In light of international and national developments in the perception of climate change as a financial risk to companies and the wider economy, directors of Turkish companies should, as part of their duty of care, be alert to climate risks, act in accordance with any legislative obligations on the company, and take steps to reorient the company's activities in line with the sustainability principles. Directors should also ensure that ESG risks and opportunities are disclosed in line with the Capital Markets Board’s Sustainability Principles Compliance Framework, and take steps towards measuring and disclosing greenhouse gas emissions in order to ensure a smooth integration of the company’s business model with the forthcoming emissions trading scheme, as well as EU laws which may affect Turkish businesses.
With an increased awareness of the risks caused by climate change that the world is facing, Türkiye is expanding its range of work in the fight against climate change day by day. It carries out legislative studies in order to comply with international agreements and fulfil its commitments, and takes steps to prepare the necessary social and financial infrastructure for the struggle. Boards of Turkish companies should be alert to these developments, which may signal increased focus from the Turkish government and regulators, and lead to new or increased risks and opportunities for companies as a result of new policies and legislation.
Türkiye signed the Paris Agreement with representatives from 175 countries at the signing ceremony held in New York on 22 April 2016. Türkiye’s ‘Intended Nationally Determined Contribution’ (INDC), submitted on 30 September 2015 and, outlining Türkiye’s plans for the targets of the Paris Agreement, states that by 2030 Türkiye will reduce greenhouse gas emissions by 21% compared to the ‘business as usual’ (BAU) level.1
On 27 September 2021, the Presidency announced a target of net-zero emissions by 2053, noting that this would require far-reaching changes, including in investment and production.
The Law Regarding the Approval of the Paris Agreement by the Turkish Grand National Assembly was published in the Official Gazette dated 7 October 2021, numbered 31621, and entered into force on 10 November 2021.2
Through its Updated First Nationally Determined Contribution submitted on 13 April 2023, Turkey confirms its commitment to reduce greenhouse gas emissions by 41% by 2030 (695 Mt CO2 eq. in year 2030) compared to the BAU scenario given in Türkiye’s first NDC (also INDC) with 2012 considered as the base year (reference year). Türkiye intends to peak its emissions no later than 20383
The name of the ‘Ministry of Environment and Urbanization’ was changed to the ‘Ministry of Environment, Urbanization and Climate Change’ with the presidential decree published in the Official Gazette dated 29 October 2021 and numbered 31643.4 This may suggest an increased focus on climate policy by the Ministry.
Türkiye's first Climate Council was held in February 2022 under the coordination of the Ministry of Environment, Urbanization and Climate Change. Almost 1,500 stakeholders participated from various sectors including public, private, research institutions, NGOs, and youth. Within the scope of the Council; 7 sub-committees were established on GHG emission reduction; science and technology; green finance and carbon pricing; climate change adaptation; local governments; and migration, just transition and social policies. At the end of the Council, 217 recommendations were adopted to provide a vision for the 2053 net zero target of Türkiye. 76 of which were prioritized, and all recommendations were shared with the public.5
The work on preparing a ‘climate law’, which will set out a legal framework for Türkiye’s climate goals, continues.
On 16 July 2021, the Turkish Government approved the ‘Green Deal Action Plan’, a roadmap aimed at promoting a green economy in multiple policy areas.6 With this plan, Türkiye aims to align with the ‘European Green Deal’ of the European Union (EU). The plan includes actions such as limiting carbon emissions, increasing green finance and working towards a green and circular economy.
The Guide on ‘Green Debt Instruments, Sustainable Debt Instruments, Green Lease Certificates and Sustainable Lease Certificates Guide’, which was published by CMB on 24 February 2022, aims to increase transparency, honesty, consistency and comparability in the financing of sustainability projects and green projects.7
The economic and financial effects of risks stemming from climate change also affect price stability and financial stability in the markets. As a result, central banks are following developments regarding climate change and factoring climate risks into their monetary policy. The Central Bank of the Republic of Türkiye (CBRT) stated that it recognizes the potential impact of climate change on the general price level and that it will adopt sustainable finance initiatives to reduce climate-related risks. The CBRT established a ‘Green Economy and Climate Change Department’ to identify and evaluate the risks and opportunities arising from climate change for the country's financial system.
