A Brief Review of the Environmental Aspect of ESG in Türkiye

As one of the 21^st century’s biggest global concerns, the climate crisis has increased the importance of ESG, which introduced a new meaning to “sustainability” and has driven companies to take an active role in the environmental dimension of ESG to prevent climate change and global warming.

Why is ESG important? What does the “E” in ESG stand for?

Climate change and global warming are among the most debated modern day topics and have attributed to the increasing importance of the environmental, social, and governance (“ESG”) criteria in companies as a result of the rapid increase in public awareness.

Nowadays, investors, consumers, and governments tend to consider ESG as significant as financial achievements when assessing a company’s sustainability and credibility. As such, most companies have started to adapt their organizations to raise the standards of social development and environmental protection by embracing open governance, reconciling the interests of various stakeholders with an overall goal of quality and sustainability. [1] It is becoming more evident that environmental concerns have a substantial impact on determining a company’s sustainability, and the environmental dimension of ESG leads to the implementation of environmental practices such as the introduction of environmental management systems, pollution abatement, or measures to limit carbon emissions.[2]

Greenhouse Gas Emissions

One of the most critical aspects of the environmental dimension of ESG concerns greenhouse gas emissions. Various greenhouse gases, especially carbon dioxide, already exist in the atmosphere and enable the capture and emission of infrared rays from the sun. Although the emission of infrared rays from the sun is significant to warm the earth, an increase in the amount of greenhouse gases released into the atmosphere due to anthropogenic activities has disturbed the atmospheric gas balance and brought along climate change and global warming concerns. [3]

The concept of a “carbon footprint”, which we often hear in the context of the impact of our air travel, came about due to the increase in greenhouse gas emissions as a result of human-induced activities, with the hopes of determining which greenhouse gases and at what rate exacerbate this situation and to assess the damage caused to the environment. In this regard, a carbon footprint can be defined as the amount of greenhouse gases produced during the lifecycle of a product, a process, or a service (expressed in the equivalent tons of carbon dioxide per functional unit of analyzed product/process/service). [4]

In order to reduce the environmental impact of greenhouse gas emissions and to comply with the ESG criteria, companies have started to prioritize calculating their product’s carbon footprint. A company’s attempt to prioritize calculating their carbon footprint will demonstrate to investors, consumers, and governments that the company is environmentally conscious, which will eventually lead to an increase in its reputation and credibility.

Calculating a Carbon Footprint

There are several methods for calculating the corporate carbon footprint, the most widely used of which is the Greenhouse Gas Protocol (“GHG Protocol”) that was issued by World Resources Institute and World Business Council for Sustainable Development in 1998 to provide guidance for both public and private sector institutions in the United States regarding the calculation of their greenhouse gas emissions. [5] The main aim of the Protocol is to serve standards for measuring and reporting organizational level direct and indirect greenhouse gas emissions, and the Protocol is used by thousands of organizations, including 63% of Fortune 500 companies in 2007 (WRI and WBCSD, 2004, WRI and WBCSD, 2011). The GHG Protocol also forms the basis of the ISO 14064 standard on organizational level greenhouse gas quantification and reporting, first published in 2006 and continuously being revised (ISO, 2017). [6]

The GHG Protocol distinguishes three categories of emissions: Scope 1 refers to direct emissions from a company’s own activities, Scope 2 refers to emissions from the production of purchased energy, and Scope 3 refers to emissions from up and downstream activities along the value chain. [7]

The assessment of different scopes of greenhouse gas emissions through the GHG Protocol enables companies to assess in detail which of their activities contribute to the emission the most while calculating their carbon footprint.

Significant Regulations around the World and in Türkiye

The increasing rate of greenhouse gas emissions in the atmosphere has paved the way for legal framework coming to the forefront both worldwide and in Türkiye. The United Nations Framework Convention on Climate Change, the Kyoto Protocol, and the Paris Agreement, which was undersigned by 197 countries, can be considered the most important commitment of countries to reduce their activities causing greenhouse gas emissions within the scope of compliance with the ESG criteria.

The Paris Agreement aims to limit the increase in global temperature caused by anthropogenic greenhouse gas emissions to below 2°C in the long-term compared to the pre-industrialization period and draws attention to the importance of achieving 1.5°C in this regard. The Paris Agreement stipulates that state parties shall contribute to the fight against climate change within the framework of the principle of “common but differentiated responsibilities and respective capabilities.” Within the framework of the said Agreement, the parties declare their “National Contribution Declarations” and “Net Zero Emission Targets” within the scope of fighting against climate change. In this regard, Türkiye announced its National Contribution Declaration as 41% by 2030 and has declared a Net Zero Emission Target for 2053. [8]

European Union Regulations

The European Union has also started its transformation to a green economy by realising the European Green Deal in 2019. It is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient, and competitive economy where there are no net emissions of greenhouse gases by 2050 and where economic growth is decoupled from resource use. [9] In order to achieve the goals presented in the European Green Deal strategy, the European Union established the European Union Emissions Trading System and Carbon Border Adjust Mechanism to provide effective solutions to reduce greenhouse gas emissions, which also encourages Türkiye to prioritize its legal regulations on carbon pricing strategies.

