The principle of sustainability initially emerged as a corporate social responsibility notion under the management activities of companies and then, brought along the necessity for companies to act ethically and responsibly towards their stakeholders. The elements of environmental, social and economic sustainability are collectively at the core of corporate social responsibility and this concept is based on the responsibility of companies towards society.
It is observed that the concept of corporate sustainability has started to gain prominence with the Sustainable Development Goals set forth by the United Nations and concrete steps have been taken through regulations at national and international level regarding the facilitation and monitoring of corporate sustainability. In this regard, especially the new regulations adopted by the European Union (“EU”) within the scope of the European Green Deal are pioneering and the developments concerning this matter have accelerated in Türkiye as of 2024.
Corporate Sustainability Developments in Türkiye
The foremost legal developments on corporate sustainability in Türkiye began in 2020 with the amendment made in the Corporate Governance Communique. With such amendment, it was stipulated that certain corporations, whose shares are publicly traded or deemed publicly traded, are subject to the sustainability principles on a voluntary basis and the disclosures on compliance with the sustainability principles were enabled to be included in the compliance reporting on corporate governance principles.
In this direction, the Sustainability Principles Compliance Framework was announced in 2020 by the Capital Market Board (“CMB”) which is authorized to determine the procedures regarding the content and publication of the sustainability compliance framework. Within this framework, publicly traded companies are enabled to provide, on a voluntary basis, a report in their annual activity reports regarding their compliance with the sustainability principles and present their justifications for the areas where they were unable to comply with.
Following these regulations introduced by the CMB, with an amendment was made to the Article 88 of the Turkish Code of Commerce (the “TCC”) in 2022, the Public Oversight Accounting and Auditing Standards Authority (the “Authority”), which is the regulatory and supervisory authority for accounting standards and independent audit in Türkiye, was given the authority to determine and publish the Türkiye Sustainability Reporting Standards for the enterprises and organizations in line with international standards, in order to ensure the unity in practice and the validity of the reporting regarding sustainability in the international arena.
Turkish Sustainability Reporting Standards
In 2023, the Public Oversight Accounting and Auditing Standards Board (the “Board”) determined the Türkiye Sustainability Reporting Standards (“TSRS”) with the authority granted by the TCC. When determining TSRS, the standards IFRS S1(General Requirements for Disclosure of Sustainability-Related Financial Information) and IFRS S2 (Climate-Related Disclosures) of the International Sustainability Standards Board were taken as basis. These standards aim to ensure a transparent and accountable operating and investment climate by enabling the analysis and reporting of the environmental, social and governance risks and opportunities of companies.
Scope of Implementation
It is mandatory for the institutions, organizations and enterprises, which exceed the thresholds of at least two of the following criteria in two consecutive reporting periods: (a) total assets of TRY 500 million, (b) annual net sales revenue of TRY 1 billion, and (c) a workforce of 250 employees and which are within the scope, to make reporting within the context of the TSRS.
The banks affiliated to the Banking Regulation and Supervision Agency (the “Agency”) are within the scope regardless of the thresholds. Investment companies subject to the oversight of the CMB, insurance, reinsurance, and pension companies, as well as precious metals intermediary institutions and companies engaged in the production or trade of precious metals, which are under the supervision the Agency, are included within the scope, subject to the thresholds.
No specific sanctions have yet been envisaged for non-compliance with reporting obligations when determining TSRS reporting treatment.
Implementation Timeline
The companies within the scope of the TSRS are obliged to comply with TSRS during the accounting periods beginning on or after January 1, 2024. The first sustainability reports shall be made in 2025.
While no transitional period has been stipulated with regards to the implementation timeline of the TSRS, certain exceptions related to the transition process have been introduced.
It is not mandatory for enterprises to present comparative information in the first reporting period and to disclose Scope 3 greenhouse gas emissions in the first two reporting periods in which TSRS is applied.
