Scope of Implementation of Turkish Sustainability Reporting Standards is Determined

Today, investors consider many factors in addition to financial statements when making investment decisions. In light of developments in recent years, the importance of sustainability has  grown as a result of increased sensitivities regarding environmental, social, and governance ("ESG") issues arising from the governance risks of businesses (Bircan & Özcan, 2023). Sustainability reporting can be defined as the process of a company disclosing its environmental, social, and governance performance to its stakeholders (Public Oversight, Accounting and Auditing Standards Authority, 2023). Such reports essentially contain information about a company's policies, procedures, and performance in areas such as climate change, water usage, waste management, employee relations, and human rights.

In Türkiye, the policy objective of “updating the sustainability reporting principles of companies in line with international standards” was launched in 2022 as part of the Medium-Long Term Program (2024-2026) under the heading of “Green Transformation”. In a report entitled “The State of Play: Sustainability Disclosure & Assurance”, published by the International Federation of Accountants (IFAC) in February 2023, encompassing 1350 companies from 21 countries including Türkiye, Türkiye ranked second highest in terms of its increase in sustainability disclosure over a 3-year period.

The scope of implementation of the Türkiye Sustainability Reporting Standards (“TSRS”) came into effect as of 1 January 2024, pursuant to the decision of the Public Oversight, Accounting, and Auditing Standards Authority (“Public Oversight Authority”) dated 27 December 2023.

TSRS consists of two main headings: “General Requirements for Disclosure of Sustainability-related Financial Information” and “Climate-related Disclosures.” TSRS comprehensively covers companies' sustainability performances consistent with international sustainability standards.

Entities Required to Prepare Sustainability Reports within the Scope of the Decision and Thresholds

The threshold values as defined by the scope of the Decision are determined as follows: the organization's (i) total assets in the financial statements of the last two years amount to 500 million TL, (ii) annual net sales revenue in the financial statements of the last two years amount to 1 billion TL, and (iii) average number of employees in the last two years is 250 people.

The following organizations are subject to TSRS for preparing sustainability reports if they exceed the threshold values in at least two of the three criteria for two consecutive reporting periods:

i) The following companies are subject to the regulations of the Capital Markets Board (CMB) under Law No. 6362

— Investment firms;

— Collective investment institutions;

— Portfolio management companies;

— Mortgage finance institutions;

— Central clearing and settlement institutions;

— Central securities depositories;

— Data storage institutions;

— Joint stock companies whose capital market instruments are traded on a stock exchange or other structured markets or which have a prospectus or issue document with a validity period approved by the CMB for their trading;

— Joint stock companies issuing capital market instruments other than shares that are not publicly offered, although not traded on a stock exchange or an organized market, or having an issue certificate with a validity period approved by the CMB for this purpose.

ii) Companies subject to the regulation and supervision of the Banking Regulation and Supervision Agency under Banking Law No. 5411

— Rating agencies;

— Financial holding companies;

— Financial leasing companies;

— Factoring companies;

— Financing companies;

— Asset management companies;

— Companies holding qualified shares in financial holding companies and banks; and

— Savings finance companies

iii) Insurance, reinsurance, and pension companies operating under Insurance Law No. 5684 and Individual Savings and Investment System Law No. 4632

iv) Precious metals intermediary institutions and companies engaged in the production or trade of precious metals and other institutions that are permitted to operate in the Borsa Istanbul Markets.

According to the Decision, organizations along with their subsidiaries and affiliates will be evaluated to determine whether the threshold values are met.

In cases where the abovementioned institutions fall below the thresholds for at least two of the three criteria in two consecutive accounting periods or fall 20 percent or more below the thresholds for at least two of these criteria in one accounting period, they will be excluded from the scope of the TSRS for the following accounting period.

In addition, all banks, except those that fall within the purview of the Savings Deposit Insurance Fund, will apply the TSRSs in preparing their sustainability reports without being subject to any thresholds.

