Board of Directors’ Roles and Responsibilities in ESG

I- Introduction

The rapid pace of industrialization, the perception that natural resources are limitless, and the fact that these resources serve as the primary inputs of the capital sector have led to a global climate crisis. Today, this crisis continues to grow rapidly within the cycle of production and consumption.

Since the capital sector has used natural resources with little foresight, climate change and global warming have already pushed even a minimally habitable environment for humanity toward an unsustainable point. In response to this problem, which poses a global risk, new regulations are now being introduced worldwide to foster a sustainable and green environment and to prevent the depletion of natural resources, albeit not at the same pace as the emerging climate crisis.

The concept of “sustainability” first gained global recognition with the “Brundtland Report”, prepared and published in 1987 by the United Nations World Commission on Environment and Development. The idea of meeting today’s needs without compromising the ability of future generations to meet their own has gradually evolved into policies focused on mitigating the effects of the climate crisis.

Another outcome of these policies was the emergence of the abbreviation “ESG”, which stands for Environmental, Social, and Governance. ESG entered the global agenda through the report titled Who Cares Wins, drafted in 2004 following the publication of the United Nations Global Compact.

In essence, ESG:

• defines the scope within which companies pursue sustainability initiatives,
• helps companies identify internal and social responsibilities,
• supports investment planning and risk management strategies in company policies, particularly with respect to environmental factors.

Although narrower in scope than the concept of sustainability, ESG serves as a key component in shaping environmental and social policies and developing action plans.

II- Assessment of Obligations

As sustainability and ESG have grown in relevance, various regulations have also emerged concerning the duties and responsibilities of boards of directors, which serve as the core governing bodies of companies. Significant legal developments have taken place both globally and in Türkiye in connection with sustainability and ESG. The Green Deal Action Plan prepared by the Turkish Ministry of Trade on 16 July 2021, and the Paris Agreement, which entered into force on 7 October 2021, are among the key regulations. However, for companies specifically, the Turkish Commercial Code No. 6102 (“TTK”) and the Capital Markets Law No. 6362 (“SPK”), together with their associated regulations and communiqués, define the framework for ESG practices and the related managerial duties and responsibilities.

Since no direct and comprehensive ESG regulation exists for how private companies must conduct their operations, companies generally shape their action plans through internal bylaws, corporate policies, and their articles of association. The significance of the matter is first addressed under Article 369 of the TTK, which provides that: “Members of the board of directors and third parties entrusted with management must perform their duties with the care of a prudent manager and must safeguard the interests of the company in accordance with the principle of good faith.”

With the amendment introduced in 2022 to Article 88/6 of the TTK, the following provision was added: “The Public Oversight, Accounting and Auditing Standards Authority is authorized to establish and publish Türkiye Sustainability Reporting Standards, aligned with international standards, for the enterprises and institutions it designates, in order to ensure consistency in practice and international recognition of sustainability-related reporting. Institutions and boards established by law to regulate and supervise certain areas may issue detailed regulations concerning the standards applicable within their respective areas, provided that such regulations comply with the Türkiye Sustainability Reporting Standards.”

This provision authorizes the Public Oversight, Accounting and Auditing Standards Authority in matters relevant to companies and empowers it to “establish and publish Türkiye Sustainability Reporting Standards, aligned with international standards, in order to ensure consistency in practice and international recognition of sustainability-related reporting for the enterprises and institutions it designates.” In this context, the Authority published draft texts titled “IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information” and “IFRS S2 Climate-Related Disclosures” to outline the framework of these efforts[1].

In defining the scope of obligations, the Capital Markets Board (“SPK”) has also set out limitations and implementation techniques through the Corporate Governance Principles (“KYİ”) and the Corporate Governance Communiqué (“KYT”). The primary purpose is to ensure that the public, as the ultimate beneficiary, receives direct and accurate information. Fulfillment of these disclosure obligations is particularly important in the context of sustainability and ESG.

For this reason, Article 369 of the TTK, which provides that “Members of the board of directors and third parties entrusted with management must perform their duties with the care of a prudent manager and must safeguard the interests of the company in accordance with the principle of good faith,” must be taken into consideration. The article clearly states that in the event of a conflict of interest, the company’s interest prevails.

Furthermore, Article 553/1 of the TTK governs the liability of the board of directors as the body responsible for the management and representation of the company, establishing liability where the company, shareholders, or company creditors suffer damage due to the board’s authority to represent and bind the company.

Based on these provisions, the liability of board members requires the presence of: (i) fault, (ii) damage, (iii) an unlawful act, and (iv) a causal link. Liability may arise for both direct and indirect damage. However, as noted, this is a duty-of-care liability.

Accordingly, we should look at the ESG responsibilities of board members within the framework of sustainability. In fact, there is no direct statutory board responsibility for sustainability or ESG. There is also no explicit regulation addressing such a duty. Additionally, the extent of the board’s duty of care within the hierarchy of interests, especially where ESG protections aligned with the public interest are concerned, remains open to interpretation. Türkiye, like other jurisdictions, has several regulations on this matter. However, analyses generally proceed under three main approaches.

In all three theories, the central aim is the company’s sustainability, and the company’s ability to generate profit remains fundamental. However, in performing these activities, neither other stakeholder groups nor societal and environmental interests should be harmed.

III- Conclusion

In essence, taking environmental and social responsibility factors into account to initiate improvement efforts advances the company’s interests and remains fully aligned with the principle of exercising managerial authority effectively and with due care.

Board members should develop an action plan for ESG around the following points:

• Identifying activities that negatively affect, or have the potential to negatively affect, society and the environment,
• Making improvements based on such findings, and
• If it is impossible to eliminate all identified adverse impacts, establishing a roadmap to minimize them as much as possible.

This management policy ensures that while the board’s primary responsibility continues to be the company’s profitability, members must also safeguard the public interest and address environmental and social considerations.

Gülşah Güven, LL.M., Partner

[1] https://www.kgk.gov.tr/ContentAssignmentDetail/4874/UFRS-S1-Su%CC%88rdu%CC%88ru%CC%88lebilirlikle-I%CC%87lgili-Finansal-Bilgilerin-Ac%CC%A7%C4%B1klanmas%C4%B1na-I%CC%87lis%CC%A7kin-Genel-Hu%CC%88ku%CC%88mler-Taslak-Metin; https://www.kgk.gov.tr/ContentAssignmentDetail/4875/UFRS-S2-I%CC%87klimle-I%CC%87lgili-Ac%CC%A7%C4%B1klamalar-Taslak-Metin