In 2021, the Ministry of Treasury and Finance published the "Sustainable Finance Framework" to issue sovereign green, social, and sustainable debt instruments.8
The Banking Regulation and Supervision Agency (BRSA) published its 2022-2025 Sustainable Banking Strategic Plan in July 2021. The plan includes actions aimed at building capacity in the assessment and management of climate-related risks and strengthening oversight of the management and identification of climate-related financial risks.9
The Turkish Commercial Code was amended in 2022 to empower the relevant institution in Türkiye to determine and publish Turkish Sustainability Standards that are compatible with international standards.
Türkiye is preparing a national green taxonomy, which will facilitate the alignment of financial resources with green investments. Also, the public incentive framework will be reviewed with the aim of accelerating the country's green transformation.
Türkiye National Energy Plan (2020 - 2035) which was published in January 2023 anticipates reaching approximately 33 GW of solar-installed power capacity and 18 GW of wind installed power capacity.
In January 2023, Türkiye released the Hydrogen Strategy which highlighted a series of energy transformation policies to increase the use and production of hydrogen in its energy mix, in order to reduce emissions in alignment with the country’s 2053 Net Zero objective. The Hydrogen Strategy specifies two key targets:
(a) reducing the cost of green hydrogen production to below $2.4/kgH by 2035 and below $1.2/kgH by 2053;
(b) ensuring that the installed power capacity of electrolysers reach 2GW in 2030, 5 GW in 2035, and 70 GW in 2053.
Directors’ Duties and Climate Change
Article 369 of the Turkish Commercial Code (TCC) No. 6102, titled ‘Duty of care and loyalty’, regulates the responsibility of the members of the board of directors of companies based on trust. The article reads as follows: “Members of the board of directors and third parties in charge of the management are responsible for fulfilling their duties with the care of a prudent manager, and following the company's interests with honesty.”10
Violations of the board of directors’ responsibilities of care are regulated by Article 553 of the TCC, which provides that “In case the founders, members of the board of directors, managers and liquidators violate their obligations arising from the law and the articles of association, they are liable to both the company, the shareholders and the creditors of the company for the damage they have caused.”
In order to determine a road map in the fight against climate change, it is undoubtedly necessary for directors of Turkish companies to determine the current and possible risks of climate change and the steps that can be taken against these risks, to prepare action plans, and to start the necessary infrastructure works in line with these plans.
Climate change risks for Türkiye are classified as ‘Physical Risks’ (including acute risks such as extreme weather events and chronic risks such as sea level rise and changes in precipitation patterns), ‘Transition Risks’ (including changes in climate policies, technology, consumer preferences and financial market expectations) and ‘Nominal Risks’ in the 2022-2025 Sustainable Banking Strategy Plan of the BRSA. These risks are considered to have potentially serious financial consequences for organisations.
A related report of the BRSA finds that the Turkish banking sector is exposed to significant transition risks through the fossil fuel-based energy production, cement, iron-steel, aluminium, fertilizer, transportation, construction, and related sectors. The EU ‘Carbon Border Adjustment Mechanism’, which will be implemented as of 2026, is also considered as an important risk in this sense.
Companies are increasingly discussing climate change at the board level. According to the ‘Türkiye Climate Change and Water Report 2022’ published by the Carbon Disclosure Project (CDP), the percentage of companies committing to absolute emissions reductions beyond 2030 has increased from 15% to 58%, and intensity targets have increased from 4% to 32% in just two years.11 In the report, it is stated that 97% of the companies have board-level oversight of climate-related issues within their organizations. In this sense, it can be said that the climate change awareness of companies in Türkiye is increasing day by day.
Putting climate change risks on the agenda of the board of directors, following the legislative work on this subject, acting in accordance with the obligations required by the legislation and reorienting the company's activities in line with the sustainability principles, should be considered within the scope of the responsibility of care of each director, even if there is no legal obligation to do so. This is because companies’ ability to adapt to changing conditions and continue their existence depends upon the foresight of their directors and the measures they take against risks.
Directors’ Disclosure Obligations and Climate Change
The Regulation on Monitoring of Greenhouse Gas Emissions in Türkiye, number 29003, was published in the Official Gazette dated 17 May 2014, and took its final form with the amendment made on 31 May 2017.12 This Regulation sets out principles regarding the regular reporting and verification of annual greenhouse gas emissions by the manufacturing sector representatives of energy-intensive sectors such as electricity, steam generation, oil refineries, petrochemicals, cement, iron-steel, aluminium, brick, ceramics, lime, paper and glass production.