The European Union Emissions Trading System (“EU ETS”)

The EU Emissions Trading System is a “cap and trade” system. It caps the total volume of GHG emissions from installations and aircraft operators responsible for around 50% of EU GHG emissions. The system provides for trading emission allowances so that the total emissions of the installations and aircraft operators stays within the cap and the least-cost measures can be implemented to reduce emissions. The EU ETS is a major tool of the European Union in its efforts to meet emissions reductions targets both now and in the future. [10]

The Carbon Border Adjust Mechanism (“CBAM”)

The CBAM was established to provide a competitive environment in the EU and to prevent the relocation of industrial activities from EU countries to low-emission countries. The EU is introducing a tariff on imported products to reflect the EU ETS for carbon emissions emitted during production with the CBAM, aiming to promote cleaner production in other countries. [11] In order to ensure consistency and legal certainty for the countries and enterprises that will be subject to the CBAM, the EU aims to gradually introduce this mechanism and to initially implement it in sectors such as iron and steel, cement, fertilizer, aluminium, and electricity generation, which have a high risk of carbon leakage. [12]

The ETS and Türkiye

In recent years, under the guidance of T.C. Ministry of Environment, Urbanisation and Climate Change and T.C. Ministry of Energy and Natural Resources, Türkiye has also conducted legislative studies on the emission trading system and carbon pricing in parallel with the European Union. In this respect, initial drafts of the Law on Climate Change and the Regulation on the Management of Carbon Markets have been prepared by the Environment Committee of the Grand National Assembly of Türkiye and Energy Market Regulatory Authority, respectively, and are expected to be enacted. The purpose of these pieces of legislation is to establish the necessary systems to reduce greenhouse gas emissions within the country and to harmonize them with the European Union regulations.

Furthermore, Türkiye intends to establish the pilot implementation of its own emissions trading system by 2024. The establishment of this system is of critical importance given the volume of Türkiye's exports to the European Union, particularly in the iron, steel, and aluminum sectors. Unless Türkiye implements its own emissions trading system and prices its greenhouse gas emissions, the European Union, under the Carbon Border Adjust Mechanism, will price these emissions itself. In this case, the amounts that would have to be paid to the EU ETS under the CBAM could be used for the transformation of sectors in Türkiye when a carbon pricing system is established domestically, and it will be important in terms of the possible positive effects of a well-structured climate policy on the national economy. [13]

Awareness of Turkish Companies Regarding the ESG Criteria

In October 2022, 350 Türkiye (an environmental organization) and SEFİA (a research oriented environmental NGO) published a report shedding light on BIST 30 companies' understanding of climate change and sustainability. [14] The detailed approaches to carbon emissions and ESG awareness of some of the companies were included in the report, which states that several of Türkiye’s prominent companies have set net-zero targets, some are establishing carbon neutrality goals, and others have yet to make commitments in these areas. Despite the existing perspectives among Turkish companies, there appears to be a potential need to enhance awareness regarding ESG compliance and the legislative obligations that may be imposed upon them.

[1] Commission of the European Communities, 2001 at 3

[2] Gordon L. Clark and Michael Viehs, The implications of corporate social responsibility for investors: An overview and evaluation of the existing CSR literature (2014).

[3] 10 Selahattin Erdoğan, Çankırı Karatekin Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, Enerji, Çevre ve Sera Gazları  (2020) at 277-303.

[4] Francesco Fantozzi and Pietro Bartocci, Carbon Footprint as a Tool to Limit Greenhouse Gas Emissions (2016).

[5] Lott, M., Silverman, et al., Rethinking the Greenhouse Gas Protocol: Insights from an Expert Stakeholder Engagement (2023).

[6] 167 Gabor Harangozo and Cecilia Szigeti, Journal of Cleaner Production, Corporate carbon footprint analysis in practice – With a special focus on validity and reliability issues (2017), at 1177-1183.

[7] 12 Lena Klaaßen and Christian Stoll, Nature Communications, Harmonizing corporate carbon footprints (2021), at 1-13.

[8] World Resources Institute, Corporate Value Chain (Scope 3) Accounting and Reporting Standard, at 5.

[9] Republic of Türkiye Ministry of Foreign affairs, Paris Anlaşması, https://www.mfa.gov.tr/paris-anlasmasi.tr.mfa.

[10] European Commission, The European green deal.COM (2019) 640 final.

[11] C Action, EU ETS Handbook (2015).

[12] Republic of Türkiye Ministry of Foreign affairs, Directorate of EU Affairs, Sınırda Karbon Düzenleme Mekanizması'na (SKDM) ilişkin Tüzük AB Resmi Gazetesi’nde yayımlandı, https://www.ab.gov.tr/test_53490.html

[13] Daniel Ferrie and Nerea Artamendi-Erro, Carbon Border Adjustment Mechanism: Questions and Answers (2021).

[14] 22 Ayşe Uyduranoğlu, et al., Ankara Avrupa Çalışmaları Dergisi, Avrupa Yeşil Mutabakatı’na Uyum Çerçevesinde Türkiye’deki İşletmelerin Emisyon Ticaretine Verdikleri Desteği Etkileyen Faktörler (2023) at 257-289. DergiPark, https://dergipark.org.tr/tr/pub/aacd/issue/78953/1327099 350 Türkiye and SEİA, İklim Değişikliği ve Sürdürülebilirlik Araştırması: Bist 30 Firmalarının Görünümü,  https://350turkiye.org/files/2022/12/bist-30-firmalarinin-gorunumu.pdf