In recent years, Environmental, Social and Governance (ESG) criteria have been playing an increasingly decisive role in global investment decisions. With the ESG approach, which emphasises that companies should operate within the framework of sustainability and ethical management, it is predicted that companies that prioritise ESG factors will gain a more advantageous position in the long term, and investors will tend to be more inclined towards ESG-compliant companies. This trend creates complex compliance obligations for foreign investors operating in an area where different legal regulations intersect.
Increasing competition in a globalising world and the sustainable growth of companies that adopt ESG principles strengthen investor confidence, customer loyalty and stakeholder relations.
Turkey is affected by the regulatory frameworks of both Europe and the Middle East due to its geographical location and economic structure. At the same time, the practical impact of American ESG standards cannot be ignored, especially due to the presence of US-based multinational companies.
i. ESG Regulations in Turkey
Legal Framework
ESG practices in the European Union are complemented by the demand for more explicit and comprehensive information, and reporting is a legal obligation according to the Corporate Sustainability Reporting Directive (CSRD). Accordingly, the Capital Markets Board (CMB) Regulation in Turkey was published on 2 October 2020. According to the Capital Markets Board Regulation; reporting of ESG performance in annual reports was made mandatory, companies traded on Borsa Istanbul were required to adhere to the apply or disclose principle and were expected to develop a compliance framework with sustainable principles.
Environmental Law No. 2872 requires reporting on carbon emissions. Therefore, circular economy and waste management standards were introduced and responsibilities were clarified.
Apart from these developments, action plans were developed to ensure Turkey’s compliance with the Green Deal. In 22021, the “Green Deal Action Plan” was published. This action plan, which is necessary to protect and maintain commercial communication with the European Union, is summarised below:
– Border Carbon Regulation: In order to comply with the carbon tax to be introduced by the EU, the emission reduction and reporting capacities of companies have been improved.
– Green Circular Economy: Green transformation of industrial policy and resource efficiency are targeted.
– Green financing: It is aimed to support green financing by providing access to sustainable financing sources.
ESG Reporting Requirements
In Turkey, mandatory reporting is divided into voluntary reporting and reporting under the supervision of the CMB.
Mandatory reporting means reporting in accordance with the Sustainability Principles Compliance Framework for companies traded on Borsa Istanbul. Environmental impact assessment reports in certain sectors are also within this scope.
Voluntary reporting is the reporting that enables companies to take steps and show their development within the scope of ESG, although it is not compulsory in their transactions and activities. Examples of these are Global Reporting Initiative, Carbon Disclosure Project, Integrated Reporting Framework.
Reporting under the supervision of the CMB ensures the audit of the accuracy and consistency of the reported ESG data. Capital market sanctions such as administrative fines are stipulated for incomplete or misleading disclosures.
ii. EMEA Region ESG Compliance
The EMEA region covers Europe, the Middle East and Africa. The EMEA region is the global leader in terms of ESG regulations. The European Union bases its ESG regulations on sustainability and manages its agenda accordingly. This situation has affected other countries in the same direction.
a. European Union Regulations
With the European Green Deal, the European Union aims to make Europe carbon-neutral by 2050. With the Carbon Regulation Mechanism at the Border, carbon leakage is prevented. In addition, sustainable product standards and circular economy principles have been adopted with the Green Deal.
The Sustainable Finance Disclosure Regulation entered into force in 2021. Sustainability disclosure obligations were introduced for financial market participants. Financial products will be classified according to their environmental and social characteristics, and disclosures will be provided in accordance with their categories. In this way, it is aimed to prevent green washing practices and to ensure sustainability from reality and harmony with the environment.
Corporate Sustainability Reporting Directive, sustainability reporting requirements that have been expanded since 2023 are included. With this Directive, the principle of double materiality is applied in reporting, which has become binding for large companies within the European Union and companies operating within the EU borders. This double materiality principle requires companies to take into account not only financial impacts but also environmental and social impacts in sustainability reporting. In other words, companies have to report not only the impact of sustainability factors on their financial position, but also the impact of their activities on external stakeholders such as the environment, society and human rights.
Dual materiality is considered in two aspects: financial materiality and impact materiality. Financial materiality covers the effects of environmental and social factors on the company’s value chain, risks and opportunities, while impact materiality refers to the positive or negative effects of the company’s activities on the environment, society and human rights.
