Turkey’s NAB is looking to galvanise impact investment by tapping into a vibrant local private sector and by attracting international players. However, several obstacles remain, such as the need to generate more awareness.
Turkey may be relative late starter in impact investing – its ecosystem only began to incubate in earnest in 2020 – but it is making up for lost time, propelled by the country’s Impact Investing Advisory Board (EYDK), which now boasts 45 member institutions.
EYDK serves as a national advisory board (NAB), charged with steering Turkey’s national strategy to promote impact investing. It is only the second NAB in the region, after Israel.
EYDK is working to ensure that local entrepreneurship aligns with themes such as women’s empowerment, financial inclusion, improving refugee livelihoods, and promoting renewable energy and health.
The NAB’s mission is to realise what the United Nations Development Programme (UNDP) has described as Turkey’s potential to become a catalytic regional entry point to the Middle East/North Africa, and eastern Europe and central Asian impact markets.
It means that generating awareness is vital. “There have been a lot of sustainability and impact efforts in our country, but the impact investor universe has not been aware of this,” says Hale Özsoy, director of Turkven Private Equity and a vice president at EYDK.
The Turkish private sector could prove to be a powerful catalyst in building impact investing.
“We have a lot of local companies that have become regional powers. We have a lot of multinationals that have been operating in Turkey for a long time. Global development banks also have big footprints here and bring a lot of dynamism,” says Özsoy.
Banks in Turkey all report their sustainability metrics, besides issuing green bonds and impact bonds.
The aim is to tap into this bank of expertise. “At EYDK, we want to use the experience of the bigger Turkish companies, the banks, the conglomerates, the big FMCG players, and the public sector to help the smaller companies attract impact funds and share know-how with similar organisations all around the world,” says Özsoy, who has 20 years of experience in private equity.
Besides leveraging Turkey’s unique geographic advantages, bridging east and west, the UNDP has also highlighted the country’s relatively developed financial market, while still presenting opportunities to generate social and environmental impact to alleviate development challenges in the region.
A focus area for EYDK is developing a standardised framework for impact investment. Despite a deep-rooted Turkish culture of charitable giving and entrepreneurship, the country is being held back from mobilising private funding by a lack of knowledge in designing and managing impact investments.
“The critical thing is to have a really trusted system where the metrics are measured and reported carefully, so that investors have the confidence that their money is going to right initiatives,” says Özsoy.
Transparency is also paramount. “It takes a lot of time and effort to incorporate an easy-to-use, efficient and concise reporting mechanism. So we’re trying to help stakeholders to develop this common language and infrastructure,” says Özsoy.
Another obstacle is the lack of established international impact investors.
“Other than the development banks, which have a big presence, we don’t yet have a lot of European dedicated impact investors in Turkey,” says Özsoy.
This could in part be an awareness issue, which is why EYDK is looking to build partnerships with foreign organisations, to show to the world that an ecosystem is developing in the country.
Access to capital
There are some green shoots. Bridges Fund Management, a specialist UK impact investment fund manager, helped launch the first social impact bond in Turkey, in August 2023.
That saw Istanbul Development Agency (ISTKA) launch a $1.25m (€1.18m) bond to train and employ young unemployed individuals in the software sector. Bridges Outcomes Partnerships will provide pre-financing to service providers, assuming all the risk. It will receive payment from ISTKA if the targets outlined in the contract are achieved.
Another challenge facing Turkey is a lack of capital. To overcome this, EYDK is looking to develop platforms where entrepreneurs can meet investors, and tap their resources and capital. “Although people have very good ideas that create a tangible social impact, they may not be able get access to financing,” said Özsoy. Improving access to capital requires attracting more impact funds to the country, he adds.
One Turkish investment manager looking to fill the financing gap is Istanbul-based idacapital, a venture capital investor that describes itself as the first impact investor in Turkey. Starting out in 2016, its fund size is now around $17m. According to its cofounder Cem Baytok, about 75% of its investor base is made up of institutional investors.
Within idacapital’s portfolio is WorqCompany, which provides revenue-based financing for e-commerce merchants active in online marketplaces like Amazon or Trendyol.
Baytok said around 30% of these marketplace sellers reside in the less developed and earthquake-prone areas of the country. Like many small businesses, these e-commerce merchants face challenges accessing financing, mainly because commercial banks don’t appraise their businesses.
“For example, they don’t have a physical store. So what WorqCompany does is electronically trace all the past performance of these marketplace sellers. We look at their actual sales performance and understand whether they have the potential to grow these. If they have enough inventory to sell, they can grow,” said Baytok.
WorqCompany’s model is to buy sellers’ inventory, and sell it back to them with the deferred payments. “We share the revenue that that they make from the sales, which makes it in shariah-compliant terms, a murabaha transaction,” says Baytok
About 50% of its customers are women-owned businesses. It has reached more than 250 customers and aims to reach around 400 customers by the end of 2023.
“We are continuously outperforming market rate returns, which shows that impact investing is a lucrative investment approach in Turkey,” says Baytok.
Now idacapital is preparing its first social impact sukuk (a form of Islamic debt security), working with a participation bank for the launch in the fourth quarter of 2023.
More such products will help seed a deeper ecosystem that could thrust Turkey onto international impact investors’ radar screens.
“We have had a fast start, but it takes a lot of steps to attract impact investors,” says Özsoy. “We’ve made a lot of progress, but we still have a lot to do.”