Economic approaches and policies reflect the cultural structures of societies. The cultural structures of societies that are insensitive to the environment, human rights violations and social damages, and the basic policies of the governments of countries that are based on these structures, have been output economy and profit. In this environment, for years, the basic goal of companies in every sector has been profitability and as a way to achieve this, output-based economic policies. The damage to the environment, human rights violations and other social damages have been ignored by these companies and country governments.

These managerial approaches led to extreme pollution of the environment and to changes in seasons, causing an increase in poverty and migration. These results began to provoke reactions, especially in developed societies. These reactions led to increased environmental awareness and to countries to make efforts to reduce poverty and to prevent migration. This framework led to various international conferences and as a result, international treaties were made. The Sustainable Development Goals set by the UN in 2015 and agreements such as the European Green Deal, led to the effective approach of ESG (environmental, social, and governance) for companies. It has now become important for companies to focus not only on profit but also on environmental factors such as the climate crisis, social diversity and inclusivity, governance issues such as ethics and transparency.

The concept of ESG, which is expressed as an abbreviation of the first letters of the words “Environment, Social and Governance” and which is sometimes used synonymously with corporate sustainability aims for companies to act responsibly towards all internal and external stakeholders in the fields of environment, social and management. ESG refers to the examination of a company's environmental, social and governance practices and their impacts and progress against these assessments. However, even if the governances of countries are not sufficient, international agreements ensure that companies monitor their environmental, social and governance practices and comply with the specified criteria.For example, the fact that the Border Carbon Adjustment Mechanism will be applied to the iron and steel, aluminum, electricity, fertilizer, cement and hydrogen sectors and the sub-product groups to be announced forces companies to implement and comply with the EGS criteria.

Capital markets use ESG to evaluate organizations and determine future financial performance. Ethics, sustainability and corporate governance are considered as non-financial performance indicators and provide accountability and systems for managing a company's impact, such as its carbon footprint.

In recent years, the demand for ESG compliance has increased rapidly due to agreements and treaties such as the Paris Climate Agreement and the European Green Deal to solve various environmental problems such as the climate crisis, deforestation, increasing greenhouse gas emissions, and biodiversity crises.Investors, consumers, and regulators expect companies to provide more transparency and accountability. In recent years, the emerging consumer awareness and shaping consumer behaviors are materializing thanks to developing communication technologies and forcing companies to comply with ESG criteria. Therefore, companies feel obliged to comply with ESG criteria and integrate ESG factors into their strategies. Profitability is the most important element for businesses. In this regard, it is important for businesses to be fair, adopt an environmentally friendly structure, and adopt a social benefit approach and sustainability. Businesses that embrace ESG will be much more profitable in the long run. It is possible to list the importance of EGS under the following headings:

• The concept of ESG goes beyond traditional financial performance. It encourages companies to consider not only profit but also their environmental and social impact and governance practice issues. This allows the business to focus on the long-term perspective of sustainability and social responsibility.
• Focusing on ESG factors can help companies reduce financial risks and seize opportunities. For example, energy efficiency and carbon footprint reduction efforts can reduce energy costs. At the same time, consumer demand and investor interest may increase demand for sustainable products and services.
• Investors no longer focus solely on financial returns. Investors focusing on ESG factors evaluate companies' sustainability commitments and social responsibilities and include these factors in their investment decisions. Likewise, consumers are showing more interest in ethical and sustainable products and services.
• Focusing on ESG factors can strengthen a company’s reputation and increase brand value. Companies’ commitment to environmental and social responsibility is appreciated by consumers and customers and can increase a company’s competitive advantage. In addition, more ethical practices contribute to long-term sustainable growth.

ESG offers a future perspective. By focusing on sustainability and social responsibility, companies can contribute to the solution of global problems. Additionally, companies that focus on ESG factors can better adapt to changing market conditions. Therefore, ESG plays a critical role for the future success of business and investment.

ESG criteria are important metrics used to evaluate companies' sustainability performance and measure sustainable business practices. In other words, ESG criteria provide a set of standards for a company's operations that socially conscious investors use to screen potential investments.

ESG criteria are considered a step towards building a more sustainable, fair and ethical future for business. ESG criteria will become even more important for the business and investment world in the future. As sustainability issues and social responsibility expectations increase, companies will need to focus on ESG factors and integrate these factors into their business strategies. Additionally, investments and sustainable investment products that focus on ESG factors will be in greater demand. Therefore, ESG criteria will play an important role in helping business and society move towards a more sustainable future. On this basis, advice on an ESG index, which allows companies to have more directly relevant information on environmental, social and good governance issues, is very important.

