The Impact Of ESG Compliance On Termination Rights Under Contract Law

1. INTRODUCTION

In recent years, ESG (Environmental, Social, Governance) principles have evolved into significant normative standards that appear—either explicitly or implicitly—within the content of commercial contracts. These principles, whether or not they are regarded as binding ethical responsibilities, must also be taken into account in terms of the legal validity and performance of contractual relationships. Particularly with the establishment of a legal framework for sustainability reporting, ESG considerations may give rise to legal consequences that could lead to contract termination. Within this study, the relationship between ESG reporting and its contractual reflections with respect to termination rights is examined under the Türkiye Sustainability Reporting Standards ("TSRS") across different scenarios.

2. INTRODUCTION OF ESG REGULATION INTO CONTRACTS

If a contract concluded between the parties explicitly includes an ESG compliance clause, a breach of ESG criteria may constitute a breach of obligation within the meaning of Article 112 of the Turkish Code of Obligations ("TCO"). Such a breach, if it results in damages, may give rise to liability for compensation under Article 113 of the TCO, and may also lead to termination of the contract pursuant to Article 125 of the TCO. For instance, if the contract stipulates that production shall be carried out in accordance with ESG principles, and it is revealed that the contracting company employs child labor or causes severe environmental damage, this may be deemed a violation of an essential element of the contract. Furthermore, if the ESG obligation qualifies as a duty to be performed at or within a specified time, then—under Article 123 of the TCO—termination may be invoked if performance is not rendered within the prescribed period following a notice.

3. EUROPEAN UNION STANDARDS AND TSRS

The European Union has taken its most comprehensive steps regarding sustainability reporting through the Corporate Sustainability Reporting Directive ("CSRD"). The CSRD has made it mandatory for companies operating within the European Union, or meeting certain size criteria within the EU, to report information in the field of ESG. This obligation aims not only to disclose companies' financial performance but also to transparently reveal their impacts on the environment and society. In addition, the European Sustainability Reporting Standards ("ESRS"), published alongside the CSRD, set forth the specific topics and indicators under which such reports must be prepared. A distinctive feature of the ESRS is the "double materiality" approach, which requires reporting both on the company's impacts on the environment and society, and on how environmental and social developments affect the company's financial position.

In Türkiye, the Türkiye Sustainability Reporting Standards ("TSRS") have been developed to meet the need for a national standard in this area. The authority to prepare, publish, and regulate the application of TSRS rests with the Public Oversight, Accounting and Auditing Standards Authority ("KGK"). In designing the TSRS, the KGK primarily relied on the International Sustainability Standards Board's ("ISSB") IFRS S1 (General Sustainability-related Disclosures) and IFRS S2 (Climate-related Disclosures), while also taking into account the EU's approach under the CSRD and ESRS. Thus, although the TSRS is technically based on ISSB standards, it has been structured to align in substance and scope with EU regulations.

It should be noted in this context that the KGK is a public legal entity with regulatory and supervisory authority pursuant to Article 9 of Decree Law No. 660. The Authority is tasked with setting accounting and auditing standards for entities of public interest. Furthermore, Article 88(6) of the Turkish Commercial Code, as amended by Law No. 7415 of June 4, 2022, expressly grants the KGK the authority to issue sustainability reporting standards. Accordingly, with the KGK Board Decision dated 29 December 2023, TSRS 1 and TSRS 2 entered into force. These standards were published in the Official Gazette dated 30 December 2023, No. 32415 (second repeated issue), thereby acquiring the nature of general regulatory provisions.

1. Entities Required to Report under TSRS

Through this formation process, the TSRS has assumed a strategic role in ensuring that companies in Türkiye present their sustainability data in a transparent and auditable manner, at a level of international comparability. This facilitates both alignment with global investor expectations and compliance with the European Union market.

The entities required to prepare ESG reports under the TSRS are determined pursuant to Article 3 of the 2023 KGK Board Decision. Accordingly;

• Banks operating under the Banking Law No. 5411 (excluding those under the scope of the Savings Deposit Insurance Fund),
• Publicly traded companies and investment institutions within the scope of the Capital Markets Law No. 6362 (as per the KGK Board Decision of 14 August 2025, portfolio management companies have been excluded from the mandatory TSRS reporting requirement)
• Companies subject to the Insurance Law No. 5684 and the Individual Pension Savings and Investment System Law No. 4632,
• Payment institutions within the scope of the Law No. 6493 on Payment and Securities Settlement Systems,
• Companies other than those listed above that, in at least two of the last two fiscal periods, meet at least two of the following criteria:
  • Total assets of 500 million TL or more,
  • Annual net sales revenue of 1 billion TL or more,
  • 250 or more employees,

are obliged to prepare sustainability reports in accordance with the TSRS.

