In The News: In the News

Turkey in focus – economic challenges and corporate optimism

Erdogan’s victory at the polls is unlikely to do much to restore investor confidence in Turkey unless credible policy actions are taken to address external vulnerabilities and an overheated economy. We traveled to Turkey to try to gauge whether companies are committing to sustainable business practices in the current challenging economic and political conditions.

The results of Turkey’s recent presidential and parliamentary elections will lead to a powerful presidential system that places unprecedented powers in Recep Tayyip Erdogan’s hands. In claiming victory, Mr. Erdogan overcame a number of challenges, including a resurgent opposition, a sliding currency, and escalating concerns about inflationary pressure and economic imbalances.

We visited Turkey in the run-up to the pivotal presidential and parliamentary elections. Political and economic uncertainty, together with a debt-laden corporate sector heavily reliant on foreign currency debt, have been testing investors’ confidence in the country this year. While Erdogan’s victory will likely ease concerns about short-term political risks, dark clouds continue to loom over the economy.

Despite these challenging conditions, the companies we visited remain hopeful they will continue to grow. The historical resilience of businesses despite multiple setbacks, the impressive economic growth the country continues to experience (GDP grew by 7.3% YoY in December 2017) and a domestic consumer market of close to 80 million people support their optimism. At the same time, we were impressed by how management teams at most companies are actively incorporating material sustainability issues into their business strategies.

Leading financial institutions are investing heavily in improving their digital banking services to target underbanked segments of the population, while ensuring user data remains safe from cyberattacks. They have also been increasing allocations to renewable energy and energy efficiency projects. Management teams at large food & beverage companies have embraced sustainable agricultural sourcing practices as they strive to become powerful regional players. Finally, food retail companies, especially discount grocers, have started to factor energy efficiency and food waste considerations into logistics, store design and operations as they aggressively expand across the country.

Our research prior to the trip, as well as the engagement meetings we had, gave us confidence that for a good number of large blue-chip companies in Turkey, sustainability has become an integral part of doing business. Having said that, we acknowledge that progress so far took place during benign economic conditions that are no longer there.

An overheated and vulnerable economy, coupled with potentially unorthodox economic policies, broader pressure on emerging markets and increasing geopolitical tensions, makes us wonder about companies’ optimism. Such a challenging context can hinder their growth potential and possibly their willingness to remain committed to sustainability in the long term. We will, therefore, keep a close watch on companies’ investments in sustainability management, governance and reporting going forward.

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