The Legal Framework for Sustainable Finance: Part II - Green Transition and Compliance Agenda for Financing Parties
Introduction
The first part of our Green Transition series addressed the legal nature of the “sustainability” concept and the legal framework established by the relevant regulations in the Turkish capital markets sector.
This article will focus on why sustainability has become a critical agenda item for all transaction parties on the financing side. Sustainability compliance is both a prerequisite and a source of competitive strength for companies seeking access to capital. It dictates criteria governing climate-risk management by banks and financial institutions. Finally, it is an indispensable metric for investors in Türkiye.
Outlining the mechanics and compliance requirements of sustainable finance holds particular importance for all finance market actors in the coming period. The Climate Law No. 7552 dated 2 July 2025 establishes the legislative framework, while the National Green Strategy and Action Plan (the “Plan”), which covers the period from 2026 to 2029 and supports Türkiye’s 2053 net-zero emissions target, forms the foundation of Türkiye’s emerging sustainable finance regulatory architecture. The Plan rests on three main pillars: (i) establishing the infrastructure required for a transparent and measurable green finance ecosystem; (ii) strengthening institutional capacity and human capital in the field of green finance; and (iii) establishing market mechanisms for the development of green finance. In parallel with these objectives, the Plan envisages 11 targets and 45 actions for market participants, each with a target year, key performance indicators, and expected outputs.
In this context, this article begins by examining the forthcoming compliance requirements for borrowing companies and tracing those requirements back to their source. It then explains why sustainability constitutes a mandatory framework for financiers in terms of both risk assessment and capital allocation. Finally, it considers why investors are likely to encounter more standardized, measurable, and transparent sustainable finance products in the Turkish market.
Compliance for Corporates: Compliance Requirements and Their Origin
EU Taxonomy and Its Impact on Türkiye
The EU Taxonomy, one of the cornerstones of the European Union's sustainable finance architecture, establishes a common classification system for determining which economic activities can be considered environmentally sustainable. The environmental objectives of this system include climate change mitigation, climate change adaptation, the protection of water and marine resources, the transition to a circular economy, pollution prevention, and the protection of biodiversity.
The Taxonomy is significant not only for companies based in the European Union but also for Turkish companies with commercial and financial ties to EU markets. Environmental performance data is expected to become increasingly traceable and material in areas such as exports, supply chain financing, the use of green loans, project financing, and international investor relations. Turkish companies will be drawn into this framework indirectly, as their EU counterparties' reporting and financing obligations increasingly require value-chain data and supply-chain due diligence information. More directly, the EU's Carbon Border Adjustment Mechanism (CBAM) — a carbon tariff policy that prices the greenhouse gas emissions embedded in goods imported into the EU — is having a growing effect on the highly exposed Turkish economy. In force since 1 January 2026, CBAM imposes carbon costs and reporting requirements on carbon-intensive goods imported into the EU, directly affecting Turkish exporters in key industrial sectors. A company that is not able to explain the carbon profile of its production risks being unprepared when European buyers request such information, and could lose competitive strength as a result. According to a study conducted by EBRD, the Turkish CBAM costs are projected at roughly €138 million in 2027 and could escalate to €2.5 billion annually by 2032 if no domestic carbon pricing mitigation is scaled up.[1]
Accordingly and in line with the Plan, the Turkish Green Taxonomy Regulation (the “Taxonomy”) was published by the Ministry of Environment, Urbanisation and Climate Change in the Official Gazette on 24 September 2026.[2] The Taxonomy is largely modeled on the EU Taxonomy and clarifies which economic activities will be considered “green.” The Taxonomy serves as the primary reference for green loans, green bonds, and sustainable financing transactions. Aligning the criteria in the Banking Regulation and Supervision Agency’s (the “BRSA”) Communiqué on Banks’ Calculation of Green Asset Ratio[3] with the Taxonomy criteria has been deferred until end of 2028, at which point the classification of financing as 'green' will be governed by common criteria across both instruments, making access to green finance more predictable and systematised. We cover this topic in detail in our ESG Bulletins.
Greenwashing Risk and Legal Liability
As sustainable finance markets develop, the risk of “greenwashing” for companies is also increasing. Companies are therefore required to support their sustainability claims with policies approved at the board level, measurable performance indicators, independent verification processes, and consistent reporting practices.
In Türkiye, while the Taxonomy supports economic activities aligned with sustainable development goals and encourages the flow of financing to sustainable investments; it also specifically defines and aims to prevent greenwashing in the market. “Greenwashing” is defined as the “deceptive use of public relations, financing, advertising or marketing methods to create a misleading perception regarding the contribution of products or services to environmental objectives and their alignment with the Taxonomy” and is sanctioned by administrative fines. Potential reputational risk and more difficult access to financing are also indirect consequences of greenwashing to be borne in mind.
