ESG Comparative Guide

1 Legal and enforcement framework

1.1 What regulatory regimes and codes of practice primarily govern environmental, social and governance (ESG) regulation and implementation in your jurisdiction?

There are no specific regulations governing ESG issues in Türkiye. However, various laws and regulations include provisions relating to ESG.

At the top of the hierarchy, the Constitution of the Republic of Türkiye includes provisions on:

• the protection of environment;
• social security;
• health, safety and shelter rights;
• anti-discrimination; and
• gender equality.

In line with the Constitution, there are many laws and regulations with an ESG angle. The most relevant statutes regarding ESG are as follows:

Environment: The Environmental Law addresses the sustainability of the environment through the prevention of environmental pollution and the preservation of natural resources and land. There are also regulations on:

• environmental impact assessments for projects;
• greenhouse gas emissions;
• substances that deplete the ozone layer; and
• fluorinated greenhouse gases.

Social: Relevant statutes in this regard include:

• the Labour Law;
• the Social Security and General Health Insurance Law;
• the Occupational Health and Safety Law;
• the Unemployment Insurance Law;
• the Unions and Collective Bargaining Law;
• the Health Services Law;
• The Law on Prevention of Laundering the Proceeds of Crime;
• Law on Prevention of Financing of Terrorism;
• The Personal Data Protection Law; and
• The Consumer Protection Law.

These laws and relevant regulations:

• prohibit child labour;
• provide important rights for employees (eg, equal pay, minimum wage, maternity leave, job security, the right to join labour unions, the right to annual leave pay and unemployment pay);
• impose obligations on employers, such as requirements to:
• • employ a certain number of disabled personnel; and
  • organise working hours and working places in accordance with the occupational health and safety requirements.
• regulate health insurance and retirement regimes for citizens.
• address the fight against bribery, money laundering and terrorist financing; and
• product safety, consumer protection and the prevention of misleading advertising (eg, greenwashing)

Governance: The Commercial Code includes many provisions relating to the corporate governance of companies. They cover issues such as the following:

• the preparation and disclosure of annual reports;
• independent audit of certain companies; and
• risk management and early detection of risks.

In addition to the Commercial Code, the Banking Law, the Law on Protection of Competition and the Capital Markets Law set out corporate governance rules for companies that fall within their scope of application. Corporate governance principles are also set out in regulations issued by:

• the Capital Markets Board of Türkiye (CMB);
• the Competition Authority;
• the Banking Regulation and Supervision Agency; and
• the Public Oversight, Accounting and Auditing Standards Authority (POAA).

For example, the Corporate Governance Communiqué issued by the CMB sets out Corporate Governance Principles and a Sustainability Principles Compliance Framework for public companies.

1.2 Is the ESG framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, 'comply or explain') codes of governance?

Most of the corporate governance rules are soft codes or are mandatory only for a limited number of entities that exceed the thresholds set forth under the regulations. However, other ESG rules – such as those on employment, social security, environmental protection, competition and personal data protection – are mostly mandatory.

1.3 Which bodies are responsible for implementing and enforcing the rules and codes that make up the ESG framework? What powers do they have?

The National Sustainable Development Coordination Board is responsible for coordinating and tracking the implementation of Türkiye's sustainable development goals. The board does not have executive powers.

There is no other authority with specific responsibility for implementing ESG regulations in Türkiye. Various ministries and supervisory bodies are authorised to implement ESG regulations, depending on the subject matter. Within the framework of their legal powers, ministries and supervisory bodies are entitled to:

• make new regulations;
• conduct inspections;
• impose administrative fines; and
• take administrative precautions.

While almost all ministries have some degree of responsibility for different aspects of ESG regulations, the main supervisory bodies and institutions in relation to ESG are as follows:

• Environment:
• • The Energy Market Regulatory Authority;
  • The Environment Agency; and
  • The Directorate of Climate Change
• Social:
• • The Social Security Institution;
  • The Human Rights and Equality Institution; and
  • The Personal Data Protection Authority.
• Governance:
• • The Competition Authority;
  • The CMB;
  • The Banking Regulation and Supervision Agency; and
  • The POAA.

1.4 What is the regulators' general approach to ESG and the enforcement of the ESG framework in your jurisdiction?

In recent years, the Turkish government has been focusing on the green transition, with the specific aims of:

• combating climate change;
• meeting national goals under the Paris Agreement; and
• acclimatising Turkish exporters to the carbon border mechanisms introduced by the European Union.

In this regard:

• educational programmes have been launched to increase awareness among Turkish entities (especially regarding the EU carbon border adjustment mechanism);
• sustainability guidelines have been prepared for different sectors; and
• incentives have been provided for green projects.

