ESG Aspect of M&A Transactions: Best Practice or an Inevitable Requirement?


In the recent decade, environmental, social and governance (“ESG”) factors have become an integral part of corporate decision-making processes and have evolved into a critical framework for stakeholders aiming to align with sustainable and responsible practices. Financial institutions and investors worldwide are increasingly integrating ESG into their investment considerations. This is mostly driven by benefits such as risk mitigation, regulatory compliance, competitive returns, innovation and enhanced reputation.

Hence, mergers and acquisitions (“M&A”) are also heavily influenced by ESG factors which help companies strive to align their plans with global ESG standards. Investors, stakeholders, and regulators are increasingly scrutinising companies’ ESG performance in M&A transactions. As such, we see especially climate-related investments as one of the emerging trends in M&A activity, as investors continue to look for ESG-focused investments to meet their climate goals.

In Türkiye, ESG awareness is rising as well. Türkiye faces significant environmental challenges, from ecological conservation to combating climate change given its rapid economic development and population growth. With increased understanding of climate change and environmental deterioration, the Turkish government is increasingly seeking strategies to encourage economic growth while minimising environmental damage. Efforts are also underway to harmonise Turkish environmental legislation with the European Union’s (“EU”) regulations in light of the EU’s position as one of the largest trade partners of Türkiye. To this effect, Türkiye published the Green Deal Action Plan on 16 July 2021 with Presidential Decree No. 2021/15 to comply with global climate change mitigation policies, and to ensure the green transformation of Turkish businesses and the adoption of measures to harmonise with the EU Green Deal. The measures and targets defined in the action plan cover topics such as the carbon adjustment mechanism, national carbon pricing, the national circular economy, clean energy, sustainable smart mobility and sustainable agriculture. Further, in September 2021, the Ministry of Environment announced its goal to achieve a net zero target by 2053 through the implementation of a new climate law, which is currently in draft form. Türkiye is pursuing policies and enacting legislation in line with the EU and within the framework of its emission targets, namely the Net Zero Target by 2053 and other climate change targets.

Turkish companies involved in M&A activities are also recognising the importance of promoting a positive impact on climate and society. Buyers are evaluating how target companies manage their relationships with employees, address diversity and inclusion, and contribute to the well-being of local communities. That said, in the Turkish M&A climate, as with the rest of the world, sustainability and climate change considerations are no longer just a moral imperative, but a financial and strategic necessity. Turkish companies start to recognise embracing sustainability is not just the right thing to do; it’s also a smart financial move. As they address climate change and environmental challenges in their pursuit of growth, they have an opportunity to secure not only investment and partnerships, but also a more sustainable and prosperous future.

Due diligence aspects and regulations

While there are many benefits to integrating ESG considerations into M&A transactions, there are also certain challenges. Aligning different business practices, cultural differences, and varying levels of ESG maturity between acquirers and targets are some obstacles. Ensuring the accuracy and completeness of data related to environmental impacts, social practices, and governance structures is critical to making informed decisions creating the need for a thorough due diligence on ESG matters. ESG is therefore no longer a “nice to have” but an integral part of due diligence and buyers need to conduct a detailed due diligence to ensure alignment with ESG factors.

While there is no one-size-fits-all approach to assessing ESG issues and regulations, in general, the full range of climate legislation applicable under Turkish law needs to be taken into consideration. Various environmental aspects to mitigate risks as well as potential future environmental liabilities need to be considered and regulatory compliance needs to be ensured. Due diligence will cover a variety of topics, such as compliance with applicable legislation (e.g., Turkish REACH regulation), contaminated sites, environmental processes, the transferability of permits and licences, compliance with required environmental permits, management and compliance of value chains and much more. Furthermore, in some industries having environmental due diligence carried out by environmental experts in addition to legal due diligence is vital.

