Back to Insights

ESG from the Mergers & Acquisitions and Investment Perspective


What is ESG?

The term, which is widely used as ESG in practice, is the abbreviation of the initials of the English phrase “Environmental, Social and Governance”. ESG, which has developed as the concept of sustainability and social impact performance of an investment, covers one of the main the issues that investors should research and consider before making an investment decision.

The areas touched by ESG practices can be grouped as follows, without being limited thereto:

  • Environmental: Pollution, Waste, Water, Natural Resource Management, Supply Chain Management, Emissions and Carbon Footprint, Land Use and Non-Destruction of Forests, Energy, Renewable Energy, Climate Change and Its Impacts
  • Social: Health and Safety, Human Rights, Gender Equality, Consumer and Product Responsibility, Modern Slavery, Human Trafficking, and Child Labor, Employee and Customer Relations, Stakeholder and Community Engagement
  • Governance: Anti-Bribery and Anti-Corruption, Anti-Money Laundering, Risk Management and Audit, Reputation Management, Crisis Management, Use of Sustainable and Green Finance Tools, Financial and Corporate Reporting, Gender Non-discrimination, Diversity and Inclusion in Employment, Managers and Management Duties and Responsibilities of Board Members, Data Protection, Cyber Security, Compliance with Legislation

Considering the titles above, it is a fact that environmental awareness, social relations, and corporate governance principles are the focus of ESG-oriented investments. In order to create a consistent and sustainable investment, the relations between ESG applications should be evaluated with a holistic approach.

Less than 20 years ago, ESG was launched as a social responsibility initiative by the United Nations which is now a global phenomenon with a growth rate of 34 percent worldwide since 2016, reaching more than US$30 trillion in assets at the start of last year[1]. However, ESG did not become a major focus all at once, nor was this development disconnected from the needs of the business world and the environment. Since the beginning of the 20th century, the social pressure created by various crises, claims, boycotts, and actions in the business world has given ESG its current meaning. Some researchers even trace the history of ESG, according to some sources, to those who, in the 18th century, opposed the slave trade, smuggling and luxury consumption and boycotted companies that produced liquor, tobacco, or allowed gambling[2]. As can be seen, despite the advancement in the environmental, social, and governance aspects of the business world and capital, regardless of the consequences, took place with consumer demands, the main feature that distinguishes today's ESG concept from similar social responsibility initiatives is that it has begun to be seen that ESG sensitive business strategies also have a positive effect on company profitability. Indeed, the main motivation for the adoption of this concept and the transition to fast and fundamental applications in this field is the deep need for a sustainable economy, the support of this need with government policies, the increasing awareness of ESG, and the integration of ESG into the way companies do business has become an inevitable element both ethically and commercially.

Why is ESG Important?

The climate crisis, epidemics, social inequalities, and the reflections of the practices experienced in the global economy in connection with these situations, have inevitably increased the importance of ESG applications. The green economy, which has been growing for years, has continued to develop its unique tools. Especially in recent years, with the impact of COVID-19, the International Monetary Fund (“IMF”) has repeatedly called for green recovery. The actors in the market realized that economic development and progress would not be possible with unsustainable growth models, therefore investment instruments such as green bonds or green lease certificates were given priority. While there was a slowdown in standard investment and borrowing activities due to the effect of COVID-19, the sustainable bonds and loans market continued to grow. For example, the Turkish Capital Markets Board ("CMB") recently observed that, taking into account the above-mentioned developments, regulatory and supervisory institutions around the world have introduced regulatory frameworks for the healthy growth of these markets and the protection of investors within the framework of their public disclosure obligations. Thereupon, the CMB prepared a regulatory framework with Green Debt Instrument and Green Lease Certificate Guidelines Draft ("Guide")[3] in accordance with the provisions of Article 1 and Article 128/e of the Capital Market Law, within the framework of the 11th Development Plan, the 2021 Economic Reform Package and the Paris Climate Agreement priorities and actions. Thus, with the Guide, the CMB has taken a concrete step towards increasing the issuance of green debt instruments and green lease certificates in the Turkish capital market, strengthening investor confidence in transparency and external evaluation (such as second-party opinion/verification) obligations and diversifying investment opportunities in projects that contribute to sustainable development. The Ministry of Treasury and Finance published the Sustainable Finance Framework Document ("Framework Document")[4] on its website on 12 November 2021 to set the standards for green, social and sustainable transactions in financial markets. The Framework Document lays down the standards of sustainable finance instruments such as green, social, or sustainable bonds, loans and debt instruments, and appropriate green and social projects. In light of the developments in the world within the framework of the green economy, it is necessary to state that green debt instruments have emerged as a "result" and "mentality" beyond being a "tool" for the revival of green markets in Türkiye. Because this is a reflex shown to ensure sustainable development and economy. The development of these instruments and the growth of their markets will contribute significantly to the climate crisis. In particular, the fact that this issue is subject to supervision by a regulatory and supervisory institution such as the CMB and that the treasury borrowings to be made in this field will lead the way for many companies to contribute to the development of the economy without sacrificing social and governance factors, as well as the fight against the climate crisis[5].

