Sustainable Finance: Trends and Challenges

The finance sector plays an important leverage role in sustainable development due to its role in access to financial resources and the distribution of these resources to actors in the economy. The concept of sustainable finance, which considers the environmental and social impacts of investments in addition to their financial returns, has an important role in the successful transition to a green economy. The financial sector's preference for lending and investing in businesses that manage their environmental and social risks and impacts well is crucial for promoting sustainable transformation.

The market for sustainable finance that delivers economic, social and environmental benefits is growing every day. In 2021, the share of cumulative GFS+ (green, social, sustainable, sustainability-linked and transition) issuance reached record volumes of more than USD 1 trillion and accounted for 5% of the global bond market. In 2022, the volume of GDS+ issuance fell to USD 863.4 billion, but maintained its 5% share of the global bond market despite macroeconomic challenges. Green bond issuance accounted for more than half of total issuance in 2022, totaling USD 487.1 billion. Sustainability bonds totaled USD 166.4 billion, with social bonds at USD 130.2 billion, sustainability-linked bonds at USD 76.3 billion and transformational bonds at USD 3.5 billion .

The growing interest in sustainable finance and the proliferation of products and services in this area brings with it some implementation challenges. Perhaps the biggest of these challenges is the lack of clear consensus on the material ESG performance of organizations. The lack of global standardization in ESG reporting and the inadequacy of regulations on how to present information on ESG issues cause most companies' efforts on these issues to remain voluntary and lead to irregular and inconsistent reporting. The fact that companies decide which data to report and that this data is not comparable creates uncertainty for investors.

The steps taken by international reporting organizations to solve this problem are very promising. The International Sustainability Standards Board (ISSB), established by the International Accounting Standards Board (IFRS), published two standards coded S1 and S2 in June 2023. With the "Corporate Sustainability Reporting Directive (CSRD)", which was put into effect in 2023 by the European Financial Reporting Advisory Group (EFRAG) and shared recommendations on the development of EU sustainable reporting standards, companies and SMEs with certain qualifications are required to share their sustainability-related activities with their stakeholders. Organizations reporting under the Directive are also expected to comply with the European Sustainability Reporting Standards (ESRS). Standardization in reporting as a result of such initiatives will enable investors to overcome one of their most important challenges: access to comparable information.

Another key challenge for sustainable finance is the uncertainties that arise when financing the transition to a "net zero" economy. Sustainable finance solutions support the decarbonization of today's carbon-intensive businesses while financing the green technologies of the future. The lack of realistic roadmaps for achieving "net zero" by existing institutions and a poor understanding of climate risks, combined with the global time pressure in this area, create uncertainty.

Taxonomies that describe pathways to net zero and provide a framework for companies, investors and policymakers to identify which economic activities are environmentally sustainable help to address these uncertainties. For example, the "European Union Taxonomy of Sustainable Activities", which came into force in July 2020, provides a set of criteria that includes climate change mitigation, climate change adaptation, sustainable use and conservation of water and marine resources, transition to a circular economy, prevention and control of pollution, and protection and restoration of biodiversity and ecosystems.

However, differences between the definitions used by the many taxonomies under development may create compliance risks, especially for international organizations that are expected to comply with multiple national obligations. An increasing number of reports in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) also provide guidance for investors to integrate climate risks into their investment decisions.

Another problem in the field of sustainable finance is the lack of awareness on available financing sources. Issues such as difficulties in accessing financing sources as a result of inadequate explanation of investor expectations, investors not preferring sustainable finance due to the fear of not meeting the conditions, financial institutions not receiving sufficient data from the organizations requesting financing, and many of the investments being considered as risky are common problems in this area. Increasing the knowledge of institutions on sustainable financing sources and strengthening the capacity of financial institutions' personnel competent in sustainable finance are among the important issues.

The financial sector, which provides resources for social development, also has important responsibilities for building a sustainable future. Providing more equal, fair and impartial access to finance that will support sustainable development is important in building this future. Especially in developing countries, disseminating expertise in sustainable finance and raising awareness among stakeholders in the finance sector are among the important issues for sustainable growth.

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