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

Öykü Su Sabancı co-authored this article.

In the area of sustainability policy, companies are taking steps to address their social responsibility as well as their financial performance. In this context, it is necessary to evaluate the environmental, social, and governance (“ESG”) factors (We will use the term ESG in this article due to its widespread use in practice) in order to assess the performance of companies in terms of sustainability.

Please review our article titled “The E Factor in ESG” in which we examined the environmental factors of ESG and related regulations from here. In this article, we will focus on the social factor, which represents the 'S' in ESG.

The S-social factor addresses the impact of companies on their supply chain, their relationships with stakeholders, and their impact on society. The S factor includes various topics such as the company's social responsibilities, employee rights, and diversity and inclusion policies. Social risks associated with the S factor not only have a direct impact on the company's performance and reputation, but also have a direct impact on society. The existence of policies and practices that are contrary to the values and development of stakeholders, such as investors and employees, ultimately affects the company's national and international reputation. Therefore, companies can shape not only their internal dynamics but also their social impact by evaluating and effectively implementing these elements.

The main issues related to social factors are listed below:

• Human Rights and Social Impact,
• Equal Treatment Principle,
• Workplace Policies and Procedures,
• Fair and Transparent and Accountable Governance,
• Employee Diversity and Inclusion,
• Occupational Health and Safety Measures,
• Supply Chain and Customer Satisfaction,
• Data Security,
• Encouragement and Support for Volunteer Work.

Companies committed to effectively implementing ESG factors in these key areas should first assess the social impacts of their activities and familiarize themselves with national and international regulations. In this context, please find the key national and international regulations below.

A. Supporting National Regulations

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

2. The Labor Code with numbered 4857

3. The Occupational Health and Safety Law with numbered 6331

4. Corporate Governance Principles and Communiqué

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

The fundamental provision that protects the principle of equality is Article 10 of the Constitution of the Republic of the Republic of Turkey with numbered 2709 (“the Constitution”). This article states that everyone is equal before the law without discrimination based on language, race, color, sex, political opinion, philosophical belief, religion, and similar grounds. In addition, the Constitution also contains anti-discrimination and egalitarian provisions, stating that the state is obliged to ensure the realization of equality.

2. The Labor Code with numbered 4857

The Labor Code with numbered 4857 (“the Labor Code”) and related secondary legislation include provisions on working conditions, minimum wages, working hours, safety, and labor rights. The Labor Code imposes various responsibilities on companies regarding occupational health and safety, while social security legislation contains important regulations and sanctions regarding employee’s rights and social rights.

The Labor Code adopts the principle of equal treatment and paragraph 1, Article 5 of the Labor Code prohibits discrimination based on language, race, sex, political opinion, belief, religion, and sect. Additionally, there are provisions that prevent discrimination among employees.

In accordance with the rights of employees, which are also included in the S factor of ESG, Article 71 of the Labor Code also establishes the rule of not employing child labor. This article specifically prohibits the employment of children under the age of fifteen (15).

3. The Occupational Health and Safety Law with numbered 6331

The Occupational Health and Safety Law with numbered 6331 (“OHSL”) aims to regulate the responsibilities of employers and employees to ensure occupational safety and health in workplaces. According to Article 4 of the OHSL, employers are required to take the necessary measures to ensure occupational health and safety, to provide training to their employees, and maintain the working environment safe.

In addition to the OHSL, various regulations, such as the Trade Unions and Collective Bargaining Agreements Law, regulate the rights and obligations of both employees and employers.

4. Corporate Governance Principles and Communiqué

Based on the Capital Markets Law with numbered 6362 (“CMB”), the CMB has issued the Corporate Governance Communiqué and Corporate Governance Principles. The purpose of the Corporate Governance Communiqué is to determine the corporate governance principles to be applied by companies and the procedures and principles regarding party transactions. The related regulations aim to encourage companies to establish transparent, fair, and effective governance structures to secure investors and stakeholders and to ensure the effective functioning of the capital market.

Related provisions regulate that:

• Shareholders are entitled to fair and equal treatment, effective participation of shareholders in all decision-making processes affecting the company, and the right to information.
• As corporate governance principles also aim to focus on social impact, companies should pay attention to their social responsibilities. 

B. Supporting International Regulations

1. United Nations Guiding Principles on Business and Human Rights

2. UN Global Compact

3. OECD Guidelines

4. ISO 26000 Social Responsibility Guidelines

1. United Nations Guiding Principles on Business and Human Rights

The United Nations Guiding Principles on Business and Human Rights, unanimously adopted by the United Nations (“UN”) in 2011. The aim is to protect and promote human rights in the context of business. The principles build on and operationalize the “protect-respect-compensate” framework, adopted by the UN Human Rights Council in 2008.

The principles are categorized into three (3) sections. These three sections are: (i) the obligation of the state to safeguard human rights, (ii) the accountability of companies to uphold human rights, and (iii) the right to seek redress.

2. UN Global Compact (“UNGC”)

The United Nations Global Compact (“UNGC”) published by the UN, is comprised of ten (10) principles based on the Universal Declaration of Human Rights, the International Labor Organization (“ILO”) Declaration on Fundamental Principles and Rights at Work, the United Nations Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption. These principles address the fundamental responsibilities of businesses in the areas of human rights, labor standards, the environment, and anti-corruption for sustainable business development.

3. OECD Guidelines

The Organization for Economic Cooperation and Development (“OECD”) has developed guidelines for multinational enterprises on corporate social responsibility. These guidelines encourage companies to take responsibility for a range of issues, including employee rights, anti-corruption, and consumer rights.

4. ISO 26000 Social Responsibility Guidelines

ISO 26000 Social Responsibility Guidelines (“ISO 26000”), first published in 2010 by the International Organization for Standardization (“ISO”), is an internationally recognized guide to social responsibility and is used to help companies assess and develop their social responsibility requirements.

ISO 26000 establishes seven (7) principles. These principles are: (i) Accountability, (ii) Transparency, (iii) Ethical behavior, (iv) Respect for stakeholders' interests, (v) Respect for the rule of law, (vi) Respect for international standards of conduct, and (vii) Respect for human rights.

C. Conclusion

Companies can achieve positive effects on both their internal dynamics and reputation by identifying and fulfilling their social responsibilities under the S-factor of ESG. In addition, companies that effectively implement social factors will stans out by building trust with investors and other stakeholders and have the potential to create sustainable value.

It is important to note that there are many national and international legislation regarding the social factors in ESG. Among these legislation, the company should implement the legislation that is appropriate for its field of activity and organizational structure.