Sustainability Reporting Regulations in Turkey

This article discusses Turkey’s sustainability reporting legislation. Before proceeding, please take note of the following:

NOTE 1: Sustainability legislation is in constant motion these recent years. Written on June 4, 2023, the information in this article will soon be “outdated”.

NOTE 2: It should be noted that the concepts of “sustainability-related legislation” and “sustainability reporting legislation” are different. Sustainability is a broad concept that encompasses environmental, social, and governance (ESG) pillars. For example, this includes legal texts regulating government incentives for sustainability investments, legislation regulating carbon markets, and legislation on which organizations should verify carbon footprint.

In fact, considering that the concept of sustainability encompasses social and governance concepts, it would not be wrong to state that many legal regulations, including legislation regulating the rights of employees, protecting women’s rights, and regulating the unionization rights of employees, all fall within the scope of “sustainability-related legislation” even if the term “sustainability” is not mentioned anywhere in these regulations.

The regulations, which we define as “sustainability reporting legislation”, are a subset of the broad framework we define as “sustainability-related legislation”. Reporting regulations are very specific regulations that specify which organizations are obliged to prepare reports on their sustainability performance, in which format as well as their content and metrics to be used.

This covers the “reporting” aspect of sustainability regulations in Turkey.

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More than 190 countries, including Turkey, have become parties to the UN Sustainable Development Goals and the Tokyo and Paris agreements signed to combat climate change. Within the scope of these international arrangements, countries have made a number of commitments. Such international agreements are not signed just for the sake of it and they should not be taken lightly. They contain very well-defined obligations for each signatory countries.

Many states, including Turkey, are currently enacting one regulation after another in order to fulfill these obligations on sustainability. Some (but not all) of these regulations naturally regulate sustainability reporting.

It seems that in the coming years, it will be an inevitable obligation for all companies, except for micro enterprises, to regularly report on their sustainability performance and to start disclosing the required data in these reports.

The Turkish Public Oversight Authority (Kamu Gözetimi Kurumu, KGK for short) and Turkish Sustainability Reporting Standards (TSRS)

So, what is the situation in Turkey when it comes to “sustainability reporting”?

Those who know how a state and its legal system work would first look to understand exactly which government authority is authorised to regulate a particular matter, and under what conditions. So, let’s begin here.

 

With the June 2022 amendment to the Turkish Commercial Code No. 6102, the Public Oversight Authority (KGK) was designated as the Turkish public body authorised to “determine and publish Turkish Sustainability Reporting Standards in line with international standards in order to ensure unity in practice for businesses and organizations and international validity of sustainability reporting…”

Therefore, it is necessary to start by looking at which standards and regulations were issued by the KGK.

First and foremost, we come across the standards TSRS 1 General Provisions on Disclosure of Sustainability-Related Financial Information and TSRS 2 Climate-related Disclosures, which entered into force on January 1, 2024.

It should be emphasized that these two standards are based on the IFRS 1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures issued by the International Sustainability Standards Board (ISSB), and that they are almost one-to-one translations.

The main subject of TSRS 1 General Requirements for Disclosure of Sustainability-related Financial Information is, as the name suggests, the financial sustainability of companies and the related disclosures. In other words, it deals with all risks and opportunities related to the sustainability of the firm that may affect the firm’s cash flows, access to financing, cost of capital and financial adequacy in the short, medium and long term, and specifies what kind of disclosures firms should make on these topics. For example, sustainability of the supply chain, sourcing of critical raw materials from sustainable sources and security of supply, costs of compliance with environmental regulations and their impact on a firm’s financial performance.

TSRS 2 Climate-related Disclosures deals with combating climate change. It complements TSRS 1, but is more specific and particularly addresses climate-related risks and opportunities related to the. For example, a firm’s climate change strategy to combat climate change, adaptation and mitigation plans according to possible climate change scenarios, and estimated costs arising from these.

The KGK acted very quickly and published on its website the “draft” Guidance on Sector-Based Implementation of TSRS 2 for public comment on April 29, 2024, before the first two standards (TSRS 1 and TSRS 2) even had time to cool down.  This “Guidance” document covers climate-related disclosures and related metrics for 68 different sectors and sub-sectors, ranging from food to automobiles, cruise ships to leisure facilities, chemicals to healthcare. At the time this blog is being written (June 4, 2024), it is not yet clear whether or when these texts will cease to be drafts and enter into force.

In the meantime, we have already mentioned that the aforementioned article of the Turkish Commercial Code authorizes public institutions other than the KGK to publish sustainability standards in their jurisdictions – provided that they are in line with those published by the KGK. Again, at the time this blog is being written, no other Turkish institution or organization has published a regulation related to sustainability reporting.

Therefore, if you ask which legislation on sustainability reporting is in force in Turkey, it is necessary to look at KGK’s TSRS 1, TSRS 2 and the currently draft Guidelines.

The link between KGK’s regulations and other international regulations such as CSRD, GRI

We are assuming that most of our colleagues reading these lines are looking for any mention of the European Union’s Corporate Sustainability Reporting Directive (CSRD). And they are not wrong to do so. This is because while the CSRD legislation is the EU’s “sustainability reporting” legislation, Turkey conducts roughly half of its foreign trade with the EU, and therefore the CSRD is a critically important regulation that cannot be ignored.  Turkish companies, particularly exporters, need to pay attention to CSRD rules.

However, it should not be forgotten that Turkey’s own “national” sustainability reporting legislation is limited to the above-mentioned standards of the KGK, not CSRD. Although the TSRS standards allow the use of EFRAG’s ESRS standards and GRI standards, this is only possible as long as it “helps the entity to achieve the purpose of [the TSRS] and does not conflict with the TSRSs”. The priority is clearly on the application of the TSRSs – not the CSRD.

Within the framework of Turkey’s existing customs union with the EU and the somewhat suspended, but still ongoing, full membership negotiations, there is the possibility that Turkey might decide to harmonise the CSRD in full. In fact, our opinion is that this is inevitable.

However, at the time of writing, there are no statements or declarations of intent from the relevant public authorities in that direction. At the moment, in terms of sustainability reporting, Turkey is stuck with the TSRS standards published by KGK.

In our next article, we will expand the topic a bit more and discuss “Sustainability-related legislation” in Turkey. For example, we will touch upon the legislation issued by the Ministry of Environment, Urbanization and Climate on carbon footprint calculation and verification, the incentive legislation that the Ministry of Industry and Technology is preparing for sustainability-related investments, draft regulations of the Energy Market Regulatory Board aiming to create a carbon market in Turkey, and the regulations on the green asset ratio that the Banking Regulation and Supervision Authority plans to put into effect for banks.

By doing so, we will start to build the basis for a general purpose mapping of sustainability-related legislation in Turkey.