A regular and clear index on ESG will allow, firstly, managers and executives to make better decisions within the company, and secondly, investors will recognize and reward the efforts of companies with capital protected over time. To determine which components are parts of the ESG criteria, it is necessary to analyze them separately.

ESG criteria consist of three headings. These  environmental, social and governance criteria.

1. Environmental Criteria

Environmental factors are risk factors related to the sustainability of human life. They are essential risk factors. Environmental risk includes air and water pollution, drought, changes in seasons, storms and rainfall that cause destruction, heavy traffic, and urban sprawl, which pose potential dangers to the environment and human health. The uncontrolled migrations resulting from these risks are significantly affecting countries and societies, and even causing changes in governments.

The global risk presented at the 2024 World Economic Forum report identifies that the first four of the ten risks affecting the economy and politics in the next 2 years and over a 10-year period are environmental. These risks are identified as follows;

• Extreme changes in weather conditions,
• Sensitive changes in the global system,
• Loss of biodiversity and ecosystem collapses,
• Natural resource shortages.

Rapidly spreading pandemic diseases can also be added to these risks. Environmental risks include companies' use of natural resources, energy efficiency, carbon footprint, water management, waste management, and efforts to reduce their environmental impacts. Companies should focus on environmental factors to fulfill their sustainability commitments and aim to cause less harm to the environment.

However, the costs of focusing on environmental factors can lead companies to prioritize short-term profits over compliance with environmental factors and can lead to resistance in adapting to them. However, it is obvious that countries do not make enough efforts to fulfill the requirements of international agreements made in accordance with their socio-economic policies and to carry out the necessary inspections. For example, in Turkey, mining companies' destructive practices are allowed to damage nature and pollute the environment. In addition, industrial companies that pollute the environment have been postponing the installation of filters for years.

Companies' policies regarding possible environmental risks and how they manage these risks form the basis of environmental factors.Problems arising from human activities can lead to irreversible damages if relevant solutions are not implemented. These damages have a tangible impact on stakeholders such as customers and suppliers for institutions.

For example, according to the 6th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), there is an urgent need to transition to a low-carbon economy to prevent the devastating effects of the climate crisis. Companies that impact the environment and cause greenhouse gas emissions must adapt to global transformation to carry their brands into the future.

In addition, as the effects of the climate crisis deepen, international regulations increase and the development of new regulations accelerates.

For example, the goal of becoming a climate neutral continent by 2050, set out within the scope of the European Green Deal, is of great interest to the business world. Regulations such as the European Union Emissions Trading System (EU ETS) and the Borderline Carbon Adjustment Mechanism (CBAM) enable companies operating internationally to better manage their emissions and environmental impacts.

The main headings among the environmental criteria are as follows:

• Climate Change; Climate change causes extreme natural events due to changing weather conditions. If companies organize their activities by ignoring the effects of climate change, it means that the possible damages that may arise cannot be predicted. Emissions that cause global warming are among the leading environmental impacts of companies. Companies' emissions and related emission reduction efforts of them show how prepared they are for climate crisis-focused risks and regulations. To summarize, the areas that affect the ESG performance of companies within the scope of climate change include corporate carbon footprint, product carbon footprint, financing of environmental impact and climate change sensitivity.
• Natural Capital; Natural capital refers to the sum of natural resources used in production stages. Companies can minimize risks by developing alternative and sustainable processes against changes in natural capital. If natural capital is not used effectively, the possibility of encountering problems that are both environmentally harmful and disrupt production continuity, such as depletion of water resources, depletion of land areas, decrease in biodiversity and interruption of raw material supply, increases. Efficient utilization of natural resources allows the company to continue its activities without interruption.
• Pollution and Waste; Environmental pollution and waste generation resulting from human activities cause disruption of the natural order and harm to human health. It is necessary to comply with certain regulations in order to reduce pollution and manage waste in the institutional field. In addition, all activities must be developed inresponsibly in order to meet customer expectations and to increase brand reputation. Efficient use of resources in production processes reduces pollution. Necessary product development steps can be determined with an approach based on the product life cycle.
• Environmental Opportunities; It should not be forgotten that there are developing technologies and new environmental opportunities to manage the increasing risks focused on climate change. Renewable energy is among these opportunities. More widespread use of energy sources that do not harm the environment and are naturally renewable provides advantages in terms of efficiency and environmental impact. As we move towards a carbon-free future, it is necessary to take advantage of developing technology. In this regard, providing resource efficiency by modernizing production processes is among the environmental opportunities.