On the other hand, portfolio management companies and small and medium-sized enterprises (SMEs) that do not meet at least two of the above three criteria are not subject to ESG reporting obligations under the TSRS. This distinction is not merely an administrative convenience; it also relates to the principle of proportionality. Since the KGK's regulatory authority is grounded in the principle of public interest, imposing ESG reporting obligations on small enterprises with relatively limited business operations and financial/administrative resources would create a disproportionate administrative burden. Furthermore, considering that such companies neither raise public investment nor pose systemic risks, access to their sustainability information has been regarded as secondary in terms of public importance. Nevertheless, these companies may voluntarily report within the framework of the TSRS, and such voluntary reporting may serve as a trust-enhancing factor in contractual relationships

2. In Cases Where There Is No Explicit ESG Obligation in the Contract but the Entity Is Subject to Reporting Obligations under TSRS;

1. Failure to Publish the Required Report

If a company that is obliged to publish an ESG report under the TSRS completely fails to fulfill this obligation, such failure not only constitutes an administrative sanctionable matter before the KGK, but also amounts to a clear violation of the principle of good faith regulated under Article 2 of the Turkish Civil Code ("TCC"). Breach of a statutory obligation directly undermines the foundation of trust in business relationships and, particularly in long-term or strategically significant contracts, makes it unreasonable for the counterparty to be expected to continue the contractual relationship. Therefore, even in the absence of an explicit contractual ESG clause, the loss of trust may give rise to a right of termination for just cause.

2. Publication of Reports with Negative ESG Outcomes

If the ESG report published by a company reveals serious violations—such as severe environmental degradation, employment of child labor, or systematic discrimination—this may render the continuation of cooperation unreasonable for the counterparty, even in the absence of an ESG provision in the contract. Pursuant to Article 2 of the TCC, such grave violations may, especially with respect to commercial reputation and legal risks, entitle the counterparty to immediate termination. In some cases, the nature of the violation may even reach the level of immorality within the meaning of Article 27 of the TCO, which could give rise not only to termination but also to a claim of invalidity of the contract.

3. Submission of False or Misleading Reports

If a company subject to the TSRS knowingly publishes a false or misleading ESG report, this may constitute both a violation of the principle of good faith under Article 2 of the TCC and fraud within the meaning of Article 36 of the TCO, even in the absence of an explicit contractual obligation on the matter. In such a case, the counterparty may either terminate the contract for just cause or rescind it retroactively under Article 39 of the TCO. Misleading reporting, particularly in relationships where the element of trust is decisive in the formation of the contract, undermines the very foundation of the agreement and renders the continuation of cooperation between the parties unsustainable.

3. In Cases Where There Is No Explicit ESG Obligation in the Contract and the Entity Is Not Subject to Reporting Obligations under TSRS

1. Failure to Provide a Report Despite the Absence of a Legal Obligation

If a company not subject to the TSRS does not publish an ESG report, this will not, from a legal standpoint, constitute a direct breach of statutory obligation. However, if the business relationship between the parties is based on trust and conducted in a sector where ESG performance is in practice of material importance, the failure to provide a report may be interpreted as a violation of the principle of good faith under Article 2 of the TCC. In particular, if the party has previously made public commitments regarding ESG, the failure to fulfill these commitments or to ensure transparency undermines trust and may give rise to a right of termination for just cause.

2. Publication of a Report with Adverse ESG Outcomes

If a company not subject to the TSRS voluntarily publishes an ESG report and that report reveals serious violations, the continuation of cooperation may become unsustainable for the counterparty, even in the absence of an explicit ESG clause in the contract. Here again, the basis would be Article 2 of the TCC. Moreover, if the severity of the violation reaches the level of immorality within the meaning of Article 27 of the TCO, not only termination but also invalidity of the contract may be claimed. Particularly where such violations expose the counterparty to risks concerning its own legal compliance obligations, the right of termination can be asserted with even stronger justification.

3. Submission of False or Misleading Reports

If a company outside the scope of the TSRS voluntarily publishes an ESG report but provides false or misleading information therein, this may be deemed both a violation of the principle of good faith under Article 2 of the TCC and fraud within the meaning of Article 36 of the TCO. In such a situation, the counterparty may either terminate the contract for just cause or rescind it retroactively under Article 39 of the TCO. Misleading reporting, especially in contracts where the element of trust is fundamental, constitutes a key risk factor and makes it unreasonable to expect the continuation of cooperation.

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