Foundations of a Sustainable Future - The G Factor in ESG (Environment, Social, Governance)

Öykü Su Sabancı co-authored this article.

Environmental, social and governance factors (“ESG”) are important in assessing the sustainability performance of companies. The fact that companies, investors, and other stakeholders are aware of these issues and act in a sustainable manner is important not only for financial performance, but also for the longevity of companies and a sustainable future.

Please find our legal brief titled “E Factor in ESG” where we examined the environmental factors and related regulations from here, and our legal brief titled “S Factor in ESG” where we examined the social factors and related regulations from here. In this article, we will focus on the G-governance factor in ESG.

The G factor in ESG refers to governance factors and covers issues such as transparency, accountability, fairness, anti-corruption strategies, code of ethics, and oversight by an independent board of directors. The governance factor ensures that companies act by using the right and transparent methods and by considering the principles of diversity and inclusion when selecting their managers. In this context, investors and other stakeholders are able to select board members and senior executives of companies free from their own interests and conflicts and within the framework of ethical principles.

Key areas related to governance factors include:

·       Leadership and Corporate Governance,

·       Anti-Corruption Measures,

·       Business Ethics,

·       Internal Control and Risk Management,

·       Compliance with Regulations,

·       Transparent and Accountable Practices,

·       Board of Directors and Executives,

·       Stakeholder Relations.

Companies committed to effectively implementing governance factors in these key areas should assess their current governance status as a result of their operations and familiarize themselves with national and international regulations. In this context, please find some of the key national and international regulations below.

A.    Supportive National Regulations

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

2.     The Turkish Penal Code with numbered 5237

3.     The Turkish Commercial Code with numbered 6102

4.     The Law on Declaration of Assets, Prevention of Bribery and Corruption with numbered 3628

5.     The Right to Information Law with numbered 4982

6.     The Capital Markets Law with numbered 6362

7.     The Misdemeanors Law with numbered 5326

8.     Board Decisions on Turkish Sustainability Reporting Standards (TSRS)

9.     Corporate Governance Principles and Communique

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

The Constitution of the Republic of Turkey with numbered 2709 ("the Constitution") contains various provisions that support ESG factors such as Article 9 titled "Judicial Power" and Article 138 on "Independence of Courts" of the Constitution. These provisions aim to establish and protect justice and the independence of the judiciary.

In addition, Article 71 titled "Declaration of Assets" requires public officials to declare their assets during their term of duty. Article 74 titled "Right to Petition, Information and Application to the Ombudsman," regulates the rights of citizens to petition state organs, obtain information and apply to the Ombudsman.

2.     The Turkish Penal Code with numbered 5237

Under the Turkish Penal Code with numbered 5237 ("TCC"), corruption-related acts such as bribery, abuse of duty, and unlawful acquisition of property are criminalized and subject to various penalties. The crime of bribery (TCC Article 252), extortion (TCC Article 250), embezzlement, abuse of trust (TCC Articles 247 and 155), laundering of assets acquired from an offence (TCC Article 282), laundering of proceeds of crime, theft by deception (TCC Article 157) and misuse of public duty (TCC Article 257) are directly sanctioned, while crimes such as nepotism are indirectly sanctioned.

3.     The Turkish Commercial Code with numbered 6102

Pursuant to the Turkish Commercial Code with numbered 6102 (“TCC”), there are various provisions regarding the right to obtain and verify information in joint stock companies. Article 392 of the TCC regulates the right to obtain and examine information for the members of the board of directors, and Article 437 regulates the right to obtain and examine information for the shareholders of the company. This right is a right that supports the obligation of companies to be transparent and accountable to their stakeholders and society, which is included in the G-factor of ESG.

In addition, Article 553 of the TCC provides shareholders with the right to indemnification in the event that the organs of a legal entity violate their duties and cause damage to the company. Through the relevant article, the TCC imposes various obligations on the organs of legal entities, such as acting diligently and in the best interest of the company and aims to streamline the internal functioning of the company and ensure that it is managed in a fair manner.

Moreover, Article 1529 of the TCC regulates the principles of corporate governance, which aims to separate the company's audit and management bodies and to protect both managers and shareholders. Pursuant to this article, the Capital Markets Board (“the Board") is entitled to establish corporate governance principles. In this context, the Board has published the Corporate Governance Principles and the Corporate Governance Communiqué, which are explained in title 9 below.

4.     Declaration of Assets, Prevention of Bribery and Corruption Law with numbered 3628

Declaration of Assets, Prevention of Bribery and Corruption Law with numbered 3628 (“Law No. 3628”) regulates the declaration of assets by the parties and persons covered by the law, the renewal of declarations, the supervision of the acquisition of assets, and the provisions to be applied in case of unjustified acquisition of assets or false declaration.

