The Importance of CSRD and CSDDD for Turkish Companies

What are CSRD and CSDDD?

Companies play a pivotal role in building a sustainable society and economy. However, they also contribute to issues such as human rights violations and environmental damage within global supply chains. The European Union has introduced the Corporate Sustainability Reporting Directive (“CSRD”) and the Corporate Sustainability Due Diligence Directive (“CSDDD”) to address these risks and ensure greater corporate transparency.

The CSRD requires companies to provide improved, comprehensive, comparable and reliable reporting on environmental, social, and governance (“ESG”) matters. It aims to enhance stakeholder trust by ensuring transparent presentation of sustainability performance while improving audit processes to guarantee accurate reporting. By integration of non- financial reporting into corporate strategies, the directive promotes a sustainability-focused approach.

The CSDDD requires companies to proactively manage their human rights and environmental impacts and details comprehensive responsibilities for identification, prevention, and mitigation of potential risks. It also encourages adoption of ethical and environmentally responsible business practices within supply chains. The directive provides a framework for early identification of adverse impacts in business processes and their effective management through timely interventions.

Both regulations support the European Union’s sustainable development goals by ensuring companies consider their environmental and social impacts alongside financial targets.

The Status of Turkish Companies

While some Turkish companies are directly subject to the regulations due to their EU operations, others may accrue indirect obligations arising from the supply chains of EU business partners.

Non-EU companies are also directly subject to the CSRD where they have both generated more than 150 million euros revenue in the EU over the previous two years and have a subsidiary or branch in an EU member state which generated at least 40 million euros in the previous financial year. Reporting obligations for non- EU companies will commence in the 2028 fiscal year.

Companies within the scope of CSRD and CSDDD, both EU and non-EU, may require supply chain partners to comply. Therefore, even where Turkish companies are not directly obligated, they are expected to align with the regulations through their business partners.

Companies within the supply chain will be required to fulfill their responsibilities regarding human rights and environmental impacts and act in compliance with sustainability standards. This is crucial both for compliance reasons and to gain a competitive edge in international trade. It is therefore a strategic necessity that Turkish companies be prepared for their obligations – both direct and indirect.

How Can Companies Ensure Compliance?

Compliance with CSRD and CSDDD not only enables companies to enhance sustainability performance and meet legal requirements, but also provides an opportunity to align business strategies for long-term success. There are several critical steps that companies must take.

Firstly, businesses should assess their human rights and environmental impacts and develop a comprehensive due diligence policy which is integrated into risk management processes and provides a strategic roadmap. Regular reviews are crucial as is prompt revision in response to significant changes in company operations. Additionally, structuring operational processes in line with the principles of transparency and accountability enables companies to measure and report ESG performance more effectively.

Companies must establish a code of conduct encompassing all operations - and extended to subsidiaries and all business partners within supply chains - to ensure compliance with CSDDD. Communication with employees and stakeholders is essential for successful implementation. Under CSRD, a sustainability reporting framework aligned with international reporting standards (e.g., GRI, SASB, TCFD) must be developed to ensure the systematic collection and reporting of ESG data.

Both regulations expect companies to align their business strategies with the goals of the Paris Agreement and the European Climate Law in the fight against climate change. Accordingly, concrete plans should be developed to achieve net-zero emission targets and sustainable investments in areas such as renewable energy made.

Companies should establish a notification mechanism that considers feedback from internal and external stakeholders and allows submission of anonymous complaints. Under the CSDDD, compliance commitments must be obtained from business partners throughout the supply chain and corrective action programs implemented in cases of non-compliance.

Companies must collaborate with stakeholders to effectively manage compliance processes.

This includes provision of training to employees and supply chain actors, gathering feedback, and collective improvement efforts. The sustainability of these processes should be ensured through regular audits and comprehensive reporting.

Finally, companies must fulfill their public disclosure obligations and publish social responsibility reports at regular intervals. Compliance with CSDDD should be viewed as an opportunity to contribute to a fairer and more sustainable future rather than simply meeting a legal requirement.

The Advantages of Compliance

Compliance with CSRD and CSDDD is an opportunity for sustainability-focused transformation. CSDDD enables management of human rights and environmental impacts within supply chains and adoption of ethical business practices. This enhances customer trust, strengthens employee engagement, and reduces operational risks allowing companies to build reputations and achieve long-term success.

CSRD mandates transparent reporting of ESG performance which provides a competitive advantage in the EU. It enhances the trust of investors and business partners facilitating access to new markets and financing. For instance, companies adopting ESG criteria gain advantages in issuing green bonds and accessing sustainability-linked loans. Financial institutions operating in the EU often offer more favorable credit terms to companies with strong ESG performance enabling them to benefit from lower financing costs.

The Consequences of Non-Compliance

Non-compliance with CSRD and CSDDD can have significant commercial and financial consequences. Companies indirectly subject to the directives through supply chains may face multiple adverse outcomes - particularly under CSDDD.

Non-compliance can damage business relationships with partners resulting in the termination of contracts and substantial revenue losses.

Failure to comply may result in business partners compelling companies to participate in improvement programs. This itself may require operational changes, assumption of additional costs, and the adoption of higher management standards. Furthermore, companies may be

required to conduct regular reporting and operate under the oversight of business partners creating a significant burden of time and resources.

The risk of liability for compensation due to human rights violations or environmental damage could result in financial losses and reputational harm negatively impact future business opportunities.

Conclusion

CSRD is not merely a compliance requirement but an opportunity for Turkish companies to enhance competitiveness, build reputation, and create long-term business opportunities. Its potential impacts must be carefully assessed and maximum preparedness ensured to mitigate risks and maximize opportunities.