Legal Regulations on Corporate Sustainability Reporting in the European Union and Türkiye

With the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence and Amending Directive (CSDD), and Europe Sustainability Reporting Standards (ESRS) enacted by the European Union within the scope of the European Green Deal, mandatory sustainability reporting and assurance auditing have been introduced. These requirements will be gradually applied to companies of a certain scale, whether they are based in member countries or outside the European Union (EU).

As the Republic of Türkiye is a party to the Customs Union and exports approximately 40% of its total exports to the EU, it is inevitable that Turkish companies will be affected by the abovementioned legislative provisions. In this article, the legal regulations regarding corporate sustainability reporting in the European Union and Türkiye are outlined.

1.    Legal Regulations on Corporate Sustainability in the European Union

a)    Corporate Sustainability Reporting Directive (CSRD) numbered 2022/2464

The CSRD was published in the Official Journal of the EU on December 16, 2022 and came into force on January 5, 2023. With the CSRD, the Non-Financial Reporting Directive (NFRD), which was previously in force in the EU and applied only to companies listed in the stock exchange, has been significantly revised and the scope of its sustainability reporting greatly expanded and strengthened. EU Member States are required to incorporate CSRD’s provisions into their national laws as of July 6, 2024 (18 months from the date of ıi’s entry into force).

The CSRD obliges companies that have commercial activities in the EU and meet certain criteria to identify the current and potential impacts, risks, and opportunities ‘caused by their activities on the environment and people’ and ‘by social and environmental issues on the activities of the companies’ to eliminate negative effects, to prevent or minimize potential negative outcomes, and to report them in accordance with ESRS standards, taking into account downstream and upstream business partners and stakeholders in the global supply and value chain and adhering to the principle of double materiality.

The CSRD applies to all large companies that are headquartered in EU member states and meet two of the following three criteria:

i. Companies with a net turnover more than €40 million per annum,

ii. Companies with a balance sheet total of more than €20 million,

iii. Companies with more than 250 employees (annual average).

The CSRD also applies to companies headquartered in non-EU 3^rd party countries if they meet the following criteria:

i. Companies with net sales in the EU (in each of the last two consecutive financial years) of more than €150 million and with a large or capital market oriented subsidiary in the EU

ii. Branches of companies or groups with net sales in the EU exceeding €40 million in the previous year and headquartered outside the EU.

However, in both of the cases mentioned above, companies or groups of companies must have net sales in the EU of more than €150 million in each of the last two consecutive financial years.

For companies subject to the CSRD, the obligation to report on sustainability will start gradually, as set out below;

i. As of the 2024 financial year, companies already covered by the NFRD,

ii. Large companies as of the 2025 financial year,

iii. SMEs listed on the stock exchange as of the 2026 financial year,

iv. Non-EU companies as of the financial year 2028.

b)    Corporate Sustainability Due Diligence Directive (CSDD) numbered 2024/1760

The CSDD was published in the Official Journal of the EU on July 5, 2024 and entered into force on July 25, 2024. EU member states are obliged to adopt the CSDD into their domestic laws by July 26, 2026.

Under the due diligence obligation, companies subject to the CSDD must regularly assess the impact of their activities and those companies contributing to their value chain on the environment and human rights in order to identify existing issues and propose solutions to address them. Companies subject to the CSDD are also required to adopt a plan to ensure that their business models and strategies are in line with the Paris Agreement’s goal of limiting global warming to 1.5℃.

Starting from July 26, 2027, the CSDD will be applied gradually based on the following thresholds:

            From July 26, 2027:

i. EU-based companies with more than 5,000 employees and a worldwide net turnover exceeding €1.5 billion in the last financial year preceding July 26, 2027,

ii. Non-EU-based companies with a net turnover in the EU of more than €1.5 billion in the financial year preceding the last financial year preceding July 26, 2027.