5.     The Right to Information Law with numbered 4982

The purpose of the Right to Information Law with numbered 4982 (“Law No. 4982”) is to regulate the procedures and principles regarding the exercise of the right to information by individuals in accordance with the principles of equality, impartiality, and openness, which are the requirements of democratic and transparent governance. Article 4 of the Law No.4982 stipulates that everyone has the right to receive information and that foreigners residing in Turkey and foreign legal entities operating in Turkey shall benefit from this right within the framework of the principle of mutual benefit, provided that the information they request is related to them or their field of activity.

In response to the right to information, Article 5 regulates the obligation to provide information. Within the framework of this obligation, institutions and organizations are obliged to make all kinds of information or documents available to the applicants, except for exceptions, and to take the necessary administrative and technical measures to process the requests effectively and accurately for access to information.

6.     The Capital Markets Law with numbered 6362

The Capital Market Law No. 6362 ("CML") aims to regulate and supervise the capital market in order to ensure the functioning and development of the capital market in a reliable, transparent, efficient, stable, fair and competitive environment and to protect the rights and interests of investors. In this regard, the CML regulates capital market crimes. Article 106 of the CML regulates the crime of misuse of information in order to prevent the creation of inequality of opportunity among investors with capital market information. The offense of misuse of information is punishable by imprisonment of three (3) to five (5) years or a judicial fine.

7.     Misdemeanors Law with numbered 5326

The Article 43/A entitled "Liability of Legal Entities" of the Misdemeanors Law with numbered 5326 (“Misdemeanors Law”) provides that an administrative fine of ten thousand Turkish Liras to fifty million Turkish Liras shall be imposed on a legal entity as a result of the commission of certain crimes listed in the Misdemeanors Law for the benefit of the legal entity. These listed crimes include fraud, collusion, corruption, laundering of criminal proceeds and breach of trust.

8.     Board Decisions on Turkish Sustainability Reporting Standards (TSRS)

The Public Oversight Authority ("POA") has taken an important step towards accountability by deciding to adopt the international standards IFRS S1 and IFRS S2 which will allow companies and investors to present their sustainability information on a consistent and global basis for the capital markets, published by the International Sustainability Standards Board (“ISSB”) established by the International Financial Reporting Standards Foundation ("IFRS").

Based on the agreement between the ISSB and the POA, two Board Decisions titled "Determination of Turkish Sustainability Reporting Standards (TSRS)" and "Determination of the Scope of Application of Turkish Sustainability Reporting Standards (TSRS)" were published in the Official Gazette numbered 32414 on 29.12.2023.

In accordance with the relevant regulations, as of 01.01.2024, institutions, organizations and companies that exceed the thresholds determined for companies subject to the thresholds in two consecutive reporting periods will be required to prepare a sustainability report in accordance with the TSRS standards. These decisions made sustainability reporting, which had been voluntary until 1 January 2024, mandatory and began the process of transition to an accountable system.

9.     Corporate Governance Principles and Communique

The Capital Markets Board published the Corporate Governance Principles and Communique based on the CML. The purpose of Corporate Governance Principles and Communique is to set out the corporate governance principles to be applied by companies, as well as the procedures and principles governing transactions with related parties. The relevant legislation aims to encourage companies to establish a transparent, fair and effective governance structure, to safeguard the rights of investors and stakeholders and to ensure the effective functioning of the capital market.

-        It is emphasized that companies should establish an effective risk management and internal control system. 

-     The provisions stipulate that the companies’ board of directors should be composed of independent members, that audit procedures should be conducted fairly, and that companies should provide transparent information to stakeholders and the public about their financial status, activities, strategies, and risks. This ensures that the public and stakeholders have access to accurate and reliable information about the status of the company.

There are various provisions and regulations that support the G-governance factor of ESG, such as Banking Law, Enforcement and Bankruptcy Law, and Civil Servants Law.

B.    Supportive International Regulations

1.     The Foreign Corrupt Practices Act of 1977

2.     The United Nations Convention Against Corruption

3.     The United Nations Convention Against Transnational Organized Crime

4.     The OECD Anti-Bribery Convention

5.     The Council of Europe Private Law Convention Against Corruption (ETS 173)

6.     The Council of Europe Criminal Law Convention Against Corruption (ETS 173)

7.     The Non-Financial Reporting Directive (NFRD)

8.     The Corporate Sustainability Reporting Directive (CSRD)

9.     IFRS S1 – S2

1.     The Foreign Corrupt Practices Act of 1977

The Foreign Corrupt Practices Act of 1977 ("FCPA") enacted in the United States to combat corruption by companies doing business abroad, is the first anti-corruption statute with extraterritorial authority. The primary purpose of the FCPA is to reduce corrupt activities and prevent American companies from bribing foreign officials. It should be noted, that the FCPA applies to American companies as well as foreign companies registered in the United States.