To avoid the devastating effects of the climate crisis, sustainable investment portfolios and private initiatives in the form of effective ESG investments have been developed as ways in which people, businesses and investors of all sizes can contribute to making the world a healthier place. These methods also provide investors with a transparent and comprehensive disclosure of climate-related financial risks. In this regard, it is possible to say that public-private cooperation has increased noticeably. The COP26 Summit is an international example of policies implemented to slow and ultimately reverse climate change[6].

In addition, considering that investments always have inherent risks, ESG investment instruments that provide long-term confidence in direct proportion to sustainability will be able to eliminate many risks, including reputational risks. ESG instruments can shape the market by finding its reflection not only in investor behavior but also in consumer behavior. For example, ESG investment tools have become the focus of consumers and, therefore, investors in a wide range from companies that adopt the Green IT[7] approach in their production and service delivery processes to energy-saving smart systems or from sustainable approaches in the textile sector to electric charging stations.

Moreover, although corporate governance and corporate ethics have always been a part of good governance, especially after the global economic crisis that started in 2008, it has become a "must-have" condition for investors. Beyond where corporate social responsibility is regulated, investors also need to adopt ethical corporate governance practices. Because the actions of companies that lack these practices may have direct or indirect social effects. In this context, fundamental problems of companies, such as lobbying, data privacy, tax transparency, and the fight against corruption and bribery are taken as indicators. ESG encourages investors to take a stand against companies that lack transparency towards each other (peer pressure). The driving force here is the risk of serious environmental, social, financial, and human rights violations, which may occur due to the violation of the UN's Sustainable Development Goals[8] and applicable due diligence laws, as well as the risk of reputational damage.

New Investment Approaches Within the Scope of ESG

Along with the concept of ESG, concepts such as responsible investment, socially responsible investor, and impact investing came to the fore.

Responsible Investment

Responsible Investment is defined as a strategy and practice that integrates ESG factors into all evaluation criteria, from the investment decision to the end of the investment.[9] First of all, it should be noted that socially responsible investments have different investment approaches such as ethical investing, social responsibility investing, or impact investing. These different approaches aim to combine financial return with moral or ethical considerations; therefore, responsible investment is an ESG-oriented investment strategy that can be implemented by investors whose primary aim is financial return in a sustainable manner in terms of ethical and social issues in business. In this context, responsible investment argues that ESG factors are not abstract concepts that only consider ethical and environmental principles, and companies that do not take these principles into account, in fact, have significant risks on the financial returns provided to investors. The development of this understanding includes i) greater recognition in the financial community that ESG factors often play an important role in determining risk and return; ii) increasing demand for transparency of the beneficiaries and investors about how and where their money is invested; and iii) increasing regulatory recommendations that integrating ESG factors as part of an investor's duty to clients and beneficiaries. The growing number of academic studies support the idea that integrating ESG factors is not costly[10].

Socially Responsible Investment

Socially Responsible Investment ("SRI" - also known as Value-Based Investment or Ethical Investment) uses negative screening to avoid investing in companies that have negative impacts on the environment or society. Negative screening refers to the deliberate avoidance of investing in companies or organizations with activities that conflict with the investor's non-financial values. After this screening, certain titles are removed from the investment options, and in this way, it is aimed to prevent the investment portfolio from causing negative results.

