Green Finance to Governance: Türkiye’s 2025 ESG Legal Reforms in Project Finance

I. Introduction

Türkiye is undergoing a rapid transformation in its legal and financial frameworks, aligning more closely with global ESG (Environmental, Social, Governance) expectations. As a seasoned international trade and project finance lawyer with two decades of experience in Türkiye, this article provides both legal insight and factual clarity on recent ESG reform trends and their implications for project finance in 2025.

In this introduction, we will:

• Clarify why ESG matters now more than ever in Türkiye’s project finance landscape
• Provide updated figures and market context to ground legal developments in real-world trends
• Outline the scope and structure of legal reforms relevant to ESG integration in financing deals

ESG: A Catalyst for Legal Evolution in Project Finance

Globally, the ESG finance market has grown to an estimated US $7.07 trillion in 2025, reflecting a CAGR of about 11.3% since 2024. While Türkiye remains a smaller issuer of ESG-labeled finance than Europe or the U.S., domestic activity is expanding fast.

• In a landmark infrastructure move in July 2025, Türkiye secured €2.4 billion in green financing for a cross-border rail link to Nakhchivan, Azerbaijan— a key milestone underwriting sustainability in project finance.
• Türkiye’s financing mix is also bolstered through a US $5 billion MoU with the Asian Infrastructure Investment Bank to fund public-sector sustainable and green development projects over the next three years.

Domestically, Türkiye is targeting a fourfold expansion of wind and solar power capacity by 2035 (to reach roughly 120 GW), necessitating an estimated US $108 billion in investments, central to both national energy strategy and climate-risk mitigation obligations under ESG frameworks.

Why ESG Compliance Is Now a Must in Project Finance

Legal and regulatory pressure

• Türkiye’s Türkiye Sustainability Reporting Standards (TSRS) were significantly narrowed via amendments effective from accounting periods starting January 1, 2024, refining the scope of mandatory ESG disclosures—a critical baseline for investors and lenders assessing project risks.
• New draft Climate Change Law and emissions trading system (ETS) frameworks currently under development (draft redrafted in early 2025) would introduce binding carbon compliance obligations for project-based energy and infrastructure ventures.

Institutional adoption and performance impact

• Empirical research on BIST 100-listed firms shows ESG adoption—particularly environmental and governance dimensions—positively impacts return on equity (ROE) and market valuation (Tobin’s Q), evidencing investor preference and firm resilience in Türkiye’s context.
• Leading Turkish banks such as TSKB have deepened their ESG financing strategies through instruments like green bonds and sustainability-linked loans. TSKB’s green investment transactions increased significantly in 2024, and they are positioned to remain central players in 2025‑oriented project finance deals.

II. Türkiye’s ESG Regulatory Framework

Türkiye’s ESG regulatory framework in 2025 reflects a decisive shift from aspirational sustainability guidelines to enforceable legal obligations, particularly for project finance structures in infrastructure, energy, and strategic sectors. This framework now draws on three main pillars: national legislation, harmonization with international standards, and sector-specific compliance obligations.

1. National Legislative Foundations

Türkiye’s regulatory authorities have progressively tightened the legal framework governing ESG disclosures and reporting obligations. The Türkiye Sustainability Reporting Standards (TSRS), introduced under the Turkish Financial Reporting Standards regime, were updated for accounting periods beginning January 1, 2024. The revisions narrowed the scope of mandatory disclosures while embedding stricter sustainability-linked performance indicators for companies operating in capital-intensive sectors such as energy, transportation, and industrial production.

Parallel to the TSRS reforms, a draft Climate Change Law and a national emissions trading system (ETS) framework were redrafted in early 2025. Once enacted, these instruments will require companies involved in major infrastructure and energy projects to obtain carbon compliance certifications, submit verified emissions data, and factor carbon pricing into financing models.

2. Alignment with International ESG Standards

Türkiye’s ESG regime is increasingly aligned with global standards, particularly the EU taxonomy for sustainable finance and the OECD Guidelines for Multinational Enterprises. The regulatory approach now incorporates disclosure concepts consistent with the EU’s Corporate Sustainability Reporting Directive (CSRD), setting a precedent for dual compliance for Turkish entities raising funds on European markets.

