Subject: Newsletter on the Draft Guideline on Green Debt Instruments and Green Lease Certificates Published by the Capital Market Board
- Draft Guideline on Green Debt Instruments and Green Lease Certificates
The Draft Guideline on Green Debt Instruments and Green Lease Certificates (the “Guideline”), published by the Capital Market Board on its website on 03.11.2021 with a public announcement, is closely related to our country’s investors and commercial actors who want to get benefits from green financing instruments and is a very important step in keeping up with the new economic order. The Capital Market Board, which has been authorized both as the regulatory and supervisory under Article 128 of the Capital Market Law numbered 6362 for the realization of the purposes under Article 1 of the same Law stated as “to regulate and supervise capital markets to ensure the functioning and development of capital markets in a secure, transparent, efficient, stable, fair and competitive environment and to protect the rights and interests of investors”, has issued a draft guideline with the principles of spreading the applicability of issuance methods of green debt instruments in our country’s market and ensuring transparency to protect the investors. Although the guideline has not been finalized, it will take its final form after submission of the opinions of stakeholders and market participants on the guideline until 30.11.2021. With the Draft Guideline, it is aimed to increase the issuance of green debt instruments in the capital market, reinforce transparency and external evaluation obligations and investor confidence and diversify investment opportunities in projects that contribute to sustainable development. On which subjects does the guideline stipulate regulations? The Guideline includes the regulations regarding the green debt instruments and green lease certificates, green projects, green debt instruments, and green lease certificates framework documents, and regarding organizations providing external evaluation services.
- Green Debt Instruments and Green Lease Certificates
The Guideline regulates green debt instruments and green lease certificates and the principles and procedures that must be followed up in their domestic and international issuances. Within the scope of the Draft Guideline, the Green Bond Principles adopted by the International Capital Markets Association (the ICMA) have been based. Such mentioned principles have been prepared to be applied voluntarily in the issuance of green bonds by the participants in international markets and are the most recognized regulation in international standards. In this context, the preparation of the Guideline prepared by the Capital Markets Board in accordance with these standards will not only prevent problems that may arise in issuance transactions abroad but will also provide significant benefits in gaining the trust of foreign investors and obtaining financing from abroad. Specific to the definitions made within the scope of the Guideline, the no different definition has been made for debt instruments from the regulations of our country, and the definition made within the scope of the Communiqué on Debt Instruments has been referred to. In this context, instruments that can be considered green debt instruments within the scope of the Guideline are; bonds prepared and issued by issuers in the status of debtors, bonds convertible into shares, convertible bonds, financing bonds, precious metal bonds, and capital market instruments that will be recognized as debt instruments in terms of its nature by the Capital Markets Board. Capital market instruments such as asset and mortgage-covered securities, asset and mortgage-backed securities, project-based securities, real estate certificates and blue debt instruments in other words blue bonds and also capital market instruments such as these can also be qualified as green-themed capital market instruments, provided that they meet the qualifications set forth. Based on this definition, within the scope of the Guideline, green debt instruments are defined as any listed or non-listed debt instruments to be used partially or fully to finance or re-finance new and/or current green projects that comply with exclusively the definition of the green project of the funds in compliance with the four main components of the Guideline and obtained from their issuance. On the other hand, green lease certificates are defined as the securities which are issued by an asset leasing company in order to partially or fully finance or refinance new and/or current green projects that comply with exclusively the definition of the green project of the funds in compliance with the four main components of the Guidelines and to be obtained from their issuance and enable the owners of such securities to have rights in proportion to their share of the revenue obtained from this asset or right. What are the general principles governing green debt instruments? Three conditions have been stipulated for the green debt instruments within the scope of the Guideline. The first of these is that the issuer shall confirm in the framework document that the issuance shall be conducted in accordance with the principles set out in the Guideline. The second condition stipulated for the issuance of the green debt instrument within the scope of the Guideline is that the funds obtained from the issuance or the fund equivalent to such amount shall be used to partially or wholly finance or re-finance of new and/or current green projects exclusively as specified in the framework document. This condition is essentially in line with the component of the use of revenues specified within the scope of the Green Bond Principles, on which the Guideline is based, and it is expected from the issuer to use the revenues generated by this issuance for green projects, in line with the issuance of green debt instruments. The last condition stipulated under the Guideline is the approval of the compliance of the green debt instrument with the Guidelines by an external evaluation company. Provided that the above-mentioned conditions are met, the debt instrument to be issued by the issuer can be described as “green”.
