A new era in Sustainability Reporting in Türkiye

Türkiye has recently taken a major step towards mandatory corporate sustainability reporting. The Turkish Sustainability Reporting Standards (“TSRS”) were published in the official gazette on 29 December 2023 by the Public Oversight, Accounting and Auditing Standards Authority (“Authority”) (Kamu Gözetimi, Muhasebe ve Denetleme Standartları Kurumu). Sustainability reporting became mandatory for companies and financial institutions exceeding the thresholds set in the TSRS as of 1 January 2024.

Türkiye has been slow to adopt sustainable practices in corporate management. However, recent initiatives such as the adoption of GRI standards by Borsa Istanbul (“BIST”) and the launch of the BIST Sustainability Index highlight the need for a more structured approach to measuring sustainability performance. Türkiye is fully committed to adopting a legal framework for sustainability reporting, as demonstrated by the recent announcement of the TSRS. This proactive move is in line with Türkiye’s strong economic and political ties with the EU and will ensure that companies are well-prepared for upcoming EU regulations, including the Corporate Sustainability Due Diligence Directive (“CSDDD”) and the Corporate Sustainability Reporting Directive (“CSRD”). Türkiye’s commitment to meeting these standards is demonstrated by the TSRS. Commercial ties to EU entities will also affect non-EU companies as EU companies are expected to refrain from entering into or extending business relationships with non-EU companies that do not have appropriate mitigation and prevention mechanisms within the scope of reporting and impact assessment. It is clear that this will create a competitive advantage for countries with reporting standards.

Although the TSRS is influenced by the aforementioned EU regulations, it is mainly based on the “General Requirements for Disclosure of Sustainability-related Financial Information” (“IFRS 1”) and the “Climate-related Disclosures” (“IFRS 2”) issued by the International Sustainability Standards Board (ISSB). The primary purpose of these standards is to provide a competitive advantage for Turkish companies and to make investments more transparent through the mandatory disclosure of existing and potential risks and opportunities related to sustainability and climate change on companies’ financial performance.

We have summarised below the scope of application, threshold values and transitional provisions of TSRS, which were long-awaited as part of the compliance with regional and global reporting standards.

Scope

TSRS consists of two sets of standards: (i) the General Provisions on Disclosure of Sustainability (“TSRS 1”) and (ii) the Climate-related Financial Information (“TSRS 2”).

TSRS 1

Under the TSRS 1, the company’s financial information that may be related to sustainability needs to be disclosed. According to the definition provided under the TSRS, sustainability-related financial information means information about the reporting entity's governance, strategy, risk management related to sustainability-related risks and opportunities, and related metrics and targets, risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance or cost of capital in the medium or long term. In this respect, as stated in the objective section of the standards, a company's financial performance cannot be considered independent from its relations with internal and external stakeholders, the environment and society. Thus, as stated among the objectives of the TSRS 1, any sustainability-related information disclosed by a company will strengthen its cash flow potential by revealing all relevant risks and opportunities. That way, reporting provides a financial return to the company in the long term and creates a framework of accountability to ensure that the companies’ operations are conducted in harmony with the environment and society. Still, it remains to be seen how sustainability reporting will be integrated into corporate governance.

TSRS 2

TSRS 2 requires disclosing data on climate-related risks and opportunities. Climate-related reporting covers the physical and transition risks companies are expected to face due to the climate crisis. In this context, companies will base their financial position analyses on climate-related data which will be specified in the report.

Threshold Values

Companies that exceed two of the following thresholds in two consecutive reporting periods will be subject to the sustainability reporting under the TSRS:

• Total assets of five hundred (500) million Turkish liras;
• Annual net sales revenue of one (1) billion Turkish liras; and
• A workforce of two hundred fifty (250) employees.

The financial statements for the last two years prepared in accordance with the legislation to which the company is subject are considered in determining whether the thresholds are exceeded.

Companies that fall within the scope of TSRS regardless of the thresholds above are listed under Article 3 of the Decision on the Scope of the Standards (“Decision”) issued by the Authority. In addition to those companies and those falling within the scope listed above, other companies and institutions may choose to report voluntarily under the TSRS.

