In today’s global trade ecosystem, Environmental, Social, and Governance (“ESG”) criteria have evolved from voluntary corporate social responsibility activities into essential elements of contract and obligations law, becoming an inseparable part of the performance process. Specifically, European Union regulations such as the Corporate Sustainability Due Diligence Directive (“CSDDD”) and the Corporate Sustainability Reporting Directive (“CSRD”) have acquired the status of indirect yet inevitable binding norms for Turkish companies. Domestically, the Turkish Sustainability Reporting Standards (“TSRS 1” and “TSRS 2”), established by the Public Oversight Authority (“POA”), have grounded this process in a legal requirement for companies exceeding specified thresholds.
Despite these normative developments in positive law, it is observed that ESG provisions inserted into contracts under the principle of freedom of contract often remain at the level of “aspirational statements” devoid of legal sanctions, rather than being structured with a “strategic legal architecture.” This legal vacuum and drafting errors expose companies not only to operational disruptions but also to severe legal risks, such as heavy damages arising from breach of contract, recourse actions, and the personal liability of board members.
I. Vague ESG Clauses vs. The Principle of Certainty
The principle of certainty (or determinability) of performance, a cornerstone of contract law, is a prerequisite for a contractual relationship to be validly established and to produce enforceable provisions. The greatest legal handicap in incorporating ESG regulations into contract texts is that these clauses often remain at the level of a “declaration of intent.” Phrases frequently encountered in ESG clauses, such as “environmentally conscious production” or “full compliance with ethical values,” lack the element of certainty in terms of the law of obligations. For an obligation to become due and for a breach to be cited, the specific conduct (to give, to do, or to refrain from doing) undertaken by the debtor must be determined beyond any doubt.
Since a vague ESG provision fails to provide a guide on “to what extent” and “in what manner” the debtor must perform, it is destined to be characterized by courts as a secondary obligation that is impossible to perform and, consequently, cannot be tied to a sanction.
The principle of “the burden of proof lies with the claimant” (Turkish Civil Code Art. 6), the bedrock of legal proceedings, imposes a heavy evidentiary burden on the plaintiff in ESG-oriented disputes. In contracts containing vague commitments like “not polluting the environment,” the absence of a concrete breach threshold brings the judicial process to a standstill. For instance, even if a company’s emissions remain below legal limits, whether this level constitutes a “breach” for the specific purpose of the contract exceeds the judge’s discretionary power, unless a concrete data set (KPI) exists. A judge cannot fill a contractual gap by unilaterally creating a “performance standard” that the parties failed to concretize through their mutual intent.
Protecting a company’s sustainability vision and providing courts or arbitration tribunals with an objective audit capability is only possible through proactive contract management. ESG provisions structured in violation of the principle of certainty create significant legal hurdles not only in detecting a breach but also in the indemnification of resulting damages. When an obligation remains at the level of a “declaration of intent,” it becomes impossible to quantify the damages arising from its breach. In cases where the causal link between the breach and the loss cannot be proven with technical data, claims for compensation face the risk of rejection due to “lack of evidence.” This transforms strategically significant ESG clauses into legally dysfunctional texts.
However, it is possible to elevate ESG provisions from aesthetic elements to primary obligations that serve as the basis for severe sanctions, such as liquidated damages or termination for cause. This is achieved by:
- Establishing mathematical thresholds and time-bound targets,
- Making direct references to international norms such as GRI Standards, ISO 14001, or the UN Global Compact,
- Ensuring “external certainty” through technical specifications.
II. Risk Analysis
While many businesses view the omission of ESG provisions as a form of “legal flexibility,” this actually pushes the company into a spiral of vulnerability. An ESG obligation not included in the contract may deprive the parent company of rights of recourse in the event of a child labor scandal or environmental pollution in the supply chain, while also rendering termination for cause impossible. More importantly, this gap represents a financial risk; investment funds and banks now categorize companies whose sustainability commitments are not legally guaranteed as “high risk.” Therefore, avoiding ESG clauses is not flexibility; rather, it is a strategic weakness that deprives the company of legal and financial defense mechanisms during a crisis.
III. Greenwashing Statements
The “green” commitments made by companies to secure financing or increase market share may trigger the risk of “Greenwashing” if they do not reflect reality. Legally, this is not merely a violation of the principle of good faith; it may also constitute “Fraud” or “Error” under the Turkish Code of Obligations No. 6098 (“TCO”), and ‘Unfair Competition’ under the Turkish Commercial Code No. 6102 (“TCC”).
Misleading sustainability data within the “Representations and Warranties” section of a contract grants the counterparty the right to rescind the contract or claim compensation for expectation damages. Particularly for companies subject to TSRS standards, inconsistencies between reported data and contractual representations are of a nature that could trigger administrative sanctions from regulatory bodies (CMB, POA).
In this regard, the ACCR v. Santos case in Australia, filed on the grounds that the company’s “clean energy” claims were misleading, proved that ESG data in the “Reps & Warranties” section can be a direct item of compensation. This is directly related to Art. 36 (Fraud) of the TCO and the unfair competition provisions of the TCC.
IV. Liabilities of Board Members
The management of ESG risks is no longer a mere discretionary decision for executives; it has become a “duty of care” pertaining to the personal liability of board members.
- Pursuant to TCC Art. 369, board members must perform their duties with the care of a prudent manager. Signing strategic contracts that do not include ESG risks or provide for the auditing of these risks may be qualified as a breach of this duty of care.
- Under TCC Art. 553, directors are personally liable to the company and shareholders if they violate obligations arising from the law or the articles of association. A massive fine or market loss incurred by the company due to an ESG error in a contract could serve as the grounds for a liability lawsuit filed directly against the executive.
The ClientEarth v. Board of Directors of Shell case in the UK, although dismissed on procedural grounds, went down in history as an attempt by shareholders to hold the board personally liable for “failing to adequately manage climate risks and breaching the duty of care.” This is the clearest indicator that the “prudent merchant” profile under TCC Art. 369 has now expanded to include ESG risks.
V. Conclusion: Legal “Check-Up” and Strategic Structuring
As demonstrated, ESG provisions cannot be added to contracts merely to provide an “ethical contribution.” These provisions are high-risk areas that directly affect the financial stability and legal security of companies. Ensuring the compliance of existing contracts with new-generation regulations (TSRS, CSDDD, etc.) requires not just a textual edit, but comprehensive risk analysis and legal engineering.