In addition to these efforts, work on legislation has also begun. We expect that with the enactment of new laws on climate change issues, many mandatory provisions will enter into force.

1.5 What private sector initiatives have been launched in your jurisdiction to complement the ESG framework?

Numerous foundations and associations, both national and international, have been working on ESG matters in Türkiye for many years. In particular, they have focused on:

• improving education in Türkiye;
• protecting women and children;
• promoting gender equality;
• safeguarding human rights;
• fighting poverty; and
• protecting the environment.

Since the early 2000s, private initiatives promoting corporate governance have also been active. In recent years, prevention of climate change and promoting the green transition are important subjects for these organisations.

Among other things, these organisations:

• establish schools and other facilities serving the public;
• provide financial and social support to disadvantaged groups;
• conduct awareness campaigns and educational activities;
• undertake research;
• prepare opinions on relevant issues to develop policy recommendations; and
• take action before the courts for the annulment of certain administrative decisions or laws that they consider against the Constitution or national law.

In addition to these foundations and associations, private sector entities have made significant contributions to the ESG framework by:

• conducting social responsibility campaigns; and
• voluntarily launching ESG initiatives within their organisations, such as:
• • announcing climate goals; and
  • publishing sustainability reports.

2 Scope of application

2.1 Which entities are captured by the rules and codes that make up the principal elements of the ESG framework in your jurisdiction?

The scope of ESG rules depends on the specific regulations. However, the following entities are subject to many regulations within the scope of the ESG framework:

• publicly traded companies;
• financial institutions;
• entities with more than 30 employees; and
• entities with manufacturing facilities.

2.2 How are entities in your jurisdiction that are not subject to specific rules or codes implementing ESG?

Major companies in Türkiye have started to adopt ESG policies and goals. These policies are mostly focused on corporate governance and sustainability, with a view towards managing risks and increasing transparency and accountability. Many of these entities are also voluntarily preparing sustainability reports and sharing them with the public.

Even before the implementation of sustainability policies, many companies had started to develop and implement social responsibility projects aimed at benefiting society and the environment. These projects often focus on areas such as:

• education;
• healthcare;
• environmental protection; and
• community development.

Initially, these efforts aimed to increase employee loyalty and enhance the reputations of companies and their brands. As awareness has increased among the local and international communities and the authorities have announced ESG action plans, these have evolved into efforts aimed at:

• meeting national climate change goals;
• preparing for upcoming local and international regulations; and
• meeting the demands of consumers and investors regarding environment, sustainability and management of climate change risks.

2.3 What are the principal ESG issues in your jurisdiction that are either part of the ESG framework or part of the implementation of ESG?

The ESG issues addressed under the current legal framework mostly relate to:

• the rights of workers;
• corporate governance;
• personal data protection, and
• environmental protection.

However, we expect that upcoming regulations will focus on climate change and the green transition.

3 Disclosure and transparency

3.1 What primary disclosure obligations relating to ESG apply in your jurisdiction?

In Türkiye, the primary disclosure obligations relating to ESG arise from the Commercial Code, which obliges certain companies to:

• disclose their annual financial reports and annual activity reports to shareholders; and
• disclose certain information to public on their websites.

It is now mandatory for certain companies that exceed the thresholds determined by the Public Oversight, Accounting and Auditing Standards Authority (POAA) to prepare sustainability reports starting from 2024. These reports must be prepared in accordance with Turkish Sustainability Reporting Standards (TSRS) announced by the POAA. The TSRS is based on the IFRS S1 and IFRS S2 announced by the International Sustainability Standards Board.

Additionally, public companies must disclose whether they comply with the Capital Markets Board regulations on corporate governance and sustainability.

Another important disclosure requirement is set forth under the Environmental Law. The developers of projects that are subject to environmental impact assessments under the relevant regulations must inform the public about these projects and their effects.

3.2 What voluntary ESG disclosures are also commonly made in your jurisdiction?

Many large corporations in Türkiye – especially holding companies, public companies and financial institutions – have been voluntarily preparing and publishing sustainability reports and integrated reports. According to a study published by the Sustainable Development Foundation Türkiye, in 2022 the foundation reviewed 48 reports (eg, sustainability reports, integrated reports, integrated financial reports, corporate responsibility reports and ESG reports) prepared by companies in 18 different sectors. These reports were mostly prepared by:

• holding companies;
• companies in the financial sector; and
• energy companies:

In total:

• 96% of sustainability reports were prepared based on the Global Reporting Initiative standards; and
• 92% of the integrated reports and integrated financial reports were prepared based on the International Integrated Reporting Council framework.

As mentioned in question 3.1, companies exceeding certain thresholds determined by the POAA are obliged to prepare sustainability reports starting from 2024.

3.3 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?