This alignment is shaping how lenders draft financing terms, with green bonds, sustainability-linked loans, and blended finance structures now referencing both local TSRS metrics and EU-aligned ESG benchmarks. This dual framework reduces fragmentation and provides comfort to international financiers who expect interoperability between Türkiye’s rules and broader global ESG frameworks.

3. Sector-Specific ESG Requirements

Project finance transactions in Türkiye must now navigate ESG obligations that vary across sectors but share a common compliance architecture.

– Energy and Infrastructure Projects: ESG-linked covenants have become standard, requiring sponsors to commit to measurable sustainability outcomes such as renewable energy sourcing or emissions reduction targets. Lenders increasingly demand third-party verification of compliance to mitigate risk.

– Defense and Strategic Sectors: While ESG in defense is often sensitive due to national security considerations, sustainability requirements still arise through supply chain obligations, export control compliance, and workforce standards embedded in sector-specific regulations.

– Real Estate and Transport: Projects must integrate environmental impact assessments, social safeguards, and governance measures into both the financing structure and operational planning phases.

4. The Role of Supervisory Authorities

Türkiye’s sustainability and ESG compliance architecture is supported by overlapping supervisory bodies:

– Capital Markets Board (SPK): Oversees sustainability disclosures for listed companies and ESG-linked financial instruments.
– Ministry of Environment, Urbanization and Climate Change: Leads on emissions compliance, environmental impact assessments, and the forthcoming ETS.
– Banking Regulation and Supervision Agency (BDDK): Guides the inclusion of ESG risk considerations in banking sector policies and loan assessments.

These agencies have jointly signaled that ESG metrics are no longer merely voluntary indicators but factors that will influence access to credit, regulatory approvals, and even public procurement eligibility.

5. Implications for Project Finance

The convergence of these frameworks means ESG is now a legal requirement, not a marketing tool, for sponsors and lenders involved in project finance in Türkiye. Loan agreements increasingly incorporate ESG covenants and sustainability reporting undertakings. Non-compliance is being tied to pricing adjustments, accelerated repayment clauses, or reputational consequences that can hinder future financing efforts.

III. Project Finance Legal Updates in 2025

Türkiye’s project finance market in 2025 reflects a turning point where ESG considerations have shifted from ancillary commitments to core legal and financial requirements. This transformation is driven by regulatory reforms, evolving lender expectations, and the embedding of ESG obligations into transaction structures.

1. ESG-Linked Covenants in Financing Structures

Loan and bond documentation for major infrastructure, energy, and industrial projects now routinely incorporate ESG-linked covenants. These provisions require borrowers to meet measurable environmental and social targets—such as renewable energy sourcing, emissions reductions, or community engagement obligations—over the life of the financing. Failure to meet these benchmarks can trigger pricing adjustments, step-up margins, or enhanced reporting duties.

Sustainability-linked loan agreements, increasingly common in Türkiye, connect financial terms directly to ESG performance. If ESG targets are met or exceeded, borrowers may benefit from reduced interest margins; conversely, failure to comply can lead to financial penalties or covenant breaches. This development has blurred the line between regulatory compliance and financial structuring.

2. Disclosure and Reporting Requirements for Green Financing

The regulatory framework now places heavy emphasis on ESG disclosures in financing transactions. Issuers of green bonds and sustainability-linked loans are required to provide detailed pre- and post-issuance reporting, aligning with both the Türkiye Sustainability Reporting Standards and international frameworks. This includes:

– Documenting how proceeds are allocated to green or social projects.
– Publishing annual impact reports demonstrating measurable ESG outcomes.
– Submitting to independent verification or assurance of ESG claims.

The result is a higher legal and operational burden for borrowers, but one that enhances credibility and investor confidence.

3. ESG Due Diligence in Project Development

Lenders and sponsors are now required to conduct comprehensive ESG due diligence at the early stages of project development. Legal teams are tasked with assessing compliance risks across environmental, labor, human rights, and governance domains. This process now mirrors financial due diligence in importance and often influences whether a project reaches financial close.

For large-scale infrastructure and energy projects, environmental and social impact assessments (ESIAs) are no longer viewed as optional. They are now prerequisites for obtaining financing from both domestic banks and international financial institutions. Failure to complete or disclose such assessments can delay or block financing altogether.

