Risk reporting principles were determined, with the committee, as a result of the evaluation of the Risk Management System of Tofaş Turkish Automobile Factory Inc. Reporting studies and Committee evaluations are periodically submitted to the Board of Directors in accordance with the determined principles.

Company activities are managed proactively by the management, taking into account the extent to which risks and risk-based financial, commercial, and operational results will affect the company. The management handles the identification and evaluation process in 5 stages for the systematic management of risks:

1- Identification of risks

2- Measurement of risks

3- Evaluation of risks

4- Reducing or transferring risks

5- Monitoring and reporting risks

Internal Control System and Internal Audit System are monitored by the Audit Committee. The Committee takes proactive measures against predictable potential risks such as corporate risk management and financial, commercial, and operational risks within the company’s internal control system and internal audit activities. Evaluations are made to make sure that the company fulfills the responsibilities required by the legal regulations on internal control, internal audits, and risk management.

The statements and reports of the relevant committees are presented to the Board of Directors. Internal audit activity is carried out to ensure that the company’s internal control system is subject to continuous monitoring and evaluation.

Precautionary approach or precautionary principle: To ensure that the committees within the Board of Directors work more efficiently, the Early Detection of Risk and Risk Management Committee was established within the framework of Article 378 of the Turkish Commercial Code No. 6102, which entered into force on July 1, 2012, with the Board of Directors’ decision dated 01.10.2012. The purpose of this committee are to carry out studies for the early detection of risks that endanger the company’s existence, development, and continuity, implement the necessary measures regarding the identified risks, and manage the risk.

In 2021, 7 meetings were led by Neslihan Tonbul with the participation of Sergio Duca, Melih Poyraz and Giorgio Fossati.  

ESG Risks and Opportunities

	Risks	Opportunities
Economic	Payment risks The main financial consequences of risks are represented by the loss of market share due to the temporary inability to use the tools requested in the market.	DBS (Direct Debit System) Internal control system Tofaş R&D Centre increased the number of EU-funded research projects
Environmental	New CO2 emissions regulations of the European Union require CO2 reductions ranging from 30-50 percent by 2030.	Energy-saving projects implemented by Tofaş in line with World Class Production (one of the highest standards in production worldwide) are a structured production system that encourages sustainable, systematic improvements to eliminate losses. In our production processes, we are working on solutions that will further reduce our energy consumption, mainly focusing on reducing the use of fossil fuels.
Social	There is no middle or long term risk	We are working on spreading the awareness of environmental and climate responsibility in our value chain with our supplier and dealer development activities and customer information services. Everyone at Tofaş is constantly encouraged to contribute suggestions and Kaizens. Every suggestion or Kaizen are taken into consideration, and its potential implementation is evaluated.

Climate change as a process integrated into the company’s risk governance mechanisms

As Tofaş, we position climate risks in our value chain. We evaluate these risks according to the importance of managing them in a better and integrated way. These climate risks are determined by our score over the financial impact values.

At Tofaş, the Risk Management System is a multi-disciplinary and integrated process under the responsibility of the Board of Directors.

The climate-related risk assessment process starts with categorizing the probability of occurrence, potential impact on profitability, business continuity, and reputation (and a combination of these elements). These elements are analyzed together to determine the importance and order of priority of risks. Current measures are analyzed, and future containment measures, action plans and responsible persons are identified for the events that exceed a predetermined severity threshold.

According to the Tofaş risk assessment methodology, climate-related risks are scored considering financial, reputation-related, productive, operational, human, and legal effects. The maximum score is defined as the risk assessment score. All risks are evaluated according to impact, probability, and time frame. If the score is less than six as a result of the calculation, we define the risk as acceptable. Other classifications are moderate risk (scores 6 to 12) and high risk (scores 12 to 16). However, if there is a reputational or legal risk, the potential risk is always defined as “High”. To score financial impact, risk can be defined as an appropriate level of financial loss that does not have a material impact on the company. Less than 1,000,000 euros is not considered a significant economic impact.