The board of directors is the representative and the ultimate management body of the company. It is responsible for evaluating and approving the reports prepared by the relevant departments and committees of the company. Therefore, it is the board's responsibility to ensure that disclosed information is accurate.

3.4 What best practices should be considered in relation to ESG reporting and disclosure?

• Companies should identify and report on ESG issues that are material to their business and stakeholders.
• ESG disclosures should be specific and accurate to avoid greenwashing.
• Obtaining independent assurance on ESG disclosures from independent auditors will increase the credibility and reliability of the reported information.
• In case of voluntary reporting, following recognised reporting frameworks and standards, such as the Global Reporting Initiative will help companies to follow best practices for ESG reporting.

In case of mandatory reporting, TSRS must be applied.

4 Strategy and governance

4.1 How is ESG strategy typically designed and implemented in companies in your jurisdiction?

The ESG strategies of companies in Türkiye are usually determined by the board of directors or a sustainability/ESG committee reporting to the board. The members of an ESG committee may include:

• board members;
• the chief executive officer (CEO);
• the chief financial officer; and
• other senior managers of relevant departments.

Some companies establish working groups, coordination committees and/or the role of a chief sustainability officer (CSO) to implement their ESG strategy and coordinate relevant departments in the company.

4.2 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?

The board of directors is the ultimate responsible body for the management of the company. Thus, it:

• determines and approves the ESG strategy; and
• oversees the implementation of the same.

The CEO usually leads the implementation of the ESG strategy with the help of a working committee or a CSO. Due to the multi-disciplinary nature of ESG, the different departments within the company – such as legal, compliance, human resources, internal audit and finance – should cooperate to ensure that it can achieve its ESG goals.

4.3 What mechanisms are typically utilised to monitor the implementation of ESG strategy in your jurisdiction?

Many companies monitor their ESG strategy through internal audits conducted by their internal audit departments or committees reporting to the board of directors. In addition to internal audits, some major companies ensure independent audits of their non-financial information. The International Standard on Assurance Engagements (ISAE 3000) and the Assurance Engagements on Greenhouse Gas Statement (ISAE 3410) are often referenced by companies that have obtained independent assurance.

4.4 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?

The board of directors is responsible for monitoring the ESG goals of companies. Internal audit committees and internal audit departments reporting to the board play a key role in this regard.

4.5 How is executive compensation typically aligned with ESG strategy in your jurisdiction?

Executive compensation in Türkiye is typically aligned with the financial metrics of the company. However, many companies set key performance indicators that link executive compensation to the achievement of their climate goals, such as:

• reduced energy and water consumption;
• increased sustainability score; and
• enhanced gender equality (eg, increasing number of women in workplace and the board).

4.6 What best practices should be considered in relation to the design and implementation of ESG strategy?

The design and implementation of an ESG strategy should follow a structured approach. The first step involves a materiality assessment, identifying key stakeholders and prioritising ESG issues. Subsequently, businesses must establish a baseline by evaluating their current ESG situation. Once the baseline is determined, specific, achievable and measurable goals should be set. To implement these goals, a roadmap should be prepared and internal stakeholders should be encouraged to participate.

5 Financing

5.1 What is the general approach of lenders towards ESG in your jurisdiction? What internal and external information regarding a prospective borrower will they typically consider in this regard?

The banking sector has been one of the key drivers of ESG developments in Türkiye.

Many banks:

• offer products for:
• • financing green projects;
  • supporting women entrepreneurs;
  • supporting the green transition of entities; and
  • purchasing eco-friendly vehicles; and
• take the environmental and social impacts of a borrower's activities into consideration as well as its credit rating.

Some of the major banks in Türkiye (Akbank, Garanti BBVA, ING Türkiye, İş Bank, Şekerbank, TSKB, Yapı Kredi and Development Investment Bank of Türkiye) have signed the Sustainable Finance Declaration under the UN Global Compact. They have agreed to consider the environmental and social impacts of a borrower during their loan assessment process in respect of loans for more than $10 million. Certain banks (Garanti Bank, İşbank, TSKB, Halkbank and Yapı Kredi Bank) have also joined the UN Net-Zero Banking Alliance and have committed to set 2030 and 2050 net-zero targets for their lending and investment portfolios.

There is no uniform approach regarding the information requested by banks. This depends on the bank's policies on ESG and the specific sustainable finance product that the borrower intends to use.

5.2 Are bonds/loans that are marketed as green bonds/loans, social bonds/loans, sustainability bonds/loans or similar a feature of the markets in your jurisdiction?

In addition to the sustainable finance products offered by banks to customers, many sustainability-linked bonds have been issued in the Turkish market. According to figures provided by the Turkish Central Bank, the green bonds issued in the Turkish market amounted to TRY 4.975 million as of 22 December 2023.

