Sustainability has been defined by the United Nations as "meeting the needs of the present without compromising the ability of future generations to meet their own needs" and, in a corporate context, it refers to a company's overall approach to managing a wide range of environmental, social, and governance risks and issues. Sustainability and ESG are increasingly becoming part of companies' board agenda, understood by companies through a regulatory, compliance, and risk management lens, and seen as inextricably linked with a green light to operate. Companies engage in ESG not only to “do good,” but also due to a growing recognition that taking a robust approach to managing these issues can mitigate risk and provide benefits such as enhanced consumer trust and loyalty, ability to attract talent, ability to meet stakeholder expectations and improve the company’s resilience, and profitability over the long term.
Investing based on ESG principles is becoming very popular since they help investors prevent losses by eliminating companies that engage in risky or unethical practices that would likely cause investors to be held accountable. The criteria are also becoming crucial in the modern world as the negative effects of climate change, the necessity of managing environmental risks, and the increasing importance attached to human rights and ethical values are the most important issues lately.
In this respect, the 2030 Agenda for Sustainable Development, adopted by all members of the United Nations in 2015, provides a plan for peace and prosperity for all people and the planet by submitting 17 sustainable development goals (SDG) that are an urgent call to action by all developed and developing countries. Accordingly, many companies take SDGs into account when creating their ESG principles. Turkey, as a developing country, submitted its nationally determined contributions in relation to the Paris Agreement on October 11, 2021, in which greenhouse gas emissions are envisaged to be reduced by up to 21% by 2030. It is important to note that the EU's commitment is to reduce emissions by at least 40% by 2030.
While developed countries made considerable progress in environmental accounting and environmental reporting, developing countries such as Turkey are still at an early stage. One of the main reasons for this is that, while sustainability reporting is compulsory in many countries, it is not mandatory in developing countries yet.
Having said that, ESG has started to play a more important role in Turkey since October 1, 2020, as the Capital Markets Board (CMB) amended the Corporate Governance Communique to ensure that public companies adopt the idea of sustainability and report their sustainability performance. With this regulation, the CMB also provided the Sustainability Principles Compliance Framework, which introduces the ESG principles. However, those principles are not compulsory for listed companies. They are, however, required to report the justification for their non-compliance with the principles and the effects thereof. Even if the principles are operated on a comply-or-explain basis, for the time being, this development is an important step for sustainability studies for Turkey and it certainly attracts investors who take ESG principles into account when selecting their investments. Furthermore, ESG principles are also one of the key consideration points in the country's Eleventh Development Plan (for the years 2019-2023).
In Turkey, it has been observed that many companies with foreign investments have certain business code of conduct practices in which ESG criteria are sought in their business with their stakeholders. These codes of conduct are typically aligned with the SDGs and seek to provide guidance to local companies and third-party suppliers. Companies in Turkey increasingly view diversity and inclusion as a business imperative that fosters innovation and competitiveness and are working to achieve inclusive workplaces and diversity in the boardroom, as well as supporting the wider community in combatting inequality, in pursuit of the SDGs.
All in all, for ESG efforts to work, aligned development needs to take place all around the world. Turkey needs to develop actions in line with international standards and further include those actions in the country's development plans. As for companies, they should prepare and improve their standards for a better, fairer, and more sustainable future and constantly follow up on developments in ESG.
Nigar Gokmen, Head of Energy, Mining, and Infrastructure, and Tugay Hanegelioglu, Associate, Esin Attorney Partnership
This Article was originally published in Issue 9.7 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.