Types of climate-related risks: 

Risk type	Importance level	Risk description
Current regulations	*****	All activities of our company are managed following the relevant regulations. At the same time, it is closely monitored for current and possible future arrangements and is budgeted regularly each year.
Emerging regulations	*****	Emerging regulations directly related to company operations, such as laws, regulations, and government policies regarding increased fuel economy requirements and reduced greenhouse gas emissions, significantly impact our company operations. Compliance with emerging regulatory constraints related to climate change requires substantial management resources, instrument engineering and design attention, and additional costs and investments.
Technology	*****	Regulations in the technology field, especially new technologies in the automotive sector, are closely monitored. Our research projects in technology areas that we prioritize strategically, such as increasing research on autonomous driving technology by considering the transition to a lower carbon and energy-efficient economy, continued in 2021. Tofaş worked with 12 supplier companies in design development projects supported by TÜBİTAK and H2020 in 2020. In addition, the work of the “Fiat Friend Connect” (FYA Connect) Project, which was developed as the first remote access technology of its class within Tofaş, was completed in 2018, and the number of current users of FYA Connect reached 20,000. Since 2019, FYA Connect has been active in all models produced by Tofaş.
Legal	***	We do not expect any future conflicts concerning this item.
Market	*****	The change in customer behavior directly affects company operations. The risks associated with changes in customer expectations and needs are significant as they can result in delays in developing new technologies and cause the inability to create and sell profitable products. We follow the changing needs and trends of customers through our regular research. The ever-changing habits and developing technology worldwide create unique requirements for individuals, including our customers. As Tofaş, we develop technologies and solutions to meet these needs by using sustainable methods. Another area we are working on is the development of alternative fuel vehicles. In this direction, we closely follow the electric vehicle technologies in the world and work towards integrating these technologies with innovative solutions and applications for the domestic production of these vehicle systems and components. We also support Stellantis’ efforts to expand alternative fuel systems using natural gas and biofuels.
Prestige	***	We do not expect any future conflicts concerning this item.
Acute physical	***	Nilüfer Stream, which is 500 meters from Tofaş, has been determined as the main flood risk.
Chronic physical	**	We do not expect any future conflicts concerning this item.

Management of the climate related risks

The liabilities arising from current regulations of our existing products and services are considered climate-related financial risks, and these regulations increase the cost of our activities.

Laws, regulations, and government policies significantly impact our business processes, including increased fuel efficiency requirements, reduced greenhouse gas, and exhaust gas emissions.

We allocate the R&D budget to related activities to minimize climate-related risks. As part of the Stellantis, to comply with CO2, polluting emissions, and fuel efficiency regulations we take different measures. To specify, we optimize the environmental performance of conventional engines, increase the use of compressed Natural Gas (CNG), reduce vehicle energy demand (e.g. weight reduction and aerodynamic improvements) and emissions, design systems (e.g. starting and stopping), engage customers, and raise awareness (e.g. eco:Drive).

The activities aim to ensure the domestic production of electric vehicle systems and components by integrating these technologies with the innovative solutions/applications that we developed. Being aware of the issues such as fuel consumption, exhaust emissions, and the environmental impact of reducing the total weight of the vehicles, we carry out intensive studies in this field. Activities in this field focus on high strength/light material technologies and hybrid solutions, as well as lightweight design solutions based on cross-section and topology optimization. We spent approximately 49 million Euros on R&D in 2021.

Changing customer behavior is considered a climate-related market risk, and these risks can reduce our revenue by reducing demand for our products and services.

The massive and unexpected increase in demand for low CO2 emission vehicles could result in a potential financial impact on our revenue when considered a risk. The main economic consequences of this risk are the loss of potential sales due to the temporary unavailability of the tools demanded in the market. As a result of the market research we conducted, we observed the risk of losing approximately 2.5% market share.

Awareness of climate change is growing as the auto industry’s mobility solutions focus more and more on low-emission vehicles. We see this issue as one of the most critical development areas. At Tofaş, we conduct consumer analyses to correctly identify new market trends to manage this risk. We seek positive cooperation with unions and employee representatives to ensure production flexibility. We constantly monitor market shares and consumer demand development and analyze possible scenarios and their financial implications. Specific analyses are made on consumer attitude towards ecological cars, price elasticity, market penetration, reputation index, etc. The activities aim to ensure the domestic production of electric vehicle systems and components by integrating these technologies with the innovative solutions/applications developed. Our new type of hybrid model is launched in 2022.

Our climate strategy and decarbonization plans

As Tofaş, we use the IPCC’s transition and physical climate scenarios. We signed “The 2°C Challenge Communique”, an international business statement calling for global policies and actions to tackle climate change.

We use three different scenarios to avoid exposure to regulatory risks:

High Carbon Price Scenario: This scenario represents the implementation of policies deemed sufficient to reduce greenhouse gas emissions in line with the goal of limiting climate change to 2°C by 2100. The scenario is based on research by OECD and IEA (2017).

