Foundations of a Sustainable Future the E Factor in ESG (Environment, Social, Governance)

Öykü Su Sabancı co-authored this article.

Sustainability policies have become a critical and prioritized issue for countries, companies, and investors. In assessing the company’s success, stakeholders are no longer evaluate only the financial performance, but also consider its environmental, social, and governance (“ESG”) practices (We will use the term ESG in this article due to its widespread use in practice).

ESG practices constitute a framework evaluating (i) environmental impacts (E), (ii) social responsibilities (S), and (iii) governance practices (G), and providing an overall assessment on a company's sustainability performance. These factors contribute to planning and securing companies’ long-term sustainability and more accountable and transparent risk management for investors, independent of the financial performance.

The effective implementation of ESG factors creates various positive impacts for companies, including:

• Reducing the negative environmental impacts caused by companies,
• Reducing costs,
• Increased operational efficiencies,
• Accountable and transparent risk management,
• High preference rates for investors.

1. The E Factor of ESG – (Environment)

The "Environment” (E)”, one of the ESG factors, ensures that companies adopt a sustainable environmental approach and take effective steps in that direction. Environmental factors generally address a company's impact on all living and non-living natural systems, including air, soil, water, and the overall ecosystem.

Companies should develop effective and sustainable strategies concerning pollution and natural resource consumption within the scope of environmental factors. However, these strategies should also be integrated into all business processes and the corporate culture.

The main issues related to environmental factors are listed below:

• Energy use and efficiency,
• Waste management,
• Natural resource utilization,
• Zero emission (net zero targets),
• Awareness and green innovations,
• Climate change strategies,
• Carbon footprint measurement and regular monitoring,
• Sustainable finance.

Companies committed to effectively implementing ESG factors in these key areas should first assess the environmental impact of their activities and begin their compliance efforts by identifying national and international regulations. In this context, please review the key national and international regulations below.

2. Related National Legislation

I. The Constitution of the Republic of Turkey with numbered 2709

II. The Environmental Law with numbered 2872

III. Secondary Legislation

I. The Constitution of the Republic of Turkey with numbered 2709

According to the Article 56 in the Social and Economic Rights and Duties section of the Constitution of the Republic of Turkey with numbered 2709 (“the Constitution”), “Everyone has the right to live in a healthy and balanced environment”. This article regulates the protection of the environment and the prevention of pollution as a basic framework for achieving the policy goals of the protection and development of human health and the right to live in a healthy environment. In addition to granting everyone the right to live in a healthy environment, the Constitution also imposes environmental protection as a common duty of the state and citizens.

Article 13 of the Constitution establishes the criteria for limiting fundamental rights and freedoms, including the right to the environment. Furthermore, Article 65 stipulates that the fulfillment of the state's obligations regarding social and economic rights and duties is subject to the adequacy of financial resources.

II. The Environmental Law with numbered 2872

The Environmental Law with numbered 2872 (“Environmental Law”), which entered into force in 1983, is the primary legislation related to environmental topics. Environmental Law establishes the framework for environmental protection principles and the sanctions to be applied in case of violation of these principles. The main purpose of the Environmental Protection Law is to ensure the protection of the environment, which is the common property of all living beings, in accordance with the principles of sustainable environment and sustainable development.

The law outlines the principles to be followed in the protection of the environment. The principles regulated by the Environmental Law are: (i) the polluter pays principle, (ii) the sustainable development principle, (iii) the prevention principle, (iv) the precautionary principle, (v) the participation principle, (vi) the integration principle, and (vii) the cooperation principles. In accordance with these principles, those who pollute and damage the environment are held responsible for the pollution and damage they cause, regardless of their degree of fault.

III. Secondary Legislation

There are various secondary regulations prepared under the Environmental Law. Secondary regulations establish detailed standards and obligations on environmental issues. However, in case of non-compliance with these detailed standards, secondary legislation refers to the Environmental Law for the sanctions to be applied.

One of the crucial secondary regulations is the Regulation on Environmental Impact Assessment ("the Regulation on EIA"), which describes the procedure and requirements for environmental impact assessment and requires institutions and enterprises to mitigate their impact on the environment. According to the Regulation on EIA, environmental impact assessment is defined as “the studies to determine the positive and negative environmental impacts of the planned activities, to determine and evaluate the measures to prevent or minimize the negative impacts without harming the environment, to determine and evaluate the site and technology options, and to monitor and control the implementation of the activities.”