2. Social Criteria

Social criteria are based on the relationships of companies with all their stakeholders and the risk management in this area. Employees, suppliers’ chain and the local community where the company's activities take place constitute all stakeholders. The interaction with these stakeholders is evaluated within the scope of social impact performance.

Evaluating the social impacts of companies' activities contributes to identifying potential risks and opportunities in terms of investments. Companies' brand value and reputation are influenced by the social impact they leave. When examining the effects left in social criteria, it is important not to overlook the supply chain. The suppliers with which a corporate firm works, the approach of these suppliers to sustainability, and the kind of social impact they leave affect the ESG performance of the relevant firms. Social criteria consist of the following headings; human resources, product responsibility, and human rights.

• Human resources; Human Resources are one of the most important corporate resources that are fundamental to the production of products and services. Human resources, which appear as a great value, can be considered as capital in itself.

The talents that manage production processes and add value need to be directed in the most accurate way. Successful social capital management is possible by providing the necessary incentives and a business environment that allows development. Another important issue in the field of human resources is occupational health and safety. Companies show their commitment to sustainability goals in the social field by attaching importance to the health and safety of their employees. In this context, working conditions in the supply chain should not be ignored. The corporate importance given to diversity and equal opportunity in recruitment can be evaluated under the heading of human resources.

• Product responsibility is one of the most important factors that determine corporate reputation and customer loyalty. Areas covered by the product liability criterion; product quality, product safety, right to privacy and data security.

If the products contain any risks in terms of quality or safety, it damages the brand reputation and creates financial losses that are difficult to compensate. While carrying out production processes and outputs responsibly, the supply chain should not be forgotten. The product life cycle covers a wide area from raw material acquisition to end of product life. Detailed studies such as Life Cycle Analysis are preferred to ensure product liability and comply with ESG criteria by identifying possible risks.

• Human rights; Human rights are closely related to employee management. Practices that violate human rights, such as child labor or forced labor, indicate that companies' activities are unethical and unsustainable. In order to protect the brand reputation that ensures customer loyalty, activities that violate human rights must be completely terminated. Companies carry out their activities within a social field and local communities are closely affected by these activities.

Companies that create shared value for their environment through their activities prove their ability to create broader value and increase their ESG investment value. In addition, adopting a responsible and ethical supply approach within the supply chain can contribute to the creation of value for everyone in the social sphere.

1. Governance Criteria

ESG's criteria in the field of corporate governance refer to the decision-making behavior and activities of companies. The activities of officials involved in management processes, including the board of directors, shareholders and other managers, in the field of corporate governance are evaluated under this heading.

Areas such as decision-making mechanisms and policy determination are within the scope of corporate governance criteria. Corporate governance is an area that includes possible and high-impact risks, such as risks in the environmental and social areas. The process of determining corporate policies and making decisions shows the agility of companies and their resilience to future risks. Therefore, governance criteria have an important place among non-financial performance indicators.

What the duties and responsibilities of the people and bodies involved in the management of companies are is one of the indicators of sustainable corporate governance performance. It is necessary to demonstrate a high performance in this field in order to gain the trust of its stakeholders. Criteria in the field of corporate governance can be grouped under the headings of corporate governance and corporate behavior.

Corporate Governance; Governance principles and practices of institutions resemble a road map that directs all their activities and manages their resources. It covers the governance understanding and practices of institutions, board structure, accountability, decision-making mechanisms and business planning processes.

Corporate governance is the most important basic structure that determines stakeholder interaction. Companies that want to reflect their company culture and perspective on sustainability develop corporate governance behaviors within the framework of ESG criteria. Companies that produce various products and services in different sectors constantly improve their governance approaches with a focus on diversity in order to remain innovative.

Corporate Behaviors;Corporate behaviors refer to the values ​​and practices adopted within the framework of the governance approach.Sustainable governance understanding companies develop anti-corruption policies. At the same time, they establish auditing and internal control mechanisms. Companies increase their performance within the scope of ESG criteria by making concepts such as transparency and business ethics a part of their corporate culture.

