ESG and SUSTAINABILITY
- History and Definition
The concept of sustainability was first used in the “Brundtland Report” prepared by the United Nations World Commission on Environment and Development in 1987. In the Brundtland Report, named after Gro Harlem Brundtland, former Prime Minister of Norway, who was the President of the World Commission on Environment and Development, the concept of sustainability was defined as “development that meets the needs of today without compromising the ability of future generations to meet their needs”. The main feature of this concept, which is used in many different fields, is to protect the needs of future generations while meeting the needs of today.
Many unsustainable activities, referred to as ‘negative externalities’, arise from the economic activities of companies. Indeed, it is not a secret that there are many unsustainable companies that engage in environmentally harmful production activities within the scope of ecology and protection of environmental harmony, pollute the environment directly or indirectly, “evade taxes” through unfair tax declarations, engage in transactions that are morally considered corruption such as bribery and favouritism, and have negative impacts on society through child labour activities.
In this respect, the concept of sustainability can be defined as determining the social responsibility limits of companies, including the reporting of non-financial data in terms of determining and understanding the place and effects of companies in society, analysing environmental factors and especially ensuring economic continuity.
- Three Dimensions of Corporate Sustainability
Sustainability has three main dimensions: economic, environmental and social sustainability.
Sustainability in the economic sense is defined as the ability of companies to continue and maintain their activities successfully by caring for the needs of society and the environment and to access financing that secures them.
On the other hand, environmental sustainability can be defined as the ability of companies to protect natural resources, minimise damage to the environment and develop environmentally friendly production technologies. It can be concretised with examples such as the presence of renewable energy sources within the company, policies established to reduce emissions to the atmosphere, and the use of recyclable designed products by companies.
It is a requirement of sustainability that companies aim to include environmental issues/concerns in their corporate strategy in order to protect the right of future generations to live in a healthy environment. The fact that companies attach importance to the environmental dimension is an indicator that they care about sustainability and positively affects investors and stakeholders who make decisions based on this information.
Social sustainability, on the other hand, can be defined as companies respecting human rights, ensuring that everyone in the supply chain works in healthy and safe working conditions for a fair living wage, and supplying goods and product services by considering the benefit of the community.
III. ESG (Environment, Social, Governance)
(The term ESG (which is an abbreviation of the English words “environment”, “social” and “governance”) was first used in the report titled “Who Cares Wins” published after the United Nations Global Compact in 2004. The aim of ESG, which stands for environmental, social and governance (ESG) in Turkish, is to understand, evaluate and rate how sustainably companies operate in line with their responsibilities in terms of sustainability.
A company’s ESG performance is a guideline for the company since a company’s ESG performance and its presentation/disclosure of transparent, accurate and comparable non-financial information enable the company’s environmental, social and governance practices to be analysed and an assessment to be made on the performance and potentials of the company in question. A good ESG management of the company will lead to a good ESG score, which in turn will make it easier for companies to receive investments.
As summarised above, the legal infrastructure of ESG, which is a set of practices implemented by organisations to limit the negative perception or increase the positive perception on the environment, society and governing bodies, has been established by public institutions and has started to be the subject of business relations signed between companies.
LEGAL FRAMEWORK
- Sustainability in Turkiye
Sustainability is of great importance in terms of determining the position and effects of business life in society as well as the economic continuity of companies.
In this respect, there are public law regulations, which are referred to as strict rules of law and which include minimum standards that all companies are obliged to comply with. Labour law, which is described as mixed law according to some jurists and public law according to others, constitutes a very accurate example of these regulations. In addition, the destruction of natural resources, human rights violations and similar issues are regulated by legal regulations.
Examples of such regulations include environmental taxes, emission taxes or solid waste taxes, which impose a compelling financial obligation on companies to comply with sustainability processes.
On the other hand, the concept of “soft law”, which is referred to as soft legal rules, can be defined as a kind of regulatory law method, which consists of norms, principles, guidelines as a substitute for mandatory rules and is non-binding and is defined as weaker than the known hard legal rules. Instead of ensuring compliance with the rules through penal sanctions, these rules encourage companies to comply with these rules by developing a kind of reward mechanism in case of compliance.