4. New Obligations for Lenders and Borrowers

Recent reforms have imposed ESG obligations not only on borrowers but also on lenders and arrangers of project finance. Banks must demonstrate that they are assessing ESG risk exposure within their portfolios, integrating ESG metrics into credit risk models, and reporting aggregate sustainability performance to regulators.

Borrowers, in turn, are expected to adopt robust governance frameworks to monitor ESG performance, including:

– Establishing internal ESG compliance teams.
– Preparing annual ESG compliance reports for lenders.
– Maintaining verifiable records of environmental and social performance.

These obligations have increased transaction complexity but are fostering a more transparent, accountable financing environment.

5. Strategic Impact on Financing Terms

The integration of ESG into Türkiye’s project finance market has strategic implications for how transactions are priced and structured. Projects demonstrating strong ESG alignment often secure more favorable financing terms, including lower margins, longer tenors, and access to concessional or blended finance. Conversely, projects failing to meet ESG expectations face higher costs, tighter covenants, or outright exclusion from certain financing markets.

IV. Structuring ESG in Financing Agreements

By 2025, ESG has moved from being a side consideration to a core component of project finance documentation in Türkiye. Lenders, investors, and sponsors are now embedding ESG obligations into contracts at every stage, from term sheets to closing documentation, to ensure both compliance and alignment with market expectations.

1. Embedding ESG Covenants

Project finance agreements now feature standalone ESG covenants alongside traditional financial covenants. These clauses require borrowers to adhere to environmental, social, and governance benchmarks throughout the project’s life cycle. Key features include:

– Environmental undertakings, such as commitments to reduce greenhouse gas emissions, manage waste, and maintain biodiversity protections in construction and operational phases.
– Social obligations, including labor standards compliance, community engagement programs, and grievance mechanisms for affected stakeholders.
– Governance provisions, obligating the borrower to maintain anti-corruption frameworks, transparent reporting, and internal ESG monitoring systems.

These covenants are drafted with measurable targets and timelines, with failure to meet them leading to potential financial consequences, reputational risks, or even default scenarios in severe cases.

2. Sustainability-Linked Pricing Mechanisms

Lenders increasingly link pricing to ESG performance through sustainability-linked loan structures. Loan margins adjust based on whether borrowers achieve agreed ESG milestones, such as renewable energy usage rates or verified carbon reductions. Achieving ESG targets may result in margin reductions, while failure can trigger rate step-ups or remedial reporting obligations.

This structure effectively converts ESG performance into a legally binding financial incentive, aligning borrower behavior with sustainability objectives.

3. Verification and Monitoring Clauses

Modern project finance documentation includes independent verification clauses, requiring third-party auditors to certify ESG compliance. Borrowers must provide regular ESG performance reports, which are reviewed by these independent verifiers. Clauses often provide lenders with rights to:

– Commission additional audits if discrepancies arise.
– Request corrective action plans from borrowers if ESG targets are missed.
– Exercise information rights to inspect ESG-related records and data.

4. Regulatory Compliance Warranties

Agreements now include representations and warranties addressing ESG compliance. Borrowers must confirm that they are in full compliance with applicable sustainability reporting standards, environmental regulations, and social safeguards. Breach of these warranties can give rise to indemnity claims or event-of-default provisions.

In particular, climate-related warranties are becoming standard for energy and infrastructure projects, as lenders aim to mitigate exposure to future liabilities under emerging carbon and emissions regulations.

5. Sector-Specific ESG Structuring

The ESG clauses in project finance vary by sector but follow similar legal patterns:

– Energy and renewables: strict reporting on carbon impact, land use, and local employment.
– Transport and infrastructure: obligations around environmental impact mitigation and community resettlement protocols.
– Defense-linked projects: heightened governance scrutiny, export control compliance, and supply chain transparency, despite national security sensitivities.

This sectoral tailoring ensures ESG obligations are relevant and enforceable, without imposing blanket provisions that could hinder project execution.

6. Remedies for ESG Breaches

Contracts now provide detailed remedies for ESG breaches, ranging from corrective action plans and cure periods to margin step-ups or prepayment triggers. Some agreements give lenders the right to suspend disbursements or accelerate repayment if material ESG violations occur, reflecting how ESG risk has been elevated to the same level as credit and operational risk.