From July 26, 2028:

i. EU-based companies with more than 3,000 employees and a worldwide net turnover of more than €900 million in the last financial year preceding July 26, 2028,

iii. Non-EU-based companies with a net turnover in the EU of more than €900 million in the financial year preceding the last financial year preceding July 26, 2028.

From July 26, 2029:

i. EU-based companies or is the ultimate parent company of a group with more than 1,000 employees and a net worldwide turnover of more than €450 million in the last financial year,

ii. EU-based company which has entered to or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where those royalties amounted to more than €22.5 million in the financial year for which annual financial statements have been or should have been adopted, and provided that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than €80 million in the financial year preceding the last financial year.

iii. A non-EU-based company generated or is the ultimate parent company of a group of companies that generated an annual net turnover in the EU of more than €450 million in the financial year preceding the last financial year.

iv. A non-EU based company which entered to or is the ultimate parent company of a group that entered into franchising or licensing agreements in the EU in return for royalties with independent third-party companies, where those royalties amounted to more than €22.5 million in the financial year preceding the last financial year and provided that the company had or is the ultimate parent company of a group that had a net worldwide turnover of more than €80 million in the financial year preceding the last financial year.

The ultimate parent company may be exempted from carrying out the obligations under CSDD if its main activity is holding shares in operational subsidiaries and if it does not engage in taking management, operational or financial decisions affecting the group or one or more of its subsidiaries. This exemption requires that one of its EU subsidiaries must be designated to fulfil the obligations under the CSDD on behalf of the ultimate parent company, and this parent company must have obtained the required exemption from the competent supervisory authority.

CSDD only applies if the scope criteria is fulfilled for two consecutive financial years by both the EU and third-country companies preceding the relevant application dates established in accordance with the rules on the transposition of this Directive.

Although small and medium-sized enterprises (SMEs) are not directly within the scope of the CSDD, they will be affected by its provisions if they are suppliers or sub-suppliers of larger companies subject to the CSDD. Companies resident in Türkiye that are in the supply or value chain of companies subject to the CSDD will also be directly or indirectly affected by these regulations.

Various sanctions, such as fines (up to 5% of turnover), are envisaged to be imposed on companies that breach due diligence. It is also stated that compliance with the CSDD may be considered as a criterion for awarding public tenders and concessions. Injured parties, trade unions, and NGOs will have five years to file a lawsuit against companies violating the CSDD.

c)    European Sustainability Reporting Standards (ESRS)

On July 31, 2023, the EU Commission adopted the European Sustainability Reporting Standards (ESRS) to be used by all companies subject to CSRD.

The 12 standards determined within the scope of ESRS, in line with the Global Reporting Initiative (GRI) and International Sustainability Standards Board (ISSB), cover all environmental, social, and governance issues, including climate change, biodiversity, and human rights;

• ESRS 1: General Requirements

• ESRS 2: General Disclosures (mandatory for all companies under the CSRD)

• ESRS E1: Climate change

• ESRS E2: Pollution

• ESRS E3: Water and marine resources

• ESRS E4: Biodiversity and ecosystems

• ESRS E5: Resource use and circular economy

• ESRS S1: Own workforce

• ESRS S2: Workers in the value chain

• ESRS S3: Affected communities

• ESRS S4: Consumers and end-users

• ESRS G1: Business conduct

ESRS 1 (“General Requirements”) and ESRS 2 (“General Disclosures”) contain basic information that must be disclosed regardless of which sustainability topic is addressed, while all other standards and their disclosure requirements require and assessment of “materiality.” The “materiality” assessment of companies will be subject to external audit in accordance with the rules set out in the EU Accounting Directive to ensure that companies are treated objectively and fairly.

For example, if companies decide that “Climate” is not a material topic for them, they will not include this topic in their report. However, they will have to explain reasons for this decision in detail and share them transparently.