Transitional Period

The Decision outlines a transitional period with provisional clauses on reporting and exemptions. Provisional Clause 1 states that companies are not required to provide comparative information in their first TSRS-compliant reporting period. That said, descriptive financial information regarding sustainability must also include comparative data if it enhances understanding.

During the transitional period, Provisional Clause 2 allows companies to issue sustainability reports for the first TSRS period following the reporting of their financial statements for said period. On that basis, reports must be presented:

• with the second quarter or six-month interim financial reports if required;
• simultaneously with optional interim general-purpose financial reports, if within nine months from the reporting period’s end; or
• within nine months from the annual reporting period’s end if no interim financial report is presented.

Companies may continue to use alternative methods to the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (2004) during the transitional period, if they have used them previously. Moreover, companies in asset management, commercial banking, or insurance are exempt from disclosing Scope 3 greenhouse gas emissions and financed emissions.

How to tackle the reporting requirements

Although the TSRS is developed in accordance with global standards, it offers limited solutions to practical issues that may arise during the reporting process, particularly for companies with obligations under multiple sustainability-related reporting standards. However, by ensuring coherence between other reporting standards and TSRS, and managing the additional burden without compromising the quality of sustainability reporting, companies overcome these challenges.

Turkish companies will be most familiar with the European Sustainability Reporting Standards (“ESRS”) and the TSRS, as they are highly aligned with the international reporting standards on which the TSRS is based. The primary objective of this high level of alignment is to reduce the workload for companies. However, the scope of reporting and materiality assessment still differs significantly. The ESRS covers environmental, social, and governance matters through double materiality assessment, while the TSRS only requires companies to report on sustainability and climate-related elements that they believe are important and may impact their financial performance.

It is important to note that reporting the same or similar data under various standards can create inefficiencies in companies’ compliance performance. The TSRS provides some guidance to companies on addressing sustainability and climate risks and opportunities. However, where it lacks appropriate provisions, the GRI and ESRS can complement the TSRS. It is crucial to ensure that any use of the GRI and ESRS does not conflict with the TSRS. Turkish companies exporting to the EU or involved in EU-based companies’ value chains must incorporate ESRS standards into their processes, along with TSRS to the extent permitted.

In this context, Turkish companies must establish a uniform, all-encompassing, and adaptable reporting procedure that adheres to various reporting standards. Thorough examination of the relevant reporting standards, identification of commonalities and discrepancies, and devising a flexible reporting process that takes them into account are necessary to achieve this. To achieve effective sustainability reporting management, companies in Türkiye must seek professional advice when determining the reporting scope and processes to follow. This is crucial, given that sustainability reporting is a relatively new concept in the country.

Conclusion

Türkiye has taken a significant step towards mandatory corporate sustainability reporting by introducing the TSRS. This move marks a new era of sustainability reporting in Türkiye and reflects the country’s commitment to aligning with regional and global reporting standards. Sustainable practices have been historically slow to be adopted in corporate management. However, recent initiatives such as the adoption of GRI standards by Borsa Istanbul and the launch of the BIST Sustainability Index demonstrate the growing recognition of the importance of structured sustainability measurement.

The TSRS not only aligns Türkiye with EU regulations but also reflects global best practices, drawing from standards such as IFRS and the ISSB’s climate-related disclosures. The transitional period described in the TSRS allows companies to gradually adjust to the new reporting requirements, while also providing relief and exemptions where necessary. However, aligning TSRS with other reporting standards and managing the reporting burden efficiently remain persistent challenges.

To overcome these challenges, Turkish companies must establish robust reporting procedures that can accommodate various reporting standards, ensure coherence, and avoid duplication. To navigate this new landscape effectively, Türkiye's companies should seek professional advice and foster a culture of sustainability reporting. The introduction of TSRS marks a pivotal moment in Türkiye’s journey towards sustainable corporate practices and transparency. For more information on the TSRS and its impact on your company or business, please contact your CMS partner or your local CMS expert: Dr. Döne Yalçın, Merve Akkuş, or Deniz Tirit.