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How will European Sustainability Reporting Standards affect Türkiye?
14 Sep 2023On July 31, 2023, the European Commission adopted the first set of European Sustainability Reporting Standards (ESRS) to be used within the scope of the "Corporate Sustainability Reporting Directive", which makes corporate sustainability reporting mandatory for companies operating in the European Union (including third country companies that meet certain criteria) as of 2024. ESRS, which has been prepared largely in line with GRI and ISSB reporting frameworks, closely concerns companies that are in the supply chains of companies in the European Union and have a turnover of more than € 150 million in the European Union.
Why did the European Commission approve the ESRS?
The Non-Financial Reporting Directive previously in force in the European Union was not sufficient for companies to report sustainability-related risks and opportunities. These standards, which did not meet the sustainability information needs of investors and other stakeholders, also made it difficult to objectively compare the reporting of companies.
In order for the European Union to achieve the goals set by the European Green Deal, the financial resources of the private sector must be transferred to companies with a truly sustainable business model. Deficiencies in sustainability reporting make it difficult for investors within the scope of the Sustainable Finance Disclosure Directive to make informed and accurate decisions that respect the environment and human rights. That is why the European Commission has approved common sustainability standards to be used within the framework of the Corporate Sustainability Reporting Directive.
With ESRS, the issues in sustainability reports will be standardized, so companies will save time and financial resources when preparing reports. Better quality reports will increase companies' accountability to all their stakeholders.
What should companies report under ESRS?
ESRS adopts the principle of "double materiality". Companies are required to report both the effects of their own activities on the environment and people, and the effects of social and environmental issues on the activities of companies.
ESRS 1 (“General Requirements”) sets out the general principles to be applied when reporting. ESRS 2 (“General Disclosures”) contains the basic information to be reported, regardless of which sustainability issue is considered, and is mandatory for all companies covered by the CSRD. Reporting on other standards depends on companies' materiality assessment.
It is mandatory for companies to report issues considered important. Materiality assessment processes are subject to audit. For example, if it is decided that the issue of climate change is not important, it should be explained how this decision was reached.
What changes did the European Commission make in the draft EFRAG?
The changes were grouped into three categories:
- Phase implementation of some reporting standards
- Providing companies with greater flexibility in materiality assessment
- Making some mandatory reporting issues voluntary
With these changes, especially small and medium-sized companies that were not previously subject to sustainability reporting will be able to prepare for the reporting process without excessive financial burden. Not all companies have to report environmental financial risks for 2024 reporting. Issues such as social security, disabled employees, occupational diseases and work-life balance may not be reported in the first year. Companies with fewer than 750 employees may not include the following:
- First year Scope-3 emissions (ESRS E1) and workforce-related notifications (ESRS S1)
- The first two years focus on biodiversity (ESRS E4), workers in the value chain (ESRS S2), affected communities (ESRS S3) and consumers (ESRS S4)
While preparing ESRS, GRI and ISSB standards were complied with. There are some differences between ISSB's financial materiality principle and double materiality in ESRS. The EU sought to incorporate ISSB standards into the ESRS to reduce the need for companies to report ISSB-compliant.
Next stage
For the ESRS to come into force, approval from the European Parliament and the European Council is required. This process will take approximately 4 months. In the first stage, 2024 reporting for large companies, banks and insurance companies within the scope of NFRD will take place in 2025, and 2025 reporting for other large companies and listed companies outside the EU will take place in 2026. Reporting for SMEs will be in 2027 for 2026, there is a right to postpone it for two years.
In addition, non-EU companies that have an annual turnover of more than €150 million across the EU and have a specific branch in the EU or are affiliated with a large company/stock exchange-listed SME will start reporting from 2029 for 2028. Turkish companies should now increase their corporate sustainability reporting capacity.
Conclusion and evaluation
Corporate sustainability reporting is becoming mandatory worldwide. Climate change necessitates the transfer of financial resources to sustainable companies. Changing consumer behavior forces companies to increase their performance. ESRS stands out as one of the most serious steps taken in this context. Since 40% of Türkiye's exports are to the EU, a significant increase in sustainability demands for Turkish companies is expected with the implementation of ESRS. The competitiveness of companies in the EU market will depend on their compliance with international reporting frameworks.
Source: Green Growth
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