5.3 What key developments have taken place in the structuring of these instruments in your jurisdiction?

• The Banking Regulatory and Supervisory Authority (BRSA) has:
• • issued the Guide on Credit Allocation and Monitoring Processes, which defines environmentally sustainable loans and outlines the processes and procedures that must be adopted by banks; and
  • adopted the Sustainable Banking Strategic Plan (2022-2025), which states that managing climate-related financial risks and financing the transition to a sustainable and low-carbon economy are among the strategic goals for the sector.
• The Sustainability Index and Sustainability Participation Index was launched by the Istanbul stock exchange, Borsa Istanbul; and the Directive on Responsible Supply Chain Assurance Engagement and the Due Diligence Directive on Responsible Supply Chain of Precious Metals have also been issued.
• For public companies, the Capital Markets Board (CMB) has:
• • published the Green Bond, Sustainable Bond, Green Lease Certificate and Sustainable Lease Certificate Guide; and
  • issued the Sustainability Principles Framework.
• The Ministry of Treasury and Finance has prepared a Sustainable Finance Framework and issued its first green bond in international markets.

5.4 What best practices should be considered in relation to ESG in the financing context?

Best practices for sustainable finance products are outlined in the guidelines issued by:

• the BRSA for banks; and
• the CMB for issuers.

These should be followed by lenders and issuers. They include:

• for lenders, clearly defining and monitoring ESG-related covenants and breaches in each deal; and
• for borrowers, avoiding greenwashing.

6 ESG activism

6.1 What role do institutional investors and other activist shareholders play in shaping ESG in your jurisdiction?

Shareholder activism is not common in Türkiye. According to research by the Corporate Governance Association, 96% of Turkish companies are family-owned businesses. In these companies, shareholders usually also have a seat on the board. Therefore, shareholders play a key role in determining the priorities of companies, including ESG. Thus, majority shareholders define ESG policies rather than activist shareholders.

Global institutional investors can exert significant influence on the companies they invest in to incorporate ESG policies.

6.2 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction in relation to ESG?

The day-to-day business of companies, and thus also their ESG policies, are determined by the board of directors. The shareholders' influence on the day-to day business of a company is limited to the election of board members and approval of the annual reports. However, most companies in Türkiye are family owned and shareholders are usually board members as well. Therefore, family-owned companies' shareholders may have a direct influence on all aspects of the company's management, including ESG.

6.3 Which areas of ESG are shareholders currently focused on?

Shareholders are currently focused on:

• preparing their companies for new regulations expected in Türkiye; and
• adapting to the EU carbon border adjustment mechanism and other ESG regulations which must be complied with in order to export to EU and other European countries.

Other areas include the corporate governance of family-owned companies as the next generation of families assumes control.

6.4 Have there been any high-profile instances of ESG activism in recent years?

We are not aware of any.

6.5 Is ESG activism increasing or decreasing in your jurisdiction? How and why?

Awareness of ESG activism is on the rise. Activist shareholders are attending general assembly meetings of publicly traded banks to inquire on progress in relation to their climate-related undertakings.

7 Other stakeholders and rights holders

7.1 What role do stakeholders or rights holders (eg, employees, pensioners, creditors, customers, suppliers, and Indigenous communities) play in shaping ESG in your jurisdiction? What influence can they exert on a company?

Creditors, institutional investors and multinational customers are playing a key role in shaping the ESG policies of companies. Companies must:

• comply with the covenants and undertakings imposed under any sustainable/green financing loans that they obtain;
• shape their ESG policies in line with investors' requests; and
• respect customer preferences regarding ESG rules.

8 Trends and predictions

8.1 How would you describe the current ESG landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The ESG landscape in Türkiye is developing rapidly. Key goals for the government include:

• mitigating climate change risks;
• transitioning to a green and circular economy; and
• financing the green transition.

Accordingly, all ministries and regulatory bodies are currently working on developing a regulatory framework and raising awareness in this regard.

The Ministry of Environment is drafting a Climate Change Law, which is expected to enter into force in 2024. The Climate Change Law will include mandatory provisions on:

• reducing greenhouse gas emissions;
• adapting to climate change;
• increasing renewable energy and clean technologies;
• expanding protected areas; and
• advancing:
• • green financing and incentives;
  • insurance;
  • carbon credits; and
  • an emissions trading system.

We also expect that during 2024, regulations on issues covered in the Climate Change Law – including emissions trading and carbon markets – will be issued.

9 Tips and traps

9.1 What are your top tips for effective ESG implementation in your jurisdiction and what potential sticking points would you highlight?

Effective ESG implementation requires the commitment of the board and stakeholder engagement. This can be achieved by:

• establishing clear goals and action plans;
• allocating sufficient budget to achieve ESG goals; and
• introducing key performance indicators and incentives for employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.