- What Shall the Framework Document Contain?
The framework document is a document that is prepared by the issues and decided by the Board of Directors of the issuer. It is required that the information that the green debt instruments shall be issued in compliance with the four main components set forth in the Guideline and the information on the place of use of the funds to be obtained from the issuance and green debt instrument strategy and processes are included within the scope of this document. In addition to this, the issuer is expected to briefly explain the information relevant to the sustainability strategy and policy on reducing the effects of climate change, adapting to climate change, protecting natural resources, protecting biodiversity, controlling and prevention of pollution as an attachment to the framework document. Furthermore, issuers shall publicly disclose the taxonomy, green standard, or certificates that they use in the project selection process within the scope of the framework document. The external evaluation opinion or prospectus shall be announced with the framework document, and the framework document and external evaluation opinion, together with other information and documents regarding green debt instruments, shall be submitted to the Capital Markets Board during the issuance certificate or prospectus approval application.
- Green Debt Instruments Main Components
Within the scope of the Guideline, four main components have been stipulated for green debt instruments, such components are fully in compliance with the Green Bond Principles. Such main components are; the use of funds, project evaluation and selection process, management of funds, and reporting. Within the scope of the use of funds, the funds obtained by the issuers are obliged to be used for the green projects and the information regarding this must be stated in the framework document. The expected clear environmental benefits of eligible green projects identified in the framework document shall be presented to the extent possible. Furthermore, within the scope of this component, if the whole or part of funds, obtained from the issuance of green debt instruments will be or are likely to be used for refinancing purposes, an estimation of the distribution of funds between financing and refinancing of projects shall be made, and, if and to the extent possible, which investments or project portfolios can be refinanced shall be explained in the framework document. Within the scope of the Guideline, a non-limiting list of green projects has been presented in line with the Green Bond Principles, in this context; the green projects can be in the following categories; renewable energy, energy efficiency, prevention and control of pollution, environmentally sustainable management of living natural resources and land use, protection of terrestrial and aquatic biodiversity, clean transport, sustainable water, and wastewater management, climate change adaptation, green buildings and eco-efficient products and/or products, production technologies and processes adapted to the circular economy, however, issuers may also use other internationally recognized taxonomies, particularly the European Union Taxonomy.
- Project Evaluation and Selection Process
Within the scope of the project evaluation and selection processes, the following information regarding the environmental sustainability objectives of eligible green projects, information on how it is determined that the green project subject to the issuance falls within which scope of the eligible green project types, and information on the processes implemented to identify and manage potential environmental and social risks associated with green projects shall be explained by the issuers. This information shall be shared with investors within the scope of the framework document, and in order to ensure transparency and clarity by the issuers, it is recommended to disclose, where possible, also the information on the status of the eligible green project within the framework of the issuer’s inclusive objectives, strategy, policy and/or processes related to environmental sustainability, and, if any, information on the label, certificate, taxonomy, standard, compliance and exclusion criteria used in the selection of the project.
- Management of Funds
Within the scope of the component regarding the management of funds, it is aimed to provide transparency and clarity that green debt instruments are used for green projects and to facilitate the verification of this issue before investors. Within the scope of this component, the net fund obtained from the issuance of green debt instruments or an amount equal to this net fund shall be monitored by opening separate and special accounting accounts and ensuring the secure follow-up of all records made. The fund obtained from the issuance of green debt instruments can also be managed on the basis of each issue or by being aggregated for more than one green bond. Obligations within the scope of the management of funds component are required to be wholly fulfilled as long as the green debt instrument is in circulation. In addition to this, issuers are required to publicly disclose where they intend to temporarily use their unused net fund balance, within the framework of the Capital Markets Board’s regulations on public disclosure of special circumstances.
