What is ESG: Environmental, Social and Corporate Governance

As climate change becomes an ever-growing concern, the promotion of the circular economy intensifies, and the focus on companies' internal practices sharpens, the need for adopting less environmentally damaging operations has become more crucial than ever. This means that not only should companies aim to minimize their environmental impact, they should also comply with legal regulations, respond to societal expectations and procure their long-term sustainability. Consequently, the concept of ESG — Environmental, Social, and Governance — has become an essential tool in the corporate world to evaluate and guide the ethical and sustainable activities of companies.

The ESG concept basically covers 3 approaches:

• Environmental aspect addresses companies' compliance with regulations related to climate change, such as resource management, emissions, pollution control, and sustainability.

• Social aspect addresses companies' compliance with laws and standards related to labour practices, employee rights, and management of relations with customers and communities.

• Governance aspect addresses the internal systems, practices, controls, and procedures that companies utilize to self-manage, ensure transparency within the corporation, and comply with laws and regulations.

The European Union's Approach to ESG and the Compliance Process

The European Union (“EU”) has pioneered global initiatives with its approach to integrating ESG principles into its policies and management systems, which aims to promote sustainable and responsible business practices. In this sense, several major regulations that adopt and support ESG principles have been put into effect.

A Review of ESG Implementations in Turkey

Turkey has also introduced its own regulations by adopting ESG principles and has taken legal steps to stimulate sustainability in the business world.

The Green Deal Action Plan, designed to enhance environmental sustainability across various sectors in alignment with the EU Green Deal, and to ensure Turkey's compliance with international climate commitments, represents a significant initial step in this direction. This was followed by the Capital Markets Board revising the Corporate Governance Principles to highlight ESG factors. As a result of these initiatives, Turkey adopted the international standards published by the International Sustainability Standards Board (ISSB) and introduced the Turkish Sustainability Reporting Standards (“TSRS”) to position itself as a preferred country in international investment decision-making through sustainability reporting.

Two key Standards have been adopted by the Public Surveillance Accounting, and Auditing Standards Authority to set the criteria for sustainability reporting in Turkey:

• (i) TSRS 1 General Provisions on Disclosure of Sustainability-Related Financial Information

• (ii) TSRS 2 Climate-related Disclosures

The purpose of TSRSs is to require disclosure of information about sustainability and climate-related risks and opportunities that is beneficial for making funding decisions for an entity and is reasonably expected to affect the entity's future financial stability. As per these standards, entities are expected to provide disclosures related to sustainability in the following areas: (i) Governance, (ii) Strategy, (iii) Risk Management, and (iv) Metrics and Targets. Accordingly, entities are required to provide the disclosures mandated by the TSRSs as part of their general-purpose financial reports. Sustainability disclosures must be reported simultaneously with the relevant financial statements and cover the same reporting period.

Which Entities Are Required to Implement TSRS in Their Sustainability Reports?

1. According to the “Capital Markets Board Decision on the Scope of Application of the Turkish Sustainability Reporting Standards” (“Board Decision”); those institutions, organisations and entities that exceed at least two of the following thresholds in two consecutive reporting periods:

• Total assets of 500 million Turkish Liras

• Annual net sales revenue of 1 billion Turkish Liras

• Number of employees: 250

2. Companies subject to the regulation and supervision of the Capital Markets Board pursuant to the Capital Markets Law, including the following:

• Investment institutions, collective investment institutions, portfolio management companies, mortgage finance institutions, central settlement institutions, central depository institutions, data storage institutions,

• Joint stock companies whose capital market instruments are traded on a stock exchange or other organised markets or which have a registration statement or certificate of issue with a validity period approved by the Capital Markets Board for the purpose of being traded,

• Joint stock companies not traded on the stock exchange that issue capital market instruments other than shares without a public offering, (until the end of the accounting period in which the issued capital market instruments are redeemed) or have an issuance certificate with a validity period approved by the Capital Markets Board for this purpose.

3. Entities subject to the regulation and supervision of the Banking Regulation and Supervision Agency, including the following:

• Rating agencies, financial holding companies, financial leasing companies, factoring companies, financing companies, asset management companies, savings finance companies,

• Companies holding qualified shares in financial holding companies and banks as defined in Banking Law,

• Insurance, reinsurance, and pension companies operating within the scope of the Insurance Law and the Individual Pension Savings and Investment System Law,

• Entities permitted to operate in Borsa Istanbul Markets; authorized institutions, precious metals brokerage firms, companies engaged in precious metals production or trading,

are liable to implement the TSRS when preparing their sustainability reports.

4. Banks, except those within the Savings Deposit Insurance Fund, are obliged to implement the TSRS without being subject to any thresholds.

5. Institutions, organizations and entities not included in the above scope may optionally implement TSRSs in the preparation of their sustainability reports.

The Board Decision stipulates that if the entities subject to the thresholds exceed the above-mentioned limits in two consecutive accounting periods, they will be included in the scope of application of the TSRS starting from thenext accounting period. However, if these entities:

• (i) remain below the threshold values for at least two of the three criteria in two consecutive accounting periods

• (ii) found to be 20% or more below the threshold values for at least two of these criteria in an accounting period

they will be excluded from the scope starting from the next accounting period.

Transitional Provisions

Finally, in accordance with the transitional provisions of the Board Decision, entities are not required to present comparative information in the first reporting period in which they implement the TSRS. In addition, sustainability reports, which should be presented together with financial reports as a rule, can be prepared after the entities publish their financial reports in their first year of implementation of TSRSs.

Within the scope of this transition exemption, entities can prepare their sustainability reports according to the following timeline:

• For the entities required to submit a compulsory interim financial report; on the same date as the interim financial report,

• For the entities presenting an optional interim financial report; on the same date as the interim financial report, provided that it does not exceed 9 months from the end of the reporting period,

• If no interim financial report is presented; within nine months of the end of the annual reporting period in which the TSRSs are first applied.

The Future of ESG Compliance

For companies operating in Turkey and the EU, ESG compliance is not only a legal requirement but also a strategic opportunity. Businesses that actively integrate ESG principles into their operations will be better positioned to meet compliance requirements, mitigate risks, and capitalize on emerging opportunities in a rapidly changing market.

If you have any queries or require assistance, please feel free to reach out to us.

You can access the Board Decision in Turkish by clicking on the link provided here.