Additionally, sustainability reporting for the first reporting year can be conducted following the publication of financial reports for the corresponding period and the sustainability reports can be prepared on the dates specified below:
Furthermore, through its decisions published in 2024, the Board determined the Procedures and Principles for Corporate Sustainability Reporting Training regarding the implementation of TSRS and decided that sustainability reports prepared in line with the TSRS shall be subject to assurance auditing.
Draft Regulation on Türkiye Green Taxonomy
In September 2024, the Ministry of Environment, Urbanization, and Climate Change published and opened for feedback the Draft Regulation on Türkiye Green Taxonomy which is prepared in order to support the economic activities in line with sustainable development goals, promote financial flows toward sustainable investments, and prevent greenwashing in the market.
The draft introduces an obligation for institutions and organizations obliged to report within the context of the TSRS to record verified information on eligible economic activities conducted in the previous year into the Climate Change Directorate’s e-taxonomy system to be introduced, and this obligation is to be fulfilled as of January 1, 2027
Draft Regulation on Sustainability Audits
In October 2024, the Authority published and opened for feedback the Draft Regulation on Sustainability Audits outlining the procedures and principles related to the authorization of independent audit organizations and independent auditors operating in the field of sustainability, the maintenance of registry records, their obligations and responsibilities, as well as the examination and supervision of the Authority and administrative sanctions applicable. Within the scope of the concept of "sustainability audits" defined in the draft, it is understood that reports prepared pursuant to the TSRS and published as sustainability reports, integrated reports, integrated activity reports, and management reports shall be audited by the authorized audit organizations and certified auditors in reference to this regulation.
Developments in the European Union
The starting point for sustainability-related developments in the EU lies in the European Green Deal and the foundation of the EU's updated sustainable finance strategy is the EU taxonomy. With the adoption of the Taxonomy Regulation in 2020, the criteria for which types of economic activities can be considered as sustainable was established and the Strategy for Financing the Transition to a Sustainable Economy was announced in 2021 within this framework. Subsequently, the Corporate Sustainability Reporting Directive (the “CSRD”) was published in the last quarter of 2022 and the Corporate Sustainability Due Diligence Directive (the “CSDDD”) in the third quarter of 2024. Since the CSRD and CSDDD cover not only EU member state undertakings but also non-EU undertakings meeting specific criteria, these developments in the EU are also significant for Türkiye and Turkish companies.
CSRD: Reporting Obligation
The CSRD introduces regulations regarding the identification of the social and environmental impacts of undertaking activities, the elimination of existing adverse impacts, the prevention and mitigation of potential negative impacts, and the reporting of these issues.
For non-EU enterprises, the reporting obligations brought by the CSRD apply to the following that have a net turnover exceeding 150 million Euros in each of the last two consecutive financial years in the EU:
For non-EU undertakings, the compliance with the CSRD obligations is expected for financial years beginning on or after January 1, 2028.
CSDDD: Due Diligence Obligations
The CSDDD imposes various obligations on companies to prevent actual and potential adverse impacts on human rights and the environment arising from their operations.
Companies established under the laws of a non-EU country that meet any of the conditions specified under the CSDDD are subject to the due diligence obligations introduced by the CSDDD. For non-EU companies, a phased transition period has been adopted according to the net turnover generated within the EU and accordingly, the compliance is expected by July 2027, July 2028, or July 2029, depending on the category of companies.
Evaluations
The TSRS can be regarded as a tool and preparatory framework for the companies based in Türkiye to fulfill the potential obligations under the CSRD and the CSDDD. With the TSRS, the companies that will engage in sustainability reporting aligned with international standards will adopt a more transparent and accountable management perspective for investors, business partners, and employees alike by reporting not only their financial performance but also their environmental and social performance under sustainability principles.
In the forthcoming term, it is anticipated that further regulatory developments will be made in Türkiye to ensure compliance with sustainability principles, various sanctions be issued in this regard and an obligation of care in terms of corporate sustainability be imposed on relevant institutions, organizations, and businesses, in line with sustainability reporting practices in the EU. In this context, it is advisable for all companies, particularly those based in Türkiye that engage in trade with the EU, to closely and diligently monitor related developments.
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