In this context, although Corporate Governance Principles in Turkey do not directly include the concept of sustainability, it is regulated under the Public Disclosure and Transparency section that companies should include data on corporate social responsibility in their annual reports.
First of all, it should be noted that according to the Corporate Governance Communiqué published in the Official Gazette No. 28871 dated 03.01.2014, the following companies are not subject to sustainability principles
– Publicly traded corporations whose shares are not traded on the stock exchange.
– Corporations whose shares are traded in other markets, markets or platforms other than the National Market, Second National Market or Corporate Products Market.
– Among the corporations that applied/applied to the Board for the initial public offering of their shares and/or commencement of trading on the stock exchange; those whose shares will be traded on other markets, markets or platforms other than the National Market, Second National Market or Corporate Products Market.
– Partnerships deemed to be non-resident according to the Decree No. 32 on the Protection of the Value of Turkish Currency, which was put into effect by the Decree of the Council of Ministers dated 7/8/1989 and numbered 89/14391
Corporations other than those listed above are subject to the Corporate Governance Principles. There are 24 compulsory principles in the Corporate Governance Principles and these principles are included in the sections titled “Shareholders” and “Board of Directors”. Corporate governance principles can be listed as fairness, transparency, accountability and responsibility in various sources. Although the implementation of these principles is voluntary, it is obligatory to report whether they are implemented or not with the principle of “comply or explain”.
In Turkey, according to the regulations of the Capital Markets Board, listed companies must publish a compliance report in the annex of the annual report of the company, showing their compliance with the Corporate Governance Principles and explaining their non-compliance, if any. In these compliance reports, explanations within the scope of the “Sustainability Principles Compliance Framework” are included. The “Sustainability Principles Compliance Framework” includes the basic principles that publicly traded companies are expected to disclose while conducting their environmental, social, corporate/governance (ESG) activities.
The Public Oversight Authority published a board decision in the Official Gazette on 29.12.2023 in order to determine the enterprises that will be subject to sustainability reporting within the framework of the “Board Decision on the Scope of Application of Turkish Sustainability Reporting Standards (TSRS)”. According to this decision, the following companies have been included in sustainability reporting as of 01/01/2024. Accordingly
– Total assets 500 Million TL
– Annual net sales revenue 1 Billion TL
– Number of Employees 250 people
It has been announced that enterprises that exceed the threshold values of at least two of the conditions – in two consecutive reporting periods – are included in the scope of mandatory implementation. In addition to companies that meet these criteria, banks subject to the BRSA, excluding banks under the SDIF, are within the scope of mandatory reporting without being subject to any threshold. The comprehensive list is listed in the annex of the relevant decision, and companies outside the scope will be able to report in accordance with TSRS on a voluntary basis.
- International Sustainability Practises
United Nations Sustainable Development Goals
First of all, it should be noted that within the scope of the “United Nations Sustainable Development Goals”, sustainability is included in the principles aiming to improve human living conditions in order to establish social infrastructure. Some of these principles are healthy and quality life, decent work and economic growth, sustainable cities and communities, accessible and clean energy, responsible production and consumption.
ESG regulations in International Conventions
On the other hand, ESG compliance clauses have started to be included in international supply and purchase and sale contracts. Draft contracts containing ESG provisions have been adopted in international legal and trade circles and have started to increase their weight in practice. In this context, at the 2022 UIA seminar held in Vienna, sustainability criteria and ESG-compliance clauses in the Supply of Goods Contract were discussed and evaluated.
To give an example in this context, the phrase “[…]The Seller shall select suppliers with the financial, administrative and legal capacity to fulfil both commercial and human rights and environmental obligations under the Contract.” was added to the relevant contract clauses.
Within the scope of this model contract, which encourages companies to follow a sustainable corporate policy that is sensitive to human rights and the environment in many articles, companies not only use this in their own policies, but also choose to trade with companies that attach importance to their ESG performance.
Another article of the contract states: “[…] undertakes to comply with the human rights and environmental due diligence standards, policy and protection set out in the Human Rights and Environmental Policy, as may be amended from time to time.” is a concrete example of this situation.
EU Corporate Sustainability and Duty of Care Directive
On 31 July 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS). These standards cover all environmental, social and governance issues, including climate change, biodiversity and human rights.