V. Compliance and Enforcement Trends

The ESG-driven transformation of project finance in Türkiye is not limited to contractual drafting; it is actively reshaping the enforcement environment. Regulators, lenders, and investors are increasing their scrutiny, and compliance expectations are now backed by tangible oversight and penalties.

1. Heightened Regulatory Oversight

Türkiye’s regulatory bodies are moving ESG enforcement into the mainstream of financial supervision. The Capital Markets Board now requires public companies and issuers of ESG-linked instruments to provide detailed sustainability reports, which are cross-checked for accuracy and completeness. The Ministry of Environment, Urbanization and Climate Change is similarly expanding inspections, particularly for infrastructure and energy projects subject to emissions reporting or environmental permits.

For project finance transactions, this means disclosures are no longer box-ticking exercises; they are documents that can trigger audits, investigations, and sanctions if found deficient or misleading.

2. Integration of ESG Metrics into Banking Supervision

The Banking Regulation and Supervision Agency (BDDK) has directed banks to integrate ESG risk analysis into their lending and monitoring frameworks. Banks must now demonstrate they are evaluating ESG risks as part of their credit assessments, and they can face supervisory action if they fail to show evidence of such practices.

As a result, lenders are cascading these requirements down to borrowers, demanding more frequent ESG reporting and linking non-compliance to financial consequences.

3. Enforcement Through Financing Terms

ESG clauses are increasingly enforceable through direct financial levers in project finance agreements. Common remedies include:

– Margin step-ups if ESG targets are missed.
– Withholding of disbursements until corrective actions are completed.
– Acceleration rights for material ESG breaches, similar to financial covenant defaults.

These enforcement mechanisms mean that failure to meet ESG obligations is treated as a contractual breach with immediate economic impact, rather than a reputational issue to be managed quietly.

4. Growing Role of Third-Party Verification

Independent verification and monitoring bodies are now central to ESG compliance. Borrowers must often provide periodic third-party certifications of ESG performance to satisfy lender obligations and regulatory scrutiny. If auditors find discrepancies, borrowers can be compelled to provide corrective action plans or face contractual remedies.

This third-party role has increased accountability, making ESG reporting less subjective and more evidence-based.

5. Reputational and Market Consequences

Non-compliance with ESG obligations now carries reputational penalties that go beyond formal enforcement. Borrowers and sponsors risk being excluded from future green financing markets or facing higher costs of capital if they default on ESG undertakings. Lenders, too, are sensitive to the public perception of financing projects that fail to meet ESG commitments, making enforcement of ESG terms both a legal and market imperative.

VI. Outlook and Strategy

Türkiye’s ESG transformation in project finance is not a temporary trend—it is establishing a new baseline for how capital is raised, structured, and monitored. The developments of 2025 are setting a trajectory that will define the market for the rest of the decade.

1. Deepening ESG Legal Obligations

The tightening of sustainability reporting standards and the expected enactment of the Climate Change Law and emissions trading system will bring further legal complexity. Borrowers and lenders will face binding obligations on carbon disclosures, emissions caps, and governance practices that will need to be reflected in future financing documents.

2. Broader Integration Across Financial Products

ESG principles are expected to move beyond green bonds and sustainability-linked loans into all forms of project finance. Even traditional credit facilities for infrastructure or industrial projects will increasingly require ESG commitments, turning sustainability from an optional incentive into a universal financing condition.

3. Cross-Sector Expansion

While energy and infrastructure projects currently lead ESG adoption, other sectors—such as real estate, transportation, and manufacturing—will see expanded ESG expectations. Defense-related projects, though sensitive, will also face increasing scrutiny on governance and supply chain transparency.

4. Strategic Steps for Sponsors and Lenders

Project sponsors and financiers should anticipate these shifts by:

– Building ESG compliance frameworks early in project planning.
– Embedding measurable ESG metrics into all financing agreements.
– Establishing internal teams and reporting systems to manage evolving disclosure obligations.
– Coordinating with independent verifiers to ensure transparency and credibility.

5. Long-Term Implications

The evolution of ESG in Türkiye’s project finance space is aligning the market with global norms while maintaining national legal characteristics. Over the next few years, this alignment will likely lead to greater access to international capital, but also to more stringent oversight. Projects that fail to meet ESG standards may increasingly find themselves excluded from financing altogether.