The CMB, which is the regulatory and supervisory authority for the capital markets in Türkiye, aims to ensure that the capital markets operate safely, fairly and effectively by protecting the rights and interests of investors. The CMB is of the opinion that good corporate governance practices constitute the infrastructure of fair and orderly functioning capital markets. For this reason, the Corporate Governance Principles were announced to the public for the first time in 2003 and these principles were updated with the communiqués published in the following periods.
Compulsory and non-mandatory corporate governance principles, which apply to companies whose shares are traded on Borsa Istanbul, are defined in the ‘Corporate Governance Communiqué No. II-17.1’.13 The CMB, which aims to develop corporate governance practices and public disclosure practices, closely monitors whether companies comply with the mandatory principles and the explanations given by companies on the matters where they depart from the non-mandatory principles.
In October 2020, the Corporate Governance Communique was amended to include the ‘Sustainability Principles Compliance Framework’ published by the CMB, which includes the basic Environmental, Social and Corporate Governance (ESG) principles that public companies are expected to adhere to and disclose upon, including the identification of ESG risks and opportunities, and related policies, how the company’s corporate strategy is in compliance with ESG policies, risks and opportunities, and the company’s sustainability performance, goals and actions. Although the implementation of these principles is voluntary, it is obligatory to report whether they are implemented or not, on the basis of the ‘Comply or Explain’ principle.14 In other words; the application of these principles is not a legal obligation. However, companies must explain which of these principles are complied with, which are not followed, and the reasons for non-compliance.
Greenhouse gas emissions reporting may also be required for certain companies as a result of EU climate goals and regulations, and a proposed Turkish Emissions Trading System. As part of the ‘Fit For 55’ package of policies and legislation, the ‘Carbon Border Adjustment Mechanism’ published by the European Commission in July 2021 will oblige EU member countries to ensure that imported goods will be subject to an equivalent carbon price to goods originating in EU member countries in the cement, electricity, aluminium, iron, steel and fertilizer sectors following a transition period ending in 2026.15 Since this obligation indirectly covers countries exporting to EU member countries, it is envisaged that companies importing goods from Türkiye in these sectors will report the emissions occurring in the production process of the imported goods quarterly, starting from 2023, and detail any carbon price paid abroad, as well as direct and indirect emissions.
In addition, Türkiye’s NDC emphasis that 12th National Development Plan, being prepared for the period of 2024-2028, and long-term strategy towards 2053, will accommodate its increasing climate ambition by harmonizing climate targets and economic growth, streamlining the sustainable development. The NDC underlines carbon pricing instruments as cost-efficient mitigation policies and refers to the establishment of an Emission Trading System. The ‘Emissions Trading System’ involves determining an upper limit value based on the sector and the greenhouse gas emissions capacity of the facilities in the relevant system, and producing a permit for this upper limit; therefore, Turkish companies may be required to report on their emissions as part of the ‘Emissions Trading System’.
Practical Implications for Directors
Considering the approach of the Ministry of Environment, Urbanization and Climate Change, CMB, BRSA and other regulatory and supervisory institutions to climate change and its risks in Türkiye, it is recommended that companies and their directors pay attention to the following issues in their commercial practices and public disclosures:
- Establishing teams to work on the fight against climate change and sustainability at management and/or board level, determining the risks and opportunities in this regard, making reports within the company, and acknowledging that climate change risks and opportunities are within the responsibility of care and commitment in line with the principle of transparency;
- Making a transition to green production disclosures within the scope of sustainable economy principles, using renewable energy sources actively in the production sector, accelerating infrastructure works in this direction, increasing the use of alternative raw materials and fuel and taking measures to reduce emissions, and in order to achieve these goals, preparing short, medium and long-term goals within long-term action plans;
- Calculating and verifying the greenhouse gas emissions released as a result of company activities according to the ‘ISO 14064 Greenhouse Gas Reporting and Verification Standard’ published by the Turkish Standards Institute (TSI), and reporting to relevant authorities in accordance with the legislation on monitoring and reporting of greenhouse gas emissions and reductions with utmost care;
- Following the legislative preparations of the legislator regarding climate change, analysing the obligations brought by the regulations that come into force for companies, complying with these obligations, and benefiting from expert opinions on these issues if needed.
Contributors:
- Emre Durgun, Nazali Tax & Legal
- Süreyya Korkmaz, Nazali Tax & Legal
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