EU Taxonomy and Green Finance: Opportunities for Turkish Banks

Why Green Finance Is No Longer Optional for Turkish Banks

Global green bond and loan issuance exceeded USD 570 billion in 2023, setting a new record (Climate Bonds Initiative, 2024). Sustainable finance is no longer a niche area — it has become an integral part of mainstream financial markets. And at the center of this growth stands the EU Taxonomy, which brings a concrete definition to the concept of "sustainable."

Can Turkish banks afford to remain outside this development? The short answer: no. Three structural pressure points are pushing the Turkish banking sector toward green finance:

Access to international capital markets. Turkish banks regularly access international markets through syndicated loans and eurobond issuances. Investors in these markets are increasingly demanding ESG compliance and green finance capacity. Taxonomy-aligned portfolio management capacity provides access to lower borrowing costs and a broader investor base.

Development finance institution requirements. Institutions such as IFC (International Finance Corporation), EBRD (European Bank for Reconstruction and Development), and EIB (European Investment Bank) are increasingly linking green credit lines they provide to Turkish banks to EU Taxonomy-aligned classification requirements. Access to these funds is becoming dependent on banks' capacity for Taxonomy-aligned project evaluation.

Domestic regulatory expectations. The BRSA's (Banking Regulation and Supervision Agency) sustainable banking guidance principles expect banks to integrate environmental and social risks into their lending processes (BRSA, 2022). This expectation naturally requires the creation of a Taxonomy-like internal classification system.

The EU Taxonomy: A Brief Refresher

The EU Taxonomy (Regulation 2020/852) is a classification system that defines environmentally sustainable economic activities. It determines the eligibility and alignment of activities across six environmental objectives (European Parliament and Council, 2020):

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

For an activity to be considered "Taxonomy-aligned," three conditions must be met simultaneously: meeting technical screening criteria, complying with the Do No Significant Harm (DNSH) principle, and meeting minimum safeguards. This triple test is designed to minimize the risk of greenwashing.

Green Asset Ratio (GAR): The Critical Metric for Banks

What Is GAR?

Banks in the EU are required to report what share of their lending portfolio finances Taxonomy-aligned activities using the Green Asset Ratio (GAR). EBA's (European Banking Authority) Pillar 3 ESG disclosure requirements make these metrics mandatory (EBA, 2022).

The GAR calculation is based on a simple formula:

GAR = Taxonomy-Aligned Assets / Total Covered Assets

However, defining the numerator and denominator is complex. Covered assets include loans to households and SMEs, loans to non-financial corporates, and government bonds. Determining Taxonomy alignment requires evaluating borrowers' economic activities against Taxonomy criteria.

What Do the First GAR Results Show?

Initial GAR reports published by EU banks showed low ratios — in the 2 to 8 percent range for most banks. These low ratios stem from several factors:

• Most borrowers (especially SMEs) are not yet reporting Taxonomy-aligned data
• Energy performance certificate data for residential mortgages is incomplete
• Government bonds (a major portfolio item) are currently excluded from GAR scope

These low ratios reflect the size of the data gap, not the inadequacy of the Taxonomy. Ratios are expected to increase year over year.

Concrete Opportunities for Turkish Banks

1. Green Bond Issuance

Turkey's green bond market is still in its early stages but has high growth potential. Green bonds financing Taxonomy-aligned projects provide access to low-cost financing from international investors.

Natural green bond candidate projects for Turkish banks:

The "greenium" effect — the credit rating and secondary market liquidity advantage in green bond issuance — means lower borrowing costs for Turkish banks. International research indicates that green bonds are issued at 2-10 basis points lower yield compared to conventional bonds.

2. IFC, EBRD, and EIB Green Finance Lines

International development finance institutions provide significant green financing lines to Turkish banks. The terms of use for these lines are increasingly converging with the EU Taxonomy:

• EBRD's Green Economy Transition (GET) framework: Projects must meet environmental benefit criteria
• IFC's Green Bond Principles: ICMA-aligned, Taxonomy-like classification
• EIB Climate and Environment Test: Paris Agreement compatibility of financed projects

Capacity to access these funds is directly linked to the bank's Taxonomy-aligned project evaluation capability. Banks without Taxonomy knowledge will struggle to deploy these funds and lose the funding source advantage.

3. Sustainable Lending Products

Taxonomy-aligned classification capability opens new product development opportunities for banks:

• Green mortgage: Special interest rate for buildings with A or B energy performance certificates
• Green auto loan: Low-interest financing for electric and hybrid vehicles
• Green SME loan: Special terms for energy efficiency and clean production investments
• Sustainability-linked loans: Interest rate mechanism linked to borrower ESG performance

4. Portfolio Carbon Footprint Management

Measuring financed emissions using PCAF (Partnership for Carbon Accounting Financials) methodology forms the data infrastructure of a green finance strategy. Taxonomy alignment assessment and financed emissions measurement are two complementary processes — Taxonomy reveals "what is green," while PCAF reveals "how carbon-intensive the portfolio is."

Alignment with BRSA Sustainable Banking Expectations

The BRSA's sustainable banking guidance principles expect banks to integrate environmental and social risks into their management processes (BRSA, 2022). Specific expectations include:

• Integration of environmental risk assessment into lending processes
• Development of sectoral environmental risk profiles
• Development of green finance products
• Integration of climate risks into stress tests

An internal classification system aligned with the EU Taxonomy can simultaneously meet BRSA expectations and international financing access requirements. Achieving two outcomes with a single investment — both domestic regulatory compliance and international market access.

Preparation Strategy: Four-Phase Roadmap

Phase 1: Portfolio Screening (0-3 months)

Screen your existing loan portfolio for Taxonomy eligibility:

• Classify portfolio loans by sector using NACE economic activity codes
• Identify activities within Taxonomy scope (energy, transport, buildings, industry, water management, waste)
• Prioritize "high Taxonomy alignment potential" loan segments

This screening provides an initial estimate of how much of your existing portfolio could be Taxonomy-aligned.

Phase 2: Internal Classification Development (3-6 months)

Create an internal Taxonomy mapping table based on NACE codes:

• Identify the Taxonomy counterpart of each NACE code
• Integrate technical screening criteria into credit evaluation processes
• Reflect DNSH and minimum safeguard checks in internal policies

Phase 3: Data Infrastructure (6-12 months)

Design processes to collect borrowers' environmental performance data:

• Energy performance certificates (residential and commercial real estate)
• Borrower GHG emissions data
• Project-level environmental impact assessments
• Taxonomy alignment documentation

Phase 4: Pilot and Scaling (12+ months)

• Pilot a Taxonomy-aligned lending process in a selected product or sector (e.g., green mortgage or renewable energy project finance)
• Evaluate pilot results and refine processes
• After a successful pilot, scale to all relevant products and sectors

Green Finance in Turkish Banking: Current State

Green finance in the Turkish banking sector is still in its early stages, but momentum is building. Some pioneering developments:

• Multiple Turkish banks are deploying EBRD and IFC-supported green credit lines
• Sustainability-linked syndicated loans are increasing
• Banks are building environmental risk management capacity under the BRSA guidance framework
• Banks are conducting sustainability reporting under TSRS

The missing link is a systematic Taxonomy-aligned classification capability. Banks that build this capacity first will gain advantages in both international financing access and green product development.

Action Item: Green finance offers the Turkish banking sector both regulatory compliance and strategic growth opportunity. Start with a portfolio screening — understanding how much of your existing loan portfolio is directed toward Taxonomy-eligible activities forms the foundation of the entire strategy.

See how enterprise teams assess EU Taxonomy alignment across their activities.