2.    Legal Regulations on Corporate Sustainability Reporting in Türkiye

a)    Turkish Sustainability Reporting Standards

With the amendment made to Article 88 of the Turkish Commercial Code No. 6102 (“TCC”), the Public Oversight, Accounting, and Auditing Standards Authority (“KGM”) is authorized to determine and publish sustainability reporting standards and the scope of application of these standards in order to establish unity in practice and to ensure the international validity of sustainability reporting. KGM is also authorized to publish sustainability assurance audit standards to ensure the reliability of sustainability reports to be submitted by companies within the scope and to establish the mandatory assurance audit structure envisaged in the CSRD and to establish a public oversight structure over this framework.

KGM adopted the IFRS S1 and S2 standards published by the ISSB as the international basis of the Turkish Sustainability Reporting Standards (“TSRS”), and the scope of application of TSRS was published in the Official Journal dated December 29, 2023 and numbered 32414.  Among the companies listed in Article 3/1 of the said Board Decision, those that exceed the threshold values of at least two of the criteria below in two consecutive reporting periods are obliged to prepare sustainability reports as of January 1, 2024:

i. Total assets of 500 million Turkish Liras;

ii. Annual net sales revenue of 1 billion Turkish Liras;

iii. 250 employees.

Banks subject to the oversight of the Banking Regulation and Supervision Agency are within the scope of mandatory reporting, regardless of any threshold. Banks under the Saving Deposit Insurance Fund are exempted from this application. However, entities outside the scope will also be able to report in accordance with TSRS on a voluntary basis.

As stated in the TSRS, the reports will consist of four sections: (i) Governance, (ii) Strategy, (iii) Risk management, and (iv) Metrics and targets.

The purpose of TSRS 1 – General Provisions on the Disclosure of Sustainability-related Financial Information is to require entities to disclose sustainability-related risks and opportunities that will aid the primary users of general-purpose financial reports in making decisions about providing resources to said entities.    

The objective of TSRS 2 – Climate-related Disclosures require entities to disclose information about climate-related risks and opportunities that would be useful to primary users of general purpose financial reports in making funding decisions.

However, companies are not required to present comparative information in the first reporting period in which they apply the TSRSs. Companies are also not required to disclose Scope 3 greenhouse gas emissions in the first two annual reporting periods in which they apply the TSRSs.

b)    Corporate Sustainability Reporting for Companies Subject to Capital Markets Legislation and Listed on Borsa Istanbul

With the amendment made on 02.10.2020 to the Capital Markets Board’s (“CMB”) Corporate Governance Communiqué numbered II-17.1 (“Communiqué”), the Sustainability Principles Compliance Framework” has been included in its scope. Companies other than the companies listed in Article 1/2 of the Communiqué are subject to sustainability principles, and these companies are required to include disclosures within the scope of the “Sustainability Principles Compliance Framework” in their corporate governance principles compliance reporting. The “Sustainability Principles Compliance Framework” includes the basic principles that publicly-traded companies are expected to disclose while carrying out environmental, social, and corporate governance activities.

The implementation of the sustainability principles published by the CMB is voluntary. Pursuant to Article 8/1 of the Communiqué, companies are required to disclose in their annual reports whether or not corporate governance principles are applied, if not, justified explanations as to why they were not applied, conflicts of interest arising from not fully complying with these principles, and whether there is a plan to make any changes in the management practices of the corporation in the future within the framework of these principles. Companies are also required to disclose in their annual reports whether the sustainability principles are applied or not, if not, a justified explanation for this, an explanation of the effects of not fully complying with these principles on environmental and social risk management, and if there is a significant change in these explanations during the period, the relevant change must be included in the interim activity reports.

Companies are obliged to make sustainability reports using the Sustainability Report template published by the CMB on 23.06.2022 and publish them on the Public Disclosure Platform (PDP).

In addition, the shares of companies that meet certain criteria are included in the BIST Sustainability Index, which began to be calculated by Borsa Istanbul in 2014 in order to 'create a platform that communicates information on companies' sustainability policies to responsible investors,' and in the BIST Sustainability 25 Index, which began to be published as of  November 21, 2022, on a voluntary basis.