Respected Stakeholders,

Climate change is a global problem that has become more evident as a result of human activities. Our planet is 1.2 degrees warmer than before the Industrial Revolution. For the 1.5 degree target, global emissions must be reduced by 55% till 2030 and net zero must be reached in 2050. The European Union (EU) claims to be the first carbon neutral continent to achieve the 2015 Paris Agreement targets.

The issue entered our country's agenda through the EU Carbon Border Adjustment Mechanism (CBAM'). It is expected that every decision taken by the EU, to which we export approximately 50% of our exports, will also affect us. The most affected by these decisions is the steel industry, which is one of the energy and emission-intensive sectors.

The years 2030 and 2050 are two critical dates. In 2030, a 55% emission reduction compared to 1990 is targeted.

The cost of being late in the transformation; will mean to bear both the physical consequences of climate change and the costs of economic and political sanctions.

It seems necessary to create a carbon tax and establish an emission trading system within the country

As a country, the biggest advantage is that approximately 70% of steel production is produced using scrap. In this context, Turkey is luckier than countries with integrated iron and steel facilities.

Instead of reducing iron ore with carbon in blast furnaces, the process route in which DRI facilities work with hydrogen instead of natural gas and carbon, and directly converts the reduced ore into a form that can be used as an alternative to scrap in electric arc furnaces, seems to be the shortest path that can be preferred in steel production today

However, although hydrogen is presented as the only solution today, hydrogen production is a production process that uses a lot of electricity

CO2 emissions in electricity production in Turkey are higher than European values and the emission level in Electrical Energy Production, which is considered within Scope 2 emissions, will be an important issue that we need to focus on not only for steel production but also for all our sectors in the climate change and Green Deal process

The continuation of steel production with Blast Furnace and Basic Oxygen Furnace methods in integrated facilities shows that today the developments in carbon capture and storage technology will be adhered to. Again, as of today, steel production with zero carbon emissions will only be possible with carbon capture technology.

Blast Furnace and Basic Oxygen Furnace steel production technology is the most difficult process to transform in terms of emissions in today's steel production procedures, as it is fossil fuel based and energy intensive.

Another most important and urgent issue for Turkey is to obtain more of our electricity production from renewable sources

In this context, our company has identified the benefits of a sustainability report in order to transparently convey the economic, social and environmental impacts to all its stakeholders, and has presented the first sustainability report prepared for 2021 to its stakeholders with the aim of publishing regular reports. Additionally, this report has been approved by the Global Reporting Initiative (GRI). It is an international independent organization that guides businesses, state administrations and other institutions and organizations to understand their impact on issues such as climate change, human rights and the fight against corruption and to develop sustainable methods.

Our work has continued within the framework of developing the 2021 sustainability report, which we published in 2022, and ensuring compliance with climate change targets in Europe and our country.

Our country's carbon reduction target for 2030 has been announced as 41%. Additionally, a carbon neutral target has been set for 2053. In order to achieve these goals, studies on Climate Change Action Plans, Climate Change Law and Emission Trading System have been initiated in our country.

The European Union aims to reduce its emissions by at least 55% below 1990 levels by 2030, become carbon neutral in 2050 and limit global warming to 1.5 C°. In this context, the European Green Deal (EGD) was published by the EU on 11 December 2019. On July 14, 2021, the Carbon Border Adjustment Mechanism (CMAB), one of the sub-legislations of the Constitutional Court that will affect our industry the most, was announced.

Although it is possible to achieve the 2050 climate-neutral target by reducing emissions within the EU, this may have negative effects on global emissions, production and employment within the EU. As it is known, the EU has been covering emissions caused by facilities and power plants in high energy and carbon intensive sectors such as electricity, paper, cement, iron and steel, petroleum products, chemical products and airline transportation since 2005, using the EU Emission Trading System (ETS) is arranged below. Accordingly, EU producers who meet certain conditions must purchase "Emission Rights" (EUA) at a price determined in the free market for each ton of carbon they emit into the atmosphere. The number of rights traded on the market is being reduced over time in line with climate targets, thus increasing the cost of not transforming for energy and carbon-intensive sectors. " Carbon Border Adjustment Mechanism” (CBAM') can, in its simplest definition, be understood as the extension of the ETS, which is an intra-EU system, outside the EU.

SKDM can be summarized as follows;

• CBAM will first be applied to the import of products in the field of iron-steel, cement, aluminum, fertilizer, electrical energy production and hydrogen as a transition period without financial obligations, starting from October 1, 2023.
• In addition to facilities producing screws, bolts and fasteners from iron and steel, facilities producing agglomerated iron ores, ferro-manganese, ferro-chromium, nickel, kaolin and other kaolinic clays are planned to be included in the system.
• The transition period will be between October 1, 2023 - December 31, 2025, after which financial obligations will begin.
• Carbon price will be paid for products that are above the determined emission limit.
• Financial obligations will be borne by the EU importer (The importer may transfer this financial obligation to its supplier or choose to purchase it from a manufacturer that emits less carbon).
• The EU grants free carbon emission rights to some sectors (free allocation), these rights will be gradually reduced and reset to zero by 2035.
• Scope 1 will cover emissions (emissions from raw materials and natural gas). During the transition period, Scope 2 (Electricity-based) emissions will also be reported, but it will be decided later whether they will be included in the system or not. However, Scope 2 emissions for cement and fertilizer products are expected to be included in the system in the first place.
• CBAM will not be applied to countries that implement a system that is fully compliant with the EU ETS. The carbon price amount paid in partially compliant countries can be deducted from the financial liability amount that will arise under the CBAM.
• EU importers will report the carbon amounts of the products they import every three months and request this data from their suppliers.
• The revenues collected through CBAM will be transferred to the EU general budget and used in green transformation financing.

These developments in Europe and in our country, which is inevitable for companies, have accelerated the issue of Sustainable Production and Energy Conversion,

Our company works on emission reduction projects by calculating its carbon footprint in order to be prepared for all these processes and to improve sustainability reporting activities.

The Carbon Disclosure Project, formally CDP, is an international organization established in the UK in 2000 to gather information from large companies about how they manage their carbon emissions and related processes, and to share the results of this information. It is considered as one of the most important environmental initiatives in the world with its work in the field of combating climate change. In order to evaluate these studies carried out in 2022, participation in the Carbon Disclosure Project (CDP) was ensured and a leadership (A-) grade was received.