Lack of transparency in information about the product or company causes investors to lose their trust. In this context, preparation of a transparent corporate sustainability report with sustainability reporting (Global Reporting Initiative-GRI) is very valuable for improving communication with stakeholders.

Focusing on ESG (Environmental, Social and Governance) factors has a series of positive effects on business world and society. ESG factors evaluate commitment to sustainability, social responsibility, and ethical practices, and this evaluation creates various effects on companies. To measure these effects, scores have been developed with ESG. These scores and their contents are as follows;

ESG General Score: Environmental, social, and governance scores is the overall score calculated according to specific percentages.

Environmental Score: It is the score calculated as a result of the studies and investments made by companies regarding environmental factors (use of resources, gas emissions and innovation activities).

Social Score: It is the score calculated as a result of the studies and investments made by companies regarding social factors (labour, human rights, society and product responsibility).

Governance Score: It is the score calculated as a result of the studies and investments made by companies regarding governance factors (management, shareholders and corporate social responsibility).

It is assumed that compliance with ESG will be ensured in the future and that the companies that cannot achieve this compliance will be negatively affected. The effects created by focusing on ESG can be listed as follows:

• Companies that focus on ESG factors generally improve their financial performance.
• Energy efficiency improvements made to reduce environmental impacts can reduce energy costs and provide long term savings.
• Social responsibility projects and better practices regarding workers' rights can increase employee motivation and positively affect in-house efficiency.
• It helps companies reduce their financial and reputational risks. For example, if appropriate measures are not taken regarding environmental issues, the risk of facing environmental sanctions or legal liabilities may increase in the future. ESG practices offer the opportunity to identify and manage such risks in advance.
• It can strengthen companies' reputation and increase brand value. Customers and consumers tend to trust companies with ethical and sustainable practices more and prefer the products and services of these companies. Similarly, investors also consider companies' ESG practices when investing.
• It can help companies achieve innovation and competitive advantage. While sustainability-focused products and services create new market opportunities, investments to achieve sustainability goals provide competitive advantage for the future.

It can positively affect the social and environmental impact of companies. Sustainability projects and social responsibility activities can create value for societies and serve the purpose of leaving a more livable world to future generations. Therefore, focusing on ESG factors contributes to business and society building a more sustainable future.

The primary function of finance is to allocate resources efficiently and usefully. In traditional finance, the primary goal isto provide financial returns. The traditional financial approach, focusing on the output economy and its financing, has resulted in negative environmental, social and economic consequences.These negative consequences led to a number of environmental, social and governance agreements being made on both a regional and global scale, and a number of related organizations were formed. These agreements and organizations imposed certain responsibilities on both countries and institutions. Various sanctions were foreseen for institutions and organizations that do not fulfill these responsibilities.

In this context, a new financial approach has begun to be adopted, which considers environmental, social, and governance (ESG) factors as an integral part of financial decision-making. Countries and international organizations have imposed responsibilities on financial institutions in these areas. This approach is generally referred to as sustainable finance.

According to the International Finance Corporation, sustainable finance is defined as "the integration of social and environmental factors into the activities of banks and financial institutions, leading to better management of the risks that arise in this context and the evaluation of opportunities that emerge in these areas." According to the European Commission, sustainable finance involves the inclusion of environmental, social, and governance (ESG) criteria in the investment decision-making process to implement more sustainable economic activities within the financial system. Within the framework of European Union policies, sustainable finance supports economic growth on one hand while reducing pressure on the environment and considering social and economic factors on the other.

Sustainable finance represents a transformative change in how financial services contribute to a greener, fairer, and more sustainable future. Unlike traditional finance, which generally ignores environmental and social impacts, sustainable finance integrates these issues into the financial decision-making process. This approach emphasizes the need to support economic growth while reducing pressures on the environment, addressing social inequalities, and ensuring long-term sustainability. Sustainable finance is not just an ethical choice; it is a pragmatic response to the global challenges posed by climate change, resource depletion, and social inequalities.

As the effects of climate change become more pronounced and the call for social action rises, this change is becoming increasingly important. Sustainable finance plays a significant role in directing capital towards projects and businesses that have a positive environmental and social impact. This approach is essential for achieving goals such as carbon neutrality, the conservation of biodiversity, and the promotion of inclusive economic development.