The principle of dual materiality goes beyond traditional financial reporting and provides a holistic approach to sustainability. This approach is in line with the European Green Deal and sustainable finance strategies and contributes to the assessment of companies’ long-term value creation capabilities.
The EU Taxonomy Regulation is a classification system developed by the European Union to promote sustainable investments. This regulation, which entered into force in 2020, clearly defines the criteria that economic activities must meet in order to be considered environmentally sustainable.
The Regulation states that for an activity to be considered sustainable, it must significantly contribute to at least one of the six environmental objectives and at the same time not cause significant harm to the other objectives.
b. Middle East and Africa
The United Arab Emirates (UAE) and Saudi Arabia are taking important steps towards sustainable development goals. While the UAE aims to reduce carbon emissions to zero with its 2050 Net Zero Strategic Initiative, Saudi Arabia aims to achieve both environmental protection and economic diversification under its Green Initiative and Vision 2030 programme. Both countries are developing environmental, social and governance (ESG) reporting frameworks to promote corporate sustainability in this transformation process and are moving towards creating a more transparent and accountable business environment that increases investor confidence.
In Africa, regional approaches to sustainability and corporate governance are gaining strength. South Africa adopts an integrated reporting approach with the King IV Report, encouraging companies to report on environmental, social and governance (ESG) aspects along with financial performance. The African Development Bank, through its sustainable finance initiatives, supports investment in green projects and promotes sustainable development across the region.
iii. AMER ESG Regulations
The American region includes different regulatory approaches within itself. The USA also has different regulations due to its federal structure.
a. US Regulations
The United States Securities and Exchange Commission (SEC) proposed an important regulation in March 2022 to ensure that companies disclose their climate-related risks more transparently. The proposed ‘Climate Disclosure Rule’ aims to require publicly traded companies to report in detail their risks related to climate change and their impact on business strategies and financial performance.
Companies will be obliged to disclose greenhouse gas emissions arising directly from their operations and the energy they purchase. In addition, companies may also be required to report emissions from indirect sources such as supply chain and product use, if deemed important for the company’s operations and data is available. With this regulation, the SEC aims to provide investors with more holistic and reliable climate data, thereby making capital markets more resilient to climate risks.
The California Climate Corporate Responsibility Act requires large-scale companies to transparently report their greenhouse gas emissions and climate-related financial risks.
New York State has implemented regulations that encourage sustainable financial systems by reducing fossil fuel investments of public pension funds.
Massachusetts and other states are taking similar sustainability-oriented legal and regulatory steps to increase renewable energy investments and reduce climate risks.
b. Canadian Regulations
Canada is taking important steps in sustainable finance and climate risk management. The Canadian Securities Administrators (CSA) issued comprehensive guidelines to ensure that companies disclose their climate-related risks in a more transparent manner, and emphasised that these disclosures should be of a nature that can influence investment decisions.
The Net-Zero Emissions Liability Act legally secured Canada’s goal of achieving net-zero emissions by 2050 and established regular planning and reporting mechanisms to monitor progress towards this goal.
In addition, the Canada Pension Plan Investment Board (CPPIB) aims to both create long-term value and minimise climate risks by adopting a comprehensive framework that integrates ESG factors into investment decisions.
c. Latin American Regulations
Important steps are being taken in the field of sustainable finance in Latin America. Brazil has developed national standards for green bonds to finance projects with low environmental impact, increasing market transparency and investor confidence.
Mexico aims to align the financial system with climate and environmental goals by conducting a comprehensive taxonomy to define sustainable economic activities.
Chile and Colombia are both accelerating the energy transition and supporting low-carbon development models by creating incentive mechanisms for renewable energy investments.
Comparison of EMEA and AMER
Comparison of ESG regulations reveals fundamental differences in the regulatory approach.
In ESG reporting, the European Union implements a comprehensive and mandatory reporting regime for companies with the Corporate Sustainability Reporting Directive (CSRD). In contrast, the United States adopts a flexible approach based on the principle of “comply or explain” and investor and market pressure. Turkey, on the other hand, is making progress in this area and developing its regulatory framework within the scope of the harmonisation process with the EU; however, a fully mandatory and comprehensive ESG reporting system has not yet been established at the EU level.
Scope, while the EU has more comprehensive and detailed regulations, the US has less regulation on social dimensions, with a focus on climate and governance.
Sanctions, the EU has introduced clear sanctions and financial incentives. This includes financing linked to the EU Taxonomy. The US, on the other hand, is more influenced by investor pressure and risks of reputational damage.