Impact Investing

The Impact Investing approach, similar to Responsible Investment and SRI, includes social and environmental factors in the investment analysis. However, it takes the responsible investment approach a few steps further by prioritizing investing in companies or funds that prioritize social or environmental impact over financial return. Impact investments are expected to have a positive impact. Thus, the purpose of impact investing is to help a business or organization achieve specific goals that are beneficial to society or the environment. While creating financial returns is the primary expectation in ESG-focused Responsible Investment and SRI strategies, Impact Investing puts financial concerns behind social impact concerns. Making a nonprofit investment in clean energy research and development projects, regardless of how successful they will be, can be given as an example of Impact Investing.

In addition to the aforementioned practices, thanks to the intense interest in ESG, the number of applications for other similar concepts, such as sustainability investment instruments, responsible investment funds, and sustainability indices, is increasing day by day.

ESG Applications in Türkiye

While ESG investments and regulations in Europe are developing rapidly, although ESG investments in Türkiye have started to attract attention, it is possible to say that Türkiye is at an early stage in the establishment of ESG regulation. Prior to the publication of the Guide announced by the CMB above, the Office of the President of Türkiye established a partnership with the United Nations Development Program ("UNDP") in the preparation of two important reports. These reports were created under the titles of "Impact Investment Ecosystem in Türkiye," and the "Türkiye Sustainable Development Goals ("SDGs") Investor Map," and these reports took the UN SDGs as a benchmark to provide an overview of the current state of sustainable investment in Türkiye. These developments are important proof that the regulatory authorities in Türkiye also follow the global ESG developments regarding sustainability and will make regulations on ESG when they deem necessary.

Beyond these reports, Türkiye's incentive for ESG investments led to the creation of advisory legal regulations at the beginning. Accordingly, in October 2020, the CMB has amended the Communiqué On Corporate Governance[11]. In connection with this Communiqué, CMB has also published the Sustainability Principles Compliance Framework ("Framework") for publicly traded companies[12]. According to the CMB, the main purpose of this text is to “encourage companies to take a larger share of global sustainable investment flows”[13].

The framework includes more than 50 principles that fall into four categories: (i) general principles, (ii) environmental principles, (iii) human and employee rights principles, and (iv) corporate governance principles. Enforcement of these principles is currently optional. However, the reporting obligation of all listed companies in Türkiye according to the Framework is currently within the scope of the “Comply or Explain” principle. As a result, non-financial disclosures of publicly traded companies should now include explanations on whether or not sustainability principles are applied.

In terms of green and sustainable bonds, Turkish companies have reached an issuance size of approximately US$ 5 billion until this date[14]. A significant portion of these issuances were issued by banks or large companies called blue-chip. While a significant portion of the issuances is issued to foreign investors in Eurobond format, a small portion was issued to domestic investors in the form of local bonds. Looking at the equity markets, it has been observed that some companies have received an ESG rating during the public offering phase, and through this rating, they aim to attract the attention of institutional investors with high ESG sensitivity.

ESG-themed instruments in our country lag behind global practices both in terms of export frequency and size. Although Türkiye lagged behind a bit in these processes, it is not left behind, and with increasing awareness, it is a candidate country to catch up with the level of developed countries in the shortest time.

A Rising Trend in Merger and Acquisition: ESG

Increasing ESG-focused investments have also made advanced ESG due diligence ("DD") processes a growing part of merger and acquisition ("M&A") negotiations. Indeed, the M&A market has started to see ESG as an important dynamic in Financial and Legal Due Diligence Reports ("DD Report") in M&A projects, especially when it comes to investment in a global company or business idea, regarding value chains. Accordingly, companies are expected to include new provisions in their purchase agreements regarding their ESG profiles. In addition, as the legislation -which is likely to be developed and published- diversifies, examining the compliance process of companies with the relevant legislation in the field of ESG will also be considered as an important part of the DD Report.