Financial Institutions: Climate Risk Management and Green Finance Requirements
For banks and other financial institutions, sustainable finance requires taking into account the climate risk and the transition risk; besides the more traditional credit risk and market risk. According to the Plan, financial institutions are expected to align their credit policies, collateral assessments and portfolio monitoring processes with sustainability data, including verified emissions data. Turkish Banks are also required to establish climate and environmental risk-related stress testing infrastructure by 2027. The Plan also aims at standardizing reporting standards on sustainability for all business sizes and types – encouraging SMEs’ capacity building, alongside companies that are already subject to Turkish Sustainability Reporting Standards. By doing so, banks’ sustainability assessment should be more centralized, accountable and systemic. The BRSA is also expected to publish guidelines for the financial system covering sector-specific definitions of green products, green practices and approaches to contribute to the effort to prevent greenwashing across various sectors, such as insurance, capital markets and banking. From 2028 onwards, the CMB and the BRSA, alongside other institutions, will determine and monitor the share of green financial products and instruments in financial markets to help track their development.
From the perspective of Turkish banks, while making green finance products available to the borrowers, the use of funds in accordance with their intended purpose, the eligible project selection, monitoring of allocated funds, and the periodic reporting of sustainability performance will be crucial. These obligations may entail liability, not only financially under contractual commitments but also before regulatory authorities and investors.
In this context, sustainability will become an integrated process for banks: with the incorporation of climate risks and emission data into credit processes and the diversification of green finance products, banks will become instrumental in Türkiye’s green transition. Consequently, borrowers and banks are expected to act in unison toward a common goal. The impact of the legislative effort and the joint action of the borrowers and lenders should be welcomed by the international investors and financial institutions.
Investors and International Financial Institutions: Importance of Steps Taken
On the lead up to hosting COP31, Türkiye’s recent run of sustainability-linked legislative instruments signals not only a willingness to regulate the domestic market, but also shows Türkiye’s commitment to align its legislation with sustainable finance standards familiar to international investors. In this context, Türkiye Wealth Fund (“TWF”) published its inaugural Sustainable Finance Framework (“SFF”) at the end of August 2026, which has received an "Excellent" rating—the highest possible score—in the Second-Party Opinion (SPO) prepared by Sustainable Fitch.[4] The SFF sets the strategic architecture and governing principles for TWF and its portfolio companies to issue, arrange, guarantee, or support green, blue, social, and sustainability-linked bonds, loans, and debt instruments. The SFF also marks a pivotal point in Türkiye’s broader transition toward its 2053 net-zero emissions target by aligning the standards with international principles including the ICMA Green/Social Bond Principles and Sustainability Bond Guidelines, LMA/LSTA/APLMA Green and Social Loan Principles, and International Finance Corporation (IFC) Guidelines for Blue Finance.
From the perspective of investors and international financiers, the primary takeaway of the steps taken in the field of sustainability in Türkiye in recent years is that projects and issuances in Türkiye have become more clearly defined, comparable, and financeable in terms of international sustainable finance criteria. Thanks to new legal regulations, investors are encouraged to participate in a sustainable finance market that is more standardized, transparent, and aligned with international practices. International financial institutions such as the IFC, EBRD, EIB, AIIB, BSTDB, and ADB are the natural investors in a green finance market of this kind making the predictability created by these reforms directly relevant to Türkiye's ability to attract their capital.
Conclusion
In conclusion, the key determining factor in the coming period will be the extent to which companies, banks, and investors can integrate the sustainable finance framework into their decision-making, risk management, reporting, and contractual commitment processes. When developments related to the Taxonomy, BRSA’s upcoming climate risk management legislation, and greenwashing monitoring efforts are evaluated together, sustainability is no longer merely a matter of contributing to environmental goals; it has emerged as a strategic area of alignment in terms of access to financing, competitive strength, and legal risk management. As the sustainable finance infrastructure in Türkiye strengthens, companies and financial institutions that adapt early in this area will be better positioned to navigate both national regulatory developments and international sustainable finance standards.
- Long, I., Inclan, C., Conway, D., Mikolajczyk, S., Voyvoda, E., Yeldan, E., Aşıcı, A. A., & Mert, E. (2023, March). Potential impact of the Carbon Border Adjustment Mechanism on the Turkish economy: Quantification of the economic impacts and review of climate policy response options. European Bank for Reconstruction and Development. https://iklim.gov.tr/db/english/haberler/files/20230523%20Impacts%20of%20CBAM%20on%20Turkiye%20phase%202%20report%20FV3%20(2)-sayfalar-1,3,5-16%20(1)%20(1).pdf
- Bayiz, Y. (2026, September 24). Turkish Green Taxonomy Regulation published. Erdem & Erdem Law Firm. https://www.erdem-erdem.av.tr/en/insights/turkish-green-taxonomy-regulation-published
- Yıldırım Günaydın, İ. (2025, April 30). Communiqué on Banks’ Calculation of Green Asset Ratio. Erdem & Erdem Law Firm. https://www.erdem-erdem.av.tr/en/insights/communique-on-banks-calculation-of-green-asset-ratio
- Türkiye Wealth Fund. (2026, August 31). Türkiye Wealth Fund publishes its Sustainable Finance Framework [Announcement]. https://www.tvf.com.tr/en/contact/disclosures/2026/turkiye-wealth-fund-publishes-its-sustainable-finance-framework
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