ESG-related regulations are usually seen as a challenge to M&A deals and the over-regulation of certain sectors in Türkiye such as energy, healthcare and pharmaceuticals poses difficulty for clients. For instance, in the energy, metal, explosives and flammable materials production, mining, and waste disposal sectors a full environmental impact assessment is required before proceeding with a specific project. Social matters such equality and discrimination are covered under various legislation including the Turkish Constitution and health and safety standards are regulated under the Occupational Health and Safety Law. As a result, the regulatory landscape in Türkiye, while contributing to broader societal and environmental goals, necessitates a heightened awareness and strategic approach from clients engaged in M&A deals. Balancing compliance with ESG regulations and ensuring seamless business transactions requires a nuanced understanding of the intricate legal frameworks in place, particularly in sectors where regulations are perceived as more stringent. Successful navigation of these challenges not only ensures regulatory compliance but also positions companies for sustainable growth within the evolving Turkish business environment.

Assessing ESG risks in the supply chain is also becoming increasingly important. Companies operating in Türkiye have complex supply chains, and understanding the social and environmental practices of suppliers is critical to risk management and due diligence. However, accessing reliable and comprehensive ESG data in Türkiye can be challenging as company records are not always transparent and accessible.

The challenges associated with scrutinising supply chains prompted the EU to take decisive action and introduce the Corporate Sustainability Reporting Directive (“CSRD”) to ensure that companies operating in the EU have access to reliable information about their suppliers’ operations. The CSRD requires companies to identify, prevent, stop, mitigate and report on potential and actual adverse impacts on human rights and the environment. It mandates a comprehensive due diligence process for companies covered by the CSRD, requiring them to identify and prevent environmental risks, with a particular focus on assessing the potential impacts of their operations and supply chains. The Corporate Sustainability Due Diligence Directive, which has now been streamlined, aims to require companies to carry out comprehensive due diligence to identify, prevent, mitigate and account for adverse impacts on both human rights and the environment. Other EU legislation, namely the Deforestation Regulation and the Supply Chain Act, generally focus on assessing and addressing environmental risks within their operations and supply chains.

Such legislative initiatives are part of a broader EU supply chain agenda to promote sustainability and ethical business conduct. The introduction of regulations such as the Deforestation Regulation adds another layer of complexity to supply chain management within the EU. These regulations require operators and traders to implement new systems, including risk assessment and mitigation measures, to ensure that appropriate due diligence is carried out. They require that only ‘deforestation-free’ products are placed on, made available to, or exported from the EU market. The rules apply to all operators and traders, regardless of size, with potentially significant penalties for non-compliance, including fines of up to 4% of a company’s annual EU turnover, seizure of products and temporary exclusion from public procurement.

Simultaneously, the CSRD has significantly broadened the scope of non-financial reporting obligations. Turkish companies with a net turnover exceeding EUR 150,000,000 in the EU or those with at least one subsidiary or branch in the EU surpassing certain thresholds will be subject to these reporting rules, effective from the financial year 2028. This expansion underscores a heightened commitment to transparency and accountability, compelling Turkish companies to align with the stringent reporting requirements outlined in the CSRD, thereby fostering a culture of responsible and sustainable business practices within the EU framework.

These regulatory measures extend the EU’s influence beyond its borders and affect non-EU countries doing business in the EU market. While financial institutions are not currently directly required to analyse their investments for deforestation risks, they may face increased scrutiny and reporting requirements in the future. Overall, the implementation of these regulations poses significant challenges and costs for many companies, particularly in relation to the burdensome traceability requirements.

Accessing reliable and comprehensive data for ESG matters was further improved for public companies with the introduction of the disclosure principles by the Capital Markets Board of Türkiye. Public companies are now required to include includes sustainability principles in their disclosures in the annual corporate governance compliance reports. Public companies which do not comply with these principles are required to disclose the reasons for any non-compliance and their impact on environmental and social risk management in their annual corporate governance compliance reports.

Mandatory reporting requirements play a pivotal role in making ESG compliance information widely accessible and comprehensible to the public. This transparency not only encourages ESG screening but also eases the historically challenging due diligence phase in M&A transactions. By providing standardised and clear ESG data, these reporting mechanisms facilitate quicker and more effective decision-making, enabling buyers to identify potential risks and opportunities associated with a target company’s ESG practices. In essence, these reporting requirements contribute to transparency, efficiency, and integrity in both ESG evaluation and M&A processes.