Understanding sustainable finance is vital in a world where economic activities are intrinsically linked to environmental and social outcomes. This paradigm not only provides a pathway to sustainable economic growth but also enables investors, companies, and individuals to align their financial activities with broader societal goals. The mainstreaming of sustainable finance practices and principles can play an effective role in aligning financial systems and investments with sustainable development efforts.

The aim of sustainable finance is not only to minimize negative impacts, but also to actively contribute to positive change. It aims to create a financial system that supports and encourages sustainable practices, ultimately leading to a more resilient, inclusive and sustainable economy.

Sustainable finance includes tools and approaches that pursue the goal of sustainability by taking into account social and environmental impacts in the financial system. These tools help companies, investors, and financial institutions achieve their sustainability goals.

As the 1990s approached and in the early 2000s, there was a shift towards a more comprehensive approach that integrates environmental, social, and governance factors into investment analysis. During this transition period, the ESG landscape was significantly influenced by various groundbreaking reports and frameworks that shaped the understanding and implementation of sustainable practices. The main ones include the Brundtland Report (1987), which laid the foundation for sustainable development principles, the United Nations Global Compact (2000), which calls on companies to align their operations with universal principles, and the launch of the Global Reporting Initiative (GRI) guidelines in the same year, which provide a framework for transparent reporting on sustainability performance (Sellhorn and Wagner, 2022).

The Brundtland Report was published in 1987 by the United Nations World Commission on Environment and Development. This report emphasized the principle of "meeting the needs of the present without compromising the ability of future generations to meet their own needs" by introducing the concept of sustainable development. The report called for a comprehensive approach to address global challenges by highlighting the interconnectedness of environmental, social, and economic issues.

Launched in 2000, the United Nations Global Compact is a voluntary initiative that calls on companies to align their strategies and operations with universal principles such as human rights, labor, environment, and anti-corruption. The Global Compact provides a framework for businesses to align their operations with broader societal goals and contribute to sustainable development.

The Global Reporting Initiative (GRI), an independent organization, offers a comprehensive framework for sustainability reporting with guidelines launched in 2000. It provides guidelines for companies to report on their ESG performance and disclose relevant information in a consistent and transparent manner. Additionally, the establishment of the Principles for Responsible Investment (PRI) by the United Nations (UN) in 2006 further institutionalized the integration of ESG factors into investment decision-making processes.

An important initiative in the European context is the Sustainable Finance Action Plan published by the European Union (EU) in 2018 (Claringbould et al., 2019). The plan aims to mobilize financing for sustainable growth and direct capital flows towards sustainable investments. This plan includes several key components:

The Taxonomy Regulation: The Taxonomy Regulation provides a classification system for sustainable economic activities and defines criteria for environmentally sustainable activities across various sectors. It aims to support the EU's goal of being climate-neutral by 2050.

The Sustainable Finance Disclosure Regulation; The Sustainable Finance Disclosure Regulation (SFDR) sets rules for financial market participants and companies to disclose how sustainability factors are integrated into their investment decisions and risk management processes. It aims to enhance the transparency and comparability of sustainable investments.

EU Green Bond Standard;The EU Green Bond Standard is a voluntary framework that sets criteria for green bonds and ensures that the funds raised are used for environmentally sustainable projects. It aims to provide transparency and reliability to the green bond market.

Non-Financial Reporting Directive (NFRD): The NFRD requires certain large companies to ensure comprehensive disclosure of non-financial information, including environmental and social aspects, in their annual reports. The directive is designed to increase transparency and to promote comparability between companies by promoting standardized reporting of non-financial information. Although the financial sector in Europe has shifted towards ‘sustainable’ finance due to significant regulatory changes, concerns remain about the real impact of these reforms, with concerns about a potential paradoxical financialisation of sustainability (Ahlström and Monciardini, 2020).

In this context, international collaborations and initiatives such as the International Sustainability Standards Board Foundation (SASB) and the International Integrated Reporting Council (IIRC) aim to develop consistent reporting guidelines and encourage companies to adopt best practices in ESG reporting. Both collaborate with businesses, investors, standard setters and regulators to develop and improve reporting frameworks and guidelines. Currently, two standards have been published. One of these is about disclosing information about its sustainability risks and opportunities, and the other is about ensuring that it discloses information about climate-related risks and opportunities.