A legal and compliance-oriented DD and the resulting DD report form the backbone of most merger and acquisition projects. Because the identification and measurement of risks and the management of these risks can only be realized after a careful examination. These risks may be legal, as well as commercial and financial risks on which the company builds its values. ESG risks, on the other hand, can take their place among the risks that may arise in almost every field and need to be managed. Many areas, from climate change to human rights and modern slavery, from diversity to data privacy and corporate governance, can be given as examples of ESG-based risks. In measuring these risks, the ESG Rating scores obtained as a result of the analyses made by the ESG Rating Agencies (although not standardized) are evaluated by making use of the developing technology[15]. It would be appropriate to emphasize that ESG-focused investments are an investment approach beyond purely profit-oriented. Because ESG investors are now asking questions that address their own value chains and looking for answers. In this direction, an investor wants to know which company he invested in, to know about it, to analyze customer relations, to see whether it has duly procured its financial resources, to understand how it behaves towards the environment and its employees and to monitor working conditions and compliance conditions. Although this behavior of the investor may result from his own will and the driving force of the market he is in, it should be emphasized that comprehensive and detailed ESG compliance laws are now being implemented on a global scale. It should not be ignored that ESG compliance will become a legal obligation beyond a business and investment model for many companies in the near future.


Today, ESG has become a criterion that significantly affects both the way of doing business and the behavior of investors. It is an inevitable fact that ESG criteria will become an “indispensable” evaluation criterion in the future for both investors and customers. While this reality is fed by the increasing awareness of individuals and companies; it concurrently becomes a basic principle that is supported by state policies and constructed on legal grounds day by day. These processes were first led by the European Union countries; Subsequently, this current spread to the USA and then to all other countries. Türkiye has started to make significant progress in the field of ESG by taking the necessary steps under the leadership of regulators and well-known leading companies.

Investors are integrating more and more ESG criteria into their investment decision processes. The important reason for this integration is that investors want to do the right thing in terms of environmental, social, and governance issues, as well as avoid the negative effects of behaviors contrary to these principles on company profitability and investment returns. In other words, ESG-focused investments outperform other alternative investments. Investors who are aware of this pay attention to place ESG at the top of the evaluation criteria they use when making investment decisions in both capital markets and M&A markets. It is thought that some of the legal regulations summarized above will become mandatory in the very near future, taking into account the global ESG practices in Türkiye. For this reason, first of all, increasing ESG awareness within the company in all areas, supporting this awareness with various company policies and objectives and most importantly, making ESG practices a principle by creating necessary strategies will make a great contribution to sustainable success.

Bu makale ilk olarak INmagazine'de Türkçe olarak yayımlanmıştır. Türkçe metne buradan ulaşabilirsiniz.


[1] HOLDER Michael, Global sustainable investing assets surged to $30 trillion in 2018, 08.04.2019

[2] JUNESAND Nelly, The History of ESG Investing, 30.03.2021.

[3] The Guide is available here (only in Turkish):

[4] Sürdürülebilir Finansman Çerçeve Dokümanina İlişkin Basın Duyurusu

[5] ÖZGÜN Altuğ, KÜÇÜKALI Dila, Green’in 50 Tonu: SPK’nın Yeşil Borçlanma Aracı ve Yeşil Kira Sertifikası Rehberi, 15.12.2021

[6] ÖZGÜN Altuğ, KÜÇÜKALI Dila, A New Era for the ESG World: COP26 Finalizes Paris Agreement, 13.12.2021

[7] ÖZGÜN Altuğ, KÜÇÜKALI Dila, Bilişimin Yeşil Hali: Green IT ve Türkiye’deki Şirketlere Etkisi, 13.10.2021

[8] UNDP, The SDGS in Action

[9]UNPRI Sorumlu Yatırım İlkeleri, 2019

[10] See Footnote No. 8

[11] Kurumsal Yönetim Tebliği (II-17.1)’nde Değişiklik Yapılmasına Dair Tebliğ (II-17.1.a), 02.10.2020

[12] Sermaye Piyasası Kurulu, Sürdürülebilirlik İlkeleri Uyum Çerçevesi

[13] Capital Markets Board of Turkey - Corporate Governance Monitoring Report 2019, para. 30

[14] Bloomberg 2021 Data.

[15] For example; Rating agencies such as Bloomberg Professional Services ESG Data, Dow Jones Sustainability Indices, Morgan Stanley Capital International ESG Research, Fitch Ratings ESG Rating.