The other crucial regulation is the Regulation on Environmental Permit and License ("Permit and License Regulation"), which regulates the issuance and conditions of permits and licenses. Permit and License Regulation provides detailed information on the application for environmental permit or environmental permit and license certificate, the validity of permit and license certificate, the temporary activity permit, and the revocation of environmental permit or license certificate. In this regard, companies must obtain an integrated environmental permit covering air, noise, wastewater, and water emissions for the activation of their facilities.

Other major regulations issued under the Environmental Law are listed below:

i. Air Quality

The Regulation on the Air Quality Assessment and Management is prepared based on EU Directives 96/62/EC, 99/30/EC, 2000/69/EC, 2002/3/EC, and 2004/107/EC. The Regulation on the Air Quality Assessment and Management establishes the fundamental principles and procedures for the protection of air quality.

The Regulation on the Control of Air Pollution from Heating Installations and the Regulation on the Control of Air Pollution are the main sector-specific regulations that regulate air pollution by focusing on the respective activity.

ii. Water Quality

The Water Pollution Control Regulation establishes the fundamental principles for protecting water quality and preventing water pollution. In this regard, any polluting party is required to obtain a water pollution control permit.

In addition, if a facility has dangerous substances in its wastewater, it must obtain a dangerous waste storage permit from the Ministry of Environment, Urbanization and Climate Change in accordance with the Regulation on General Principles of Waste Management and the Regulation on the Control of Pollution Caused by Dangerous Substances in Water and its Environment. This waste must be collected from the licensed facility every six (6) months by a licensed storage organization.

iii. Solid and Dangerous Wastes

The Waste Management Regulation is the fundamental legislation that defines the procedures and principles of waste management from generation to disposal without harming the environment and human health, reducing waste generation, reducing the use of natural resources through ways such as reuse, recycling and recovery of wastes and the production of products with basic characteristics in this regard, and market surveillance and inspection.

According to The Waste Management Regulation:

• Waste generators are required to determine the waste code in accordance with waste code descriptions.
• Except for medical waste, dangerous waste is stored in the temporary storage area for a maximum of six (6) months and non-dangerous waste for a maximum of one (1) year.
• Facilities producing more than 1,000 kilograms of dangerous waste per month are required to obtain a temporary storage permit. If the production of dangerous waste is less than 1,000 kilograms per month, these facilities must still apply to the Ministry of Environment, Urbanization and Climate Change for an exemption.
• Regardless of the amount of dangerous waste handled, facilities engaged in the collection, transportation, storage, recycling, and temporary storage of dangerous waste are required to obtain liability insurance to cover damages that may be caused to third parties during these activities.

iv. Chemical Wastes

The environmental impact of chemicals and chemical waste and related regulations are governed by the Regulation on Classification, Labelling and Packaging of Substances and Mixtures ("CLP Regulation") and the Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals ("REACH Regulation").

According to the REACH Regulation, specifically listed substances in its annexes should not be produced, placed on the market, or used unless the conditions of restrictions are met.

Under the CLP Regulation, a substance or mixture may not be placed on the market unless it is classified, labelled, and packaged in accordance with its potential physical damage or threat it poses to human health and the environment. Additionally, if more significant threats arise that necessitate a change in the dangerous class of a material or mixture, leading to additional information on the label, the supplier is required to update the label accordingly.

According to the Environmental Law, all parties involved in the use of dangerous chemicals (production, sale, storage, use, and transportation, etc.) are considered jointly liable for any damage caused by the release of such chemicals. In addition, pursuant to the Article 20 of the Environmental Law, the administrative fine imposed for processing, importing, exporting, transporting, storing, packaging, labeling, and selling dangerous chemicals and substances containing dangerous chemicals in violation of the procedures and principles set forth in the relevant regulations is tripled.

3. Sanctions

i. Legal Liability

As mentioned above, the Environmental Law adopts the "polluter pays" principle. According to this principle, all expenses related to the prevention, limitation, and reduction of pollution shall be covered by the party causing the pollution, and all necessary expenses incurred by public institutions and organizations for the prevention of pollution shall be recovered from the polluter in accordance with the provisions of Law on the Collection of Public Receivables with numbered 6183. In addition, this liability covers the damage caused by the pollution and the expenses incurred for the rehabilitation of the polluted area.