Entities not included in the scopes listed in the Decision may prepare sustainability reports in accordance with TSRS on a voluntary basis.

Transitional Provisions

Certain transitional provisions were stipulated to facilitate the implementation of the matters regulated in the Decision. Accordingly, it is not mandatory for companies to present comparative information for the first reporting period in which they apply TSRS.

Moreover, companies are permitted to submit their  sustainability reports covering the first reporting period in which TSRS are applied after publishing their financial reports for the relevant period. Accordingly, companies will submit sustainability reports provided that:

— They are required to submit interim financial reports and their second quarter or semi-annual interim financial report simultaneously,

— The optional interim financial reporting is made within nine months of the end of the reporting period if it does not exceed the end of the second quarter or semi-annual general-purpose financial report, and

— No interim financial reports are submitted within nine months from the end of the annual reporting period in which TSRS are first applied.

Under TSRS's heading “Climate-related Measures” companies' gross greenhouse gas emissions are limited under 3 scopes. Scope 1 includes direct emissions from sources owned or controlled by an entity; Scope 2 refers to indirect emissions from the generation of imported, purchased, or consumed energy; and Scope 3 encompasses all other indirect emissions in the value chain of the entity that are not produced or controlled by the entity itself. To facilitate the implementation of the Decision, companies are not obliged to disclose greenhouse gas emissions classified as Scope 3 in the first two annual reporting periods in which they apply TSRS.

Conclusion

Companies effectively communicating their sustainability performance to stakeholders can derive a range of significant benefits. These benefits include increased transparency, enhanced decision-making processes, reduced risk levels, the ability to attract investments, and increased employee motivation. For these reasons, it is crucial for companies to closely monitor developments in sustainability and take action in this area. This not only enhances the company's long-term success but also increases its potential to shape societal and environmental impacts positively (Public Oversight, Accounting and Auditing Standards Authority, 2023).

References:

— Bircan, N.G., & Özcan, İ. (2023). Sürdürülebilirlik raporlaması açısından UFRS S1 ve S2 taslak standartlarına uyum sürecinin değerlendirilmesi: BIST sürdürülebilirlik 25 endeksi işletmeleri üzerine bir araştırma. Muhasebe Enstitüsü Dergisi - Journal of Accounting Institute, 69, 21-43. https://doi.org/10.26650/MED.1253502

— Public Oversight, Accounting and Auditing Standards Authority. (2023). Soru ve Cevaplarla Sürdürülebilirlik Raporlaması [Sustainability Reporting in Questions and Answers]. Retrieved April 3, 2024, from: https://www.kgk.gov.tr/Portalv2Uploads/files/Sustainability/Soru_ve_Cevaplarla_Surdurulebilirlik_Raporlamasi_30_05_2023-.pdf

— T.C. Cumhurbaşkanlığı Strateji ve Bütçe Başkanlığı. (2023). 2024-2026 Orta Vadeli Program [2024-2026 Medium Term Program]. Retrieved April 3, 2024, from: https://www.sbb.gov.tr/wp-content/uploads/2023/09/Orta-Vadeli-Program_2024-2026.pdf

— International Federation of Accountants. (2024). State of Play: Sustainability Assurance Disclosures – February 2024. Retrieved April 3, 2024, from: https://ifacweb.blob.core.windows.net/publicfiles/2023-02/IFAC-State-of-Play-Sustainability-Assurance-Disclosures_0.pdf

— Decision of Public Oversight, Accounting and Auditing Standards Authority dated December 27, 2023. (2023). T.C. Official Gazette (22354, 29 December 2023).

— Public Oversight, Accounting and Auditing Standards Authority. (2023). TSRS S2 İklimle İlgili Açıklamalar Taslak [TSRS S2 Draft Climate-related Disclosures]. Retrieved April 3, 2024, from: https://www.kgk.gov.tr/Portalv2Uploads/files/Duyurular/v2/Surdurulebilirlik/TSRS_S2_Iklimle_Ilgili_Aciklamalar_Taslak.pdf