The transition from traditional approaches to the ESG approach and the realization of ESG come with significant financial cost. This cost cannot be solely covered by public resources. Therefore, it is necessary to allocate resources to companies that cause environmental, social, and governance-related issues, alongside public resources. A number of financial products and applications have been developed to implement ESG factors for both resource allocation and incentive purposes.

a)ESG-Focused Indices

As ESG continues to gain significant place in the investment world, stock exchanges have started launching sustainability indices to appeal to eager investors and provide benchmarks for identifying companies with strong ESG practices. These indices serve as reference points for investors interested in investing in sustainable and responsible companies. Examples include the FTSE4Good Index Series (London Stock Exchange), Dow Jones Sustainability Indices (New York Stock Exchange), BIST Sustainability Index (Borsa Istanbul), OMX Stockholm Sustainability Index (Nasdaq Stockholm), and S&P 500 ESG Index, etc.

b) ESG Focused Exchange Traded Funds

ESG focused Exchange-Traded Funds (ETFs) are investment funds that track a specific ESG-focused index or company portfolio. These ETFs aim to provide exposure to companies that meet certain environmental, social, and governance criteria while offering investors the benefits of diversification and tradability associated with ETFs. Examples of ESG-focused ETFs include iShares MSCI Global Impact ETF (SDG), SPDR S&P 500 ESG ETF (EFIV), Vanguard ESG U.S. Stock ETF (ESGV), Nuveen ESG Small Cap ETF (NUSC), etc.

ESG ETFs are investment instruments that allow investors to gain exposure to a portfolio of securities that meet specific ESG criteria. Like other ETFs, they can be bought and sold on an exchange. On the other hand, ESG indices are benchmarks that measure the ESG performance of a group of companies recognized for their ESG-related activities and are used as reference metrics to evaluate the performance of ESG-focused investments in capital markets.

b)Impact Investment

Unlike traditional investment, which primarily focuses on financial performance, impact investing is intentional and aims to align capital with projects and companies addressing social and environmental challenges. Impact investing encompasses a wide range of themes and sectors, including renewable energy, affordable housing, sustainable agriculture, education, health, gender equality, and financial inclusion. Impact investors aim to achieve competitive market returns and even outperform traditional investments while also generating positive social and environmental outcomes through impact investment funds or impact bond issuances. They proactively seek investment opportunities with the potential to deliver measurable social or environmental outcomes (Barber et al., 2021). Impact investors use a range of methodologies and tools to monitor and evaluate the progress of the investees in achieving their targeted impact.

c)Green bonds

Green bonds are fixed-income financial instruments specifically designed to finance projects with positive environmental or climate-related benefits. They enable issuers to raise capital to finance projects that promote renewable energy, energy efficiency, sustainable infrastructure, and other environmentally friendly initiatives. The International Capital Market Association (ICMA) has established the foundation of green bond principles. The principles are continuously updated to reflect the development and growth in the green bond market with the participation of members, observers, and a broad stakeholder community.

Green bonds have a standard labeling and certification process. They typically undergo a rigorous assessment and verification process to ensure that the financed projects meet recognized green standards and targets. Organizations such as the Climate Bonds Initiative or Green Bond Principles provide guidelines and criteria to assess the environmental integrity and transparency of green bond issuances (Gilchrist et al., 2021). Following the market appetite for green bonds, Green Bond Funds and Sustainable Bond Funds are also gaining interest. These funds invest specifically in green bonds or sustainability-focused fixed-income securities with a broader scope, which may not always have a standard labeling or certification process. Four different types of green bonds can be found in today's markets.

Standard Green Themed Bond: It is a bond debt obligation that has the same characteristics as a standard bond.

Green Revenue Bond: It is a type of bond that does not return to the issuer, where the risks in the bond are tied to mortgaged cash flows, and the revenues are used to carry out green projects.

Green Project Bond: It is a bond for one or more green projects where investors directly bear the project risk.

Green Asset-Backed Securities and Mortgage-Backed Bonds: These are bonds that are based on securities such as asset-backed securities, secured by green projects, and whose repayment is dependent on cash flows generated from the assets.

d)Green Loans

Loans used by companies, local governments, or other organizations to provide funding for domestic and international green projects are defined as green loans. The fundamental characteristics of green loans are that they are allocated only to green projects that they are managed with reliable monitoring, and transparency is ensured through post-financing reporting. Companies, financial institutions, and local governments that raise debt for green projects constitute the borrowers of green loans.

