, the European Commission published new, non-binding guidelines15 for company reporting on climate-related information under the Non-Financial Reporting Directive 2014/95/EU, as part of its sustainable finance action plan.The guidance applies to large listed companies, banks and insurance companies, with more than 500 employees. The guidance proposes ways of assessing climate change impacts on the financial performance of companies and incorporates the recommended disclosures of the TCFD. They build on the report16 published in January 2019 by the Technical Expert Group on Sustainable Finance.
EU-level regulation in this area is considered necessary due to the divergent attitude of Member States to-wards environmental issues. As with other measures, the EU hopes to encourage voluntary sustainable in-vesting rather than regulating extensively in this area.
The UK is committed to helping drive the transition to a lower-carbon economy and to the delivery of sustainable development goals. As one of the prominent players in this area, the UK government has introduced measures to better integrate sustainable investing concerns into the decision making frameworks of businesses. Measures already adopted include amendments made in 2013 by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (SI 2013/1970),which require certain companies to disclose ESG matters, including their greenhouse gas emissions, in their directors’ report or, if of strategic importance, in their strategic report.
In June 2018, the House of Commons published its green finance report17 aimed at embedding sustainability in financial decision making. In doing so, businesses and regulators must factor long-term environmental risks into financial decision making. The report recommends the government should do this by:
Rather than legislative intervention, the recommendations encourage the cooperation of the government, regulators and the private sector, as does the report produced by the Green Finance Taskforce (GFT),19 launched in 2017 to help accelerate the growth of green finance in the UK. The report was published in March 2018 and recommends:
The government welcomed the GFT’s report and has begun implementing some of its recommendations. Recognising the role of the financial sector in delivering global and domestic climate and environmental objectives, the government published the Green Finance Strategy on July 2, 2019.20 For further information see A conversation on the Green Finance Strategy.
Measures include the establishment of the Green Finance Institute to foster greater cooperation between the public and private sectors, create new opportunities for investors, and strengthen the UK’s reputation as a global hub for green finance.
In this context, UK regulators are implementing measures to embed climate risk into the regulatory frame-work.
On September 26 2018, the Prudential Regulatory Authority (PRA) published a report on the financial risks facing the UK banking sector as a result of climate change.21 The report identifies two risk factors which manifest as increasing credit, market and operational risk:
In April 2019 the PRA published policy statement (PS11/19)22 and supervisory statement (SS3/19)23 Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change, with the purpose of encouraging firms to reflect on their current approach to governance and risk management structures in responding to the financial risks arising from climate change. The SS is informed by the PRA’s report noted above and is intended to complement existing policy material. The desired outcome is to encourage firms to strategically manage the financial risks from climate change, by taking account of current and future risks, and actions required to mitigate those risks. The SS sets out the PRA’s proposed expectations:
The PRA expects firms to have an initial plan in place to address the expectations and submit an updated Senior Management Function form by Tuesday October 15, 2019.
The Financial Conduct Authority (FCA) is also looking into these issues. In October 2018, the FCA published a Discussion Paper24 on the impact of climate change and green finance on financial services, setting out how the impacts of climate change are relevant to the protection of consumers and market integrity. The FCA also considers the opportunities for financial services, as a result of the transition to a low carbon economy, including the opportunity to grow as a centre for green finance, but notes that there are currently no minimum standards and guiding principles for measuring performance and impact of green finance products.
The discussion paper also identifies four areas requiring greater regulatory focus:
To help banks overcome the challenges posed by the risks of climate change, the PRA and FCA are working to establish a Climate Financial Risk Forum, aimed at improving data and furthering the development of climate-related scenarios.
The direction of travel is clear: financial institutions and investors will increasingly be required to assess, monitor and disclose the sustainability of their investments. While regulatory intervention in increasing in some markets, voluntary initiatives are being adopted in others. Although measures are likely to represent an increased cost to businesses, they also present an opportunity for the development of new products and services. In the face of climate risk, the market has an opportunity to innovate which, within the appropriate framework, can drive value as well as further climate-related and ESG objectives.
Ekin İnal and Ecem Naz Boyacıoğlu provide an overview of FinTech in Turkey.
During his State of the Nation Address, the President gave reassuring impetus to solving the current energy crisis and perennial load shedding that has been decimating the economy.