A key name is set to join the sovereign ESG bond market’s growing emerging markets sector. Turkey published its sustainable finance framework in November 2021 but is now relaunching it, having never issued under the document after struggling for market access last year. A social/green bond for earthquake reconstruction is in prospect for the Single B credit’s debut.
ING and Standard Chartered, joint structuring banks on the framework, are organising investor meetings for the sovereign from Monday. These will include group calls, as well as face-to-face meetings in Europe.
Turkey will be represented by senior officials from three ministries: treasury and finance; environment, urbanisation and climate change; and energy and natural resources.
The meetings are formally framed as a non-deal roadshow. But market participants see a debut green or – more likely – a sustainable bond with social and green use of proceeds will follow if investors are receptive.
However, with the country holding general elections in May, the window for a deal is narrow.
The framework enables the sovereign to issue bonds, loans, sukuk and other debt instruments in green, social or sustainable formats. It does not accommodate sustainability-linked bonds, which sovereigns only began issuing last year.
At launch Sustainalytics judged the framework credible and impactful. It allows Turkey to refinance eligible expenditures as far back as three years. This falls short of international best practice, which is a two-year lookback period, although the second-party opinion provider said it is “aligned” with market practice.
It is unclear if the framework and SPO will be updated. More than a year has passed since their publication, as well as Turkey being hit by the February earthquake.
Besides sovereign SLBs, this period has also seen the start of sovereign green issuance in money markets.
Sustainalytics declined to comment.
Reconstruction proceeds?
Alongside green projects, some investors have speculated that a debut deal’s use of proceeds could include reconstruction after last month’s earthquake. Turkey’s largest natural disaster in nearly a century killed at least 50,000 people and left 1.5 million homeless.
This factor, which one investor described as “the fortunate spin in the unfortunate story”, could add significantly to any deal’s appeal. “If it was earthquake recovery-focused, I think we would buy,” said Tim Ash, senior EM sovereign strategist at BlueBay Asset Management.
Reconstruction spending could potentially qualify under two of the framework’s categories of eligible social projects: access to essential services or affordable basic infrastructure.
Negative factors could include the country’s sub-investment-grade rating. This would put it off limits for insurance companies and might deter other European institutional ESG buyers like pension funds, said Viktor Szabo, investment director at Abrdn.
Governance concerns could also weigh on any deal. Besides the election’s very uncertain outcome, including President Recep Tayyip Erdogan’s willingness to transfer power if he loses, there is Turkey's record on human rights. The Council of Europe and other bodies continue to demand the release of businessman Osman Kavala after his sentencing in April to life imprisonment without parole for allegedly having sought to overthrow the government.
The CoE, of which Turkey is a member, also recently called for reinforced guarantees of judicial independence and action to strengthen political debate, pluralism and freedom of expression. Allianz Global Investors has also highlighted issues in Turkey such as the legal system and property rights, press freedom and state fragility.
Abrdn would not buy Turkey for its socially responsible strategies due to governance and political risks. But the UK fund manager would consider it for unconstrained strategies if pricing were “super-attractive”, Szabo said.
Some investors are also sceptical about Turkey’s environmental commitments. Although the country in late 2021 set a net-zero target of 2053, it was the last G20 member to ratify the Paris Agreement on climate change.
MENA expansion
Turkey’s arrival will add a significant new name to the sovereign ESG market’s growing emerging market sector. This has already seen India start issuance this year and Brazil confirm its intention of entering the market.
“The combination of EM and green and sovereign would likely be very well received by investors looking to diversify their sovereign [ESG] exposure,” said Sean Kidney, chief executive at the Climate Bonds Initiative.
Moreover, it will increase momentum in Middle East and North Africa names. Until recently Egypt was the region’s only active sovereign issuer before Israel and Sharjah, part of the United Arab Emirates, issued debut ESG bonds this year.
Kidney noted “strong pricing dynamics” for the new EM and MENA arrivals.
Market participants expect more MENA sovereigns to surface as the fossil fuel-producing region seeks to attract investors to back its transition. Saudi Arabia has appointed advisers including HSBC, while Abu Dhabi is also said to be preparing a framework.
CBI expects the overall sovereign ESG market to pass 50 names this year, up from 43 at the end of 2022. This would mean that half of all active sovereign borrowers have issued labelled bonds.