Green Loan Principles have been developed for the green loan market to facilitate environmentally sustainable economic activities, to develop, and to support green loans by leading financial institutions in global credit markets. The Green Loan Principles, based on the Green Bond Principles established and managed by the International Capital Markets Association, consist of the following;

• Use of revenues,
• Project evaluation and selection process,
• Management of revenues,
• Reporting principles.

e)Sustainability Related Loans

In addition to impact investment, green bonds and funds, sustainability-linked loans are also available outside of capital markets. These loans are credit opportunities where the interest rate or terms are linked to the borrower's sustainability performance. The borrower commits to achieving specific sustainability goals, such as reducing carbon emissions or improving social criteria. If the borrower meets these targets, they may receive a discount on interest rates or other financial incentives (Carrizosa and Ghosh, 2022).

f)Social Bonds

In the field of sustainable finance, social bonds have emerged as a powerful tool to address pressing social issues and promote positive change. These private bonds facilitate the allocation of capital to projects and initiatives that directly target social challenges, enabling governments, organizations and investors to contribute meaningfully to the betterment of communities and individuals.

Social bonds are adopted by a wide range of organizations, including governments, development agencies, financial institutions and corporations, all united by a common commitment to social responsibility. These actors use social bonds to raise funds for initiatives that tangibly contribute to social well-being. The main purpose of social bonds is to promote inclusive growth and sustainable development by directing resources to projects that address social challenges. The applications of social bonds are wide-ranging and cover many impactful projects.

g)Blue Lending And Bonds

The importance of biodiversity among policymakers is increasing. There are many positive relationships between biodiversity in water and on land and clean energy, as well as investments that are noted to negatively affect biodiversity while reducing greenhouse gas emissions in some cases. Bonds issued to emphasize investments that protect biodiversity are called blue bonds.

h)Micro Loans

A micro loan is a loan given by a microfinance institution to a micro-entrepreneur to develop their business. Micro loans are generally provided for purposes such as meeting working capital needs, purchasing raw materials and supplies, and acquiring fixed equipment necessary for manufacturing. It is a project that provides opportunities for the poor who have a business idea and need a small initial capital to engage in income-generating activities. Micro loans, which are based solely on trust and are unsecured and without guarantors, are considered an effective strategy for the poor to lift themselves out of poverty. In addition, services such as savings, insurance, and money transfers provided to those outside the traditional credit, deposit, insurance, and valid financial system or those who cannot reach these institutions are also counted among microfinance services.

i)ESG Derivatives in Financial Markets

ESG derivatives refer to financial instruments linked to ESG factors or financial products integrated with ESG. These derivatives allow investors to take positions related to ESG performance or outcomes or to manage risks (Baker, 2022). ESG derivatives can take various forms, including futures contracts, options, swaps, and structured.

The framework of sustainable finance varies significantly among countries, and each faces different access processes and barriers. Developed countries tend to have more established frameworks for sustainable finance, which include robust regulatory systems and readily available data on environmental, social, and governance (ESG) metrics. In contrast, developing economies may struggle with challenges such as limited access to capital, weaker regulatory environments, and a lack of standardized ESG reporting. Additionally, since different regions have different approaches to integrating sustainable finance, cultural and institutional barriers may hinder progress. Overcoming these barriers requires specific strategies, including capacity-building initiatives, policy reforms, and international cooperation to ensure that all countries have equal opportunities to participate in the global transition to sustainability.

International funders play an important role in developing sustainable finance by setting policies and conditions that guide capital allocation. These organizations, which range from multilateral development banks to private investment firms, often have specific criteria for supporting projects and initiatives. This may include adherence to stringent ESG standards, transparency in reporting, and compliance with global sustainability goals. Conditions set by international funders serve as a critical mechanism to ensure that investments contribute to positive environmental and social outcomes. By supporting high standards and promoting sustainable practices, international funders are having a significant impact in shaping the trajectory of global sustainable finance and encouraging the adoption of responsible financial strategies worldwide.

The complexity and breadth of ESG issues present a challenge for companies in identifying and measuring relevant ESG metrics. This challenge is particularly important for industries with unique ESG considerations, such as the Oil and Gas Industry, Pharmaceuticals and Agriculture and Food Industry, or small and medium-sized enterprises (SMEs) with limited resources and expertise. This can negatively impact ESG finance.