Within the scope of the reporting, issuers must publicly disclose up-to-date information on the use of the fund on an annual basis also to be in compliance with the Green Bond Principles. In the scope of the Guideline, it is stipulated that the instruments with a maturity of less than one year will be reported on the maturity date. Furthermore, in case of significant developments occurred regarding the issuance of debt instruments, these shall be publicly disclosed in the same manner, without waiting for the expected reporting periods. Reporting shall include the funding obtained from the issuance of the green debt instrument, a list of projects to which this fund has been allocated, a brief description of the projects, the amount used for the projects, and the estimated impacts of the projects.
- External Evaluation
Within the scope of the Guideline, one of the principles stipulated regarding the issuance of green debt instruments is that before or while issuing green debt instruments, the compatibility of the mentioned instruments with the four main components of the Guideline must be approved by a firm that provides external evaluation services. Unlike the Green Bond Principles, external evaluation is stipulated as a condition within the scope of the Guideline. However, the Green Bond Principles only recommends the external evaluation processes as a way to ensure transparency and openness. In this context, issuers are required to obtain services from an external evaluation firm after the post-issue to verify the internal monitoring method of the funds obtained from the issuance of the green debt instrument and its allocation to the project areas of use. External evaluation services; can be given in four different ways as the second party opinion, verification, certification and rating/scoring of green debt instruments. Issuers may fulfill their external audit obligations by using any or more of these services. However, the certification service is need to be performed by the service provider approved by ICMA.
- Issuances to Abroad
A separate regulation has been made for the issuance of debt instruments to be made abroad within the scope of the Guideline. Within the scope of this regulation, in the applications to be made to the Capital Markets Board for the issuance of green debt instruments abroad, the framework document, prepared in accordance with the foreign green debt/green sukuk standards where the issuance is made/to which the issuance is subject to, and approved by the board of directors and the external evaluation opinion, confirming the compliance with the foreign standards based on the issuance, are required to be submitted to the Capital Market Board. In addition to this, these information and documents shall be announced by the issuer, along with the issuance document, on the Public Disclosure Platform (“KAP”), if the issuer is a member of the Public Disclosure Platform (“KAP”), and on the issuer’s website. After issuance, fund usage reports in compliance with foreign standards shall be submitted to the Capital Markets Board within a maximum of one month after their preparation. A sample of the framework document and a green debt instrument summary report are included in the annexes of the Guideline, and the necessary documents can be prepared by the issuers based on these samples.
Within the scope of the draft Guideline published by the Capital Markets Board, the principles regarding the issuance of debt instruments to be made in the country and abroad have been regulated, and the conditions for qualifying the issued debt instruments as green have been stipulated. Especially in today’s markets, where combating the environmental degradation and the adverse effects of the climate crisis on the environment, people, society and economies have become the priority agenda in the world and in our country, and the green factor significantly affects the investment decisions of investors, the laying down regulations regarding the issuance of green debt instruments in our country is a significant development. In the press announcement published by the Capital Markets Board regarding the draft Guideline; it was emphasized that the procurement of long-term funds needed for the financing of the investments required for the transition to a low carbon economy and the projects that contribute to environmental sustainability increase the importance of the capital markets.
Considering that the “green bond” market is growing rapidly in international financial markets, and regulatory supervisory institutions such as the Capital Markets Board have developed a regulatory framework for the healthy growth of these markets and the protection of investors within the framework of public disclosure obligations, it has been stated that there is a need for such a regulation in our country. The fact that the Draft Guideline has been prepared in accordance with the internationally recognized Green Bond Principles is also a significant issue in order to avoid problems in issuing these to abroad.