Moderate Carbon Price Scenario: This scenario assumes that policies will be implemented to reduce greenhouse gas emissions and limit climate change to 2°C in the long term, but action will be delayed in the short term. It is based on assessments of the adequacy of the country’s National contribution statement by Ecofys, Climate Analytics and the Climate Action Tracker by the New Climate Team, and research by the OECD and IEA. It is assumed that countries with Nationally Determined Contributions that are not in line with the 2°C targets in the short term will increase their climate mitigation efforts in the medium and long term.

Low Price Scenario: This scenario represents a country’s complete application of its national contribution statement adequacy based on research by the OECD and IEA (2017). Prices in this scenario are likely to fall short of meeting the goals of the Paris Agreement.

Tofaş may be exposed to annual carbon pricing risk ranging from USD 1.6 million to USD 5.6 million within Scope 1 until 2030. This risk may change under different scenarios.

We use three different scenarios to avoid exposure to physical risks:

High Climate Change Scenario (RCP 8.5): Business remains as usual with emissions at current rates. This scenario is expected to cause a warming of more than 4 degrees Celsius by 2100.

Reasonable Climate Change Scenario (RCP 4.5): Applying decisive mitigation actions to reduce emissions to half the current levels by 2080. This scenario is more likely to result in warming more than 2 degrees Celsius by 2100.

Low Climate Change Scenario (RCP 2.6): Applying aggressive mitigation actions to halve emissions by 2050. This scenario is likely to result in less than 2 degrees Celsius of warming by 2100.

We use asset-level data to analyze the relevant climate scenario. In a low climate change scenario, we face 2 degrees of warming by the end of the century. In a reasonable scenario, it exceeds two degrees. Finally, in the high scenario, it exceeds 4 degrees by the end of the century.

We get the latitude and longitude coordinates of the facilities in question. We then match these facilities to a range of climate change hazards, seven in total.

Once we’ve matched them, we come to a level that can measure facility-level exposure. This then affects corporate or aggregated physical risk scores.

The time horizon handled by our company for the physical risks scenarios are considered to be until 2050, as it is realized in the transition risk analyses such as market risks and risks arising from regulations.

For evaluation, we consider water stress, flooding, heat waves, cold waves, hurricanes, forest fires, and sea level rise.

Climate change will further alter the magnitude and frequency of natural hazards and threaten our physical assets and business continuity. Our risk management policy primarily focuses on loss prevention and mitigation to help prevent property damage that could disrupt our business. According to the risk assessment, the annual investment and maintenance budget is arranged to reduce the risk score.

Tofaş has committed to reducing its Scope 1 and Scope 2 emissions by 50% by 2030 compared to 2019. Scope 1 and Scope 2 emissions were set as targets, with a total of 104,187 CO2e in 2019.

In our production processes, we are working on solutions that will further reduce our energy consumption, focusing on reducing fossil fuel use. These solutions have resulted in significant savings in energy-related costs over time. In 2021, we achieved a total energy efficiency of 77,974 GJ and savings of €520,000. Energy-efficient machines and facilities are selected first according to our green supply strategy.

In 2021, we worked to reduce energy consumption and CO2 emissions in line with the World Class Manufacturing methodology we are affiliated with. 384 energy efficiency projects were initiated, 77,974 GJ of energy was saved, and 5,148 tons of CO2 emissions were prevented within the scope of these studies. We support the transition to a low-carbon economy with energy efficiency efforts. We are also a corporate member of the Climate Platform.

The share of the development of low-emission vehicles within the scope of Stellantis in mobility solutions is increasing with the importance of climate change. As Tofaş, we support these efforts and see this issue as an area that requires continuous improvement. The total spending in design and test infrastructure for our Tofaş R&D center in the vehicle concept, style, body, interior design, suspension, engine, emissions, vibration and acoustics is more than 49 million euros. Our R&D Center has increased the number of EU-supported research projects to 23 and has worked with more than 200 international project partners within the scope of these projects.

Tofaş R&D Center aims to increase the number of patent applications yearly with new value-added projects and innovative ideas. As a result of its innovative works, Tofaş has applied for 45 patents in Turkey and 17 in the international arena.

Our risk and opportunity management processes increase our credit rating and create an opportunity to cooperate with investment banks. In this direction, our environmental activities allow access to capital easier.