ESG matters during the documentation phase

While some might claim ESG risks and issues may not change the fundamentals of a deal, there is no doubt that ESG considerations will impact transaction documents. As with due diligence, there is no one-stop-shop ESG warranty package, and the buyer will need to tailor the warranties based on sector and due diligence outcomes. If there is no particular issue as a result of the due diligence, traditional warranty packages including compliance with law, environment and no litigation warranties as well as those around employment matters can address ESG matters.

There is usually an overlap between environmental warranties and the general compliance with laws warranty and the litigation warranty. However, environmental warranties that are finely tailored will facilitate more straightforward legal action as they can pinpoint losses and damages with greater precision. This precision also enhances their effectiveness in prompting accurate disclosures. Furthermore, transactions involving land necessitate careful consideration of contaminated land warranties, with parties determining responsibility for potential contamination. For businesses falling under the European Union Emissions Trading Scheme, warranties related to emissions trading may be vital. Buyers may seek assurances regarding the adequacy of allocated allowances and their freedom from third-party claims.

In the event of a critical defect requiring essential remediation for the buyer, it is plausible that the buyer may request the remediation itself to be a condition for closing. In certain situations, warranties alone may prove inadequate, leading to instances where the relevant ESG concern is addressed through an indemnity.

Additionally, it is imperative to highlight the significance of post-closing covenants, emphasising the need for ongoing vigilance to guarantee the sustained adherence of the target company to specific ESG requirements, with a particular focus on climate-related concerns. This aspect entails a deeper exploration of the lasting commitment expected from the target company to maintain ESG standards even after the completion of the transaction. It emphasises the ongoing responsibility of the target to adhere to sustainable business practices, extending well beyond the immediate conclusion of the deal. This enduring commitment is integral to ensuring that the positive impacts of ESG integration persist over an extended period, contributing to the long-term sustainability goals of both the acquiring and target entities.

By placing emphasis on post-closing covenants, the integration of ESG considerations transcends the transactional phase, extending into the long-term commitment of the acquiring and target entities. This commitment aligns with the growing importance of sustainable and responsible business practices, ensuring that the positive impacts of ESG integration endure well beyond the immediate transaction, thereby contributing to the broader sustainability goals of the involved parties. As the legal dynamics of M&A transactions continue to evolve, this nuanced approach to ESG considerations emerges as a cornerstone in fostering enduring and impactful corporate responsibility.

The complex interaction among warranties, indemnities, and covenants during the post-closing phase plays a pivotal role as a fundamental mechanism in shaping the dynamic legal framework of M&A transactions. This approach acknowledges the dynamic nature of ESG considerations, recognising that a one-size-fits-all strategy is insufficient. Instead, a nuanced and bespoke approach is essential, tailoring the contractual framework to the unique circumstances of each deal.


In conclusion, the integration of ESG factors into M&A transactions has evolved into a global imperative, driven by the benefits of risk mitigation and enhanced reputation. In Türkiye, amid rapid economic development and population growth, ESG awareness is on the rise. The government’s commitment to align with global climate change mitigation policies, as reflected in the Green Deal Action Plan and the pursuit of a net-zero target by 2053, underscores Türkiye’s dedication to sustainable practices.

Turkish companies engaged in M&A activities are increasingly recognising the strategic necessity of incorporating ESG considerations. However, challenges persist, requiring thorough due diligence to address diverse business practices, cultural differences, and regulatory complexities, particularly in sectors like energy and healthcare. While supply chain assessments are crucial, transparency issues in accessing comprehensive ESG data remain a hurdle for Turkish companies.

Regulatory developments aim to improve ESG data accessibility in Türkiye. In the documentation phase, tailored warranties and post-closing covenants become crucial, emphasising the importance of addressing ESG concerns for successful M&A transactions.

In summary, Türkiye’s unique challenges and commitments in the realm of ESG highlight the country’s growing role in sustainable business practices. As the business landscape evolves globally, companies that integrate ESG factors into their M&A decisions not only meet ethical imperatives but also position themselves for a more sustainable and prosperous future in the Turkish market.

For more information on the importance of ESG in M&A transactions in Türkiye, please contact your CMS partner or local CMS expert: Dr. Döne Yalçın.