2.     The United Nations Convention Against Corruption

The United Nations Convention Against Corruption is the only legally binding universal convention on the fight against corruption. This Convention aims to: (i) promote and strengthen measures to prevent and combat corruption and make it more effective and efficient; (ii) encourage, facilitate, and support international cooperation and technical assistance in preventing and combating corruption, including asset recovery; and (iii) promote integrity, accountability and the proper management of public affairs and public property.

The Convention also regulates various forms of corruption such as bribery, influence peddling, abuse of office, and various forms of corruption in the private sector. The Convention regulates five (5) main aspects of the fight against corruption. These five (5) main aspects are: (i) preventive measures, (ii) criminalization and legal sanctions, (iii) international cooperation, (iv) asset recovery, and (v) technical assistance and exchange of information.

3.     The United Nations Convention Against Transnational Organized Crime

The United Nations Convention against Transnational Organized Crime ("UNTOC") aims to promote cooperation to prevent and more effectively combat transnational organized crime. The Convention establishes norms on organized crime and its sanctions as a fundamental part of international law and encourages countries to act globally.

The UNTOC was adopted in 2000 in Palermo, Italy, and several protocols have been adopted under it. These protocols are: (i) Migrant Smuggling Protocol, (ii) Trafficking in Persons Protocol, (iii) Firearms Protocol.

4.     The OECD Anti-Bribery Convention

The OECD Convention on Combating Bribery of Foreign Public Officials, opened for signature in 1997, aims to prevent the bribery of foreign public officials by natural or legal persons and to prevent corruption and bribery in international business transactions. The Convention, which sets forth the obligations of member countries in this regard, consists of seventeen (17) articles. Within the scope of the OECD Anti-Bribery Convention, effective, proportionate, and dissuasive sanctions are established for bribery offenses in order to prevent the commission of bribery offenses. Turkey is one of the thirty (30) OECD countries that are parties to the OECD Anti-Bribery Convention.

5.     The Council of Europe Civil Law Convention Against Corruption (ETS 173)

The Convention, which was drafted in 1999, aims to combat corruption in the private sector and to take legal action against bribery and other forms of corruption. The Convention provides for effective remedies to protect the rights and interests of persons harmed by corruption, including the possibility of obtaining compensation under the domestic law of the Parties. Turkey is also a party to the convention.

6.     The Council of Europe Criminal Law Convention Against Corruption (ETS 173)

This Convention was drafted in 1999 and aims to criminalize acts of corruption throughout the world. The Convention includes complementary criminal law measures and measures to improve international cooperation in the prosecution of corruption offenses. Turkey is also a party to the convention.

7.     The Non-Financial Reporting Directive (NFRD)

The European Union ("EU") published the Non-Financial Reporting Directive ("NFRD") in 2014. The purpose of the NFRD is to enable other stakeholders to assess the non-financial activities of large companies and to encourage them to be transparent.

8.     The Corporate Sustainability Reporting Directive (CSRD)

The EU Commission has published the Corporate Sustainability Reporting Directive ("CSRD"), which will change existing reporting strategies due to the lack of reliable and comparable information provided by companies. The CSRD aims to put sustainability reporting on an equal footing with financial reporting by introducing more detailed reporting requirements for companies. 

9.     IFRS S1 – S2

The ISSB, established by IFRS to develop global sustainability reporting standards, published the IFRS S1 and IFRS S2 standards on 26 June 2008 to enable companies and investors to present their sustainability information on a single, global basis for capital markets.

- IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information aims to provide investors with information about all sustainability-related risks and opportunities that could reasonably be expected to affect an entity's cash flows, access to finance or cost of capital in the short, medium, or long term.

- IFRS S2 Climate-Related Disclosures requires entities to disclose information about climate-related risks and opportunities so that their general-purpose financial reports are useful to investors in making decisions about financing the entity. 

While the main regulations are listed above, there are also various regulations in many legislations that support the G-Governance factor of ESG. In addition to these regulations, there are many organizations that are active in the field of anti-corruption, some of which are listed below.

·       United Nations (UN)

·       Council of Europe

·       World Bank (WB)

·       International Monetary Fund (IMF)

·       Group of States Against Corruption (GRECO)

·       European Anti-Fraud Office (OLAF)

·       Financial Action Task Force (FATF)

·       Anti-Corruption Network (ACN)

·       Transparency International (TI)

·       International Centre for Crime Prevention (CICP)

C.    Conclusion

Under the ESG G-factor, appropriate and effective implementation of governance issues will have a positive impact on both the internal dynamics and the reputation of companies. There are many national and international regulations related to the G-governance factor in ESG. Among these regulations, the legislation that is appropriate for the company's field of activity and the company's organization and structure should be implemented.