However, in accordance with Article 28 of the Environmental Law, the polluter is considered liable regardless of whether the polluter is at fault or not and regardless of the gravity of the fault.

ii. Administrative Fines

Article 20 of the Environmental Law provides for various administrative fines to be imposed on those who construct or operate facilities subject to a permit without obtaining a permit from the competent authorities, who continue their activities despite the revocation of their permit, who make unauthorized changes to a permitted facility and who fail to make the necessary changes required by the competent authorities. According to the Environmental Law, if the violator repeats the act leading to the imposition of an administrative fine within three (3) years, the amount of the fine is doubled for the first repetition and tripled for the second and subsequent repetitions.

In addition, Misdemeanors Law with numbered 5326 regulates various administrative fines to be imposed by municipal police officers. Under the Misdemeanors Law, administrative fines are imposed on those who cause noise pollution and those who dispose of waste in places other than designated waste collection or storage areas. The expense of disposing of such waste is also charged to the polluter, in accordance with the “polluter-pays” principle.

iii. Criminal Liability

According to articles 181, 182, 183 and 184 of the Turkish Penal Code with numbered 5237, intentionally polluting the environment by discharging or disposing of waste into the soil, water, or air in violation of the relevant procedures is a criminal offense. If it is proven that the act has caused environmental pollution, regardless of the significance of its environmental impact, the penalty shall be imposed from six (6) months to two (2) years. In addition, if the offense causes permanent damage to the environment, the penalty shall be doubled and in the case that the offense is committed with negligence, the penalty shall be imposed from two (2) months to one (1) year.

4. Supporting International Regulations

I. European Green Deal

II. EU Taxonomy

III. Paris Agreement

I. European Green Deal

The European Green Deal, which is announced by the European Union (EU) in 2019, aims to reduce carbon emissions by 55% by 2030 and make the EU the first climate-neutral continent by 2050. The European Green Deal includes various priorities and regulations. These priorities and regulations are mainly listed below:

• Clean energy production,
• Sustainable and environmentally friendly production cycles,
• Transition to a cleaner and greener construction industry,
• Sustainable food policy,
• Elimination of existing pollution,
• Sustainable transport,
• Maintenance of biodiversity.

The European Green Deal, which is in harmony and interaction with ESG factors, focuses on environmental sustainability and combating climate change and encourages companies to improve their environmental performance by adopting sustainability principles. The European Green Deal, an international agreement with the potential to have a positive global impact, involves one hundred ninety-three (193) countries.

II. EU Taxonomy

The EU Taxonomy, which was published in the Official Journal of the European Union (“EU”) in 2020 and regulated by the EU Taxonomy Regulation, describes the list of environmentally sustainable economic activities, and develops a classification system. In this way, it determines which activities of companies are environmentally sustainable.

The EU Taxonomy aims to increase sustainable investment in the EU and support the effective implementation of the European Green Deal. The EU Taxonomy uses the 'do no significant harm' criterion to ensure that investments in six areas do not harm the environment. The six areas where this criterion will apply are:

• Emission reduction in combating climate change,
• Adaptation to climate change,
• Sustainable use and protection of water and marine resources,
• Transition to a circular economy,
• Control and prevention of pollution,
• Conservation and restoration of biodiversity and ecosystems.

III. Paris Agreement

In addition to the EU legislation, the Paris Agreement, adopted at the 21st Conference of the Parties (COP 21) of the United Nations Framework Convention on Climate Change (UNFCCC) held in Paris in 2015, is recognized as a global milestone in the fight against climate change. The main purpose of the Paris Agreement is to limit the global temperature increase to below two (2) degrees Celsius and, if possible, to limit it to one and a half (1.5) degrees Celsius. In addition, Turkey became a party to the Paris Agreement in 2021, which also sets targets for finance, emissions, and climate-related losses.

5. Conclusion

The focus on environmental factors, the E factor of ESG, is critical for companies to fulfil their global responsibilities and build a sustainable future. The most important point in this context is to integrate environmental factors and regulations in this direction into all business processes of companies. As a result of this integration, companies will be in a stronger position and better prepared for the uncertainties they may face in the future.

In addition to the abovementioned regulations on environmental factors, there are numerous regulations both nationally and internationally. It is essential to identify and implement the appropriate regulations for the company's activities and structure.