ESG in the regulation of the European Union

Why Ukrainian business should consider European regulation

After analysing the ESG concepts and ESG regulation in Ukraine, it would be relevant to consider EU acquis on ESG. This is primarily due to of European integration aspirations of Ukraine. However, an even more relevant reason is the business relations with European partners which fall under the requirements of EU regulation on ESG. Therefore they require provision of ESG data from Ukrainian partners, as well as compliance with ESG principles, fulfilment of ESG requirements. Since EU implements ESG requirements that apply to third-country companies operating in the EU or having business ties with EU companies.

To manage risks appropriately, Ukrainian companies should consider the requirements of European legislation, as non-compliance with these rules may limit access to international projects and financing, result in fines and generally lead to the loss of partners and exclusion from supply chains.



Key ESG regulation in the EU

Similar to Ukrainian legislation, provisions of the European policies are separated into different areas, regulating specific issues of environmental, social and governance components of the ESG concept.

However, regulatory development direction in the EU is focused on the requirement to consider E-, S- and G-factors that affect business activities and, in turn, impact of business on these factors (dual materiality principal). Therefore, the regulatory framework dedicated to the comprehensive ESG concept deserves special attention.

Thus, analysis of the ESG concept in the European regulatory field is impossible without reviewing and considering key framework documents. They are EU Green Deal, European Climate Law and legislative package “Fit for 55”, Greenwashing Directive and proposals to the Green Claims Directive, CBAM. Altogether they have a global goal to ensure sustainable development of the Union, its Member States and the partners. They aim to achieve the established targets on decarbonisation, and determine directions for further development of policy and regulation in the EU.

However, in this publication, it would be relevant to focus on the regulation that applies to the European companies and which also concerns their foreign partners, namely:

• Regulation 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (SFDR)

This regulation introduces the definition of “sustainability factors”, which mean environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters. The regulation also specifies the principle of “no significant harm”.

It applies to: EU financial market participants, financial advisers, and relevant third-country entities operating in the EU, as European law allows for this possibility for foreign financial market participants.

Requires disclosure of information on: the integration of sustainability risks into activities of the companies from the financial sector and the impact of investment products on “sustainability factors”.

• Regulation 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (EU Taxonomy for Sustainable Activities)

This regulation establishes the criteria for determining environmentally sustainable economic activity to establish the degree of environmentally sustainable investments. It allows financial and non-financial companies to use common terminology and approaches to economic activities that can be considered environmentally sustainable.

It applies to: (i) measures that impose requirements on financial market participants or issuers in relation to financial products or corporate bonds that are offered as environmentally sustainable; (ii) financial market participants that offer financial products; and (iii) companies that are required to publish non-financial statements.

It defines criteria according to which environmentally sustainable activities include activities that:

• contribute to climate change adaptation and mitigation; sustainable use and protection of water and marine resources; transition to a circular economy; prevention and control of pollution; protection and restoration of biodiversity and ecosystems (at least to one of those goals);
• does no significant harm to any of the above environmental goals;
• is performed compliance with safeguards (on protection of human rights, employees, etc.);
• aligned with the European Commission’s technical screening criteria for compliance with environmental objectives.

Delegated Regulations have been adopted to implement the Taxonomy:

• 2021/2139 of 4 June 2021 on technical screening criteria in the field of climate change mitigation or adaptation,
• 2021/2178 of 6 July 2021 on information disclosure,
• 2023/2486 of 27 June 2023 on technical screening criteria in the field of sustainable use and protection of water and marine resources, transition to a circular economy, prevention and control of pollution, protection and restoration of biodiversity and ecosystems.

Whether the EU Taxonomy applies to third-country companies is under debate. It is worth noting that regulation does not explicitly require third-country entities to apply its provisions in their activities. However, the regulation is complementary to the SFDR which in turn applies to non-EU entities. It also applies in conjunction with other regulatory requirements in the field of sustainability and ESG regulation. Therefore, the companies with links to the EU markets should consider the potential application of the regulation to third-country entities.

• Directive 2022/2464 of 14 December 2022 on corporate sustainability reporting (CSRD)

The directive introduces significant amendments to the general rules on financial and management reporting (Directive 2013/34/EU of 26 June 2013) as regards sustainable reporting rules, and it also defines when the sustainable reporting requirement comes into force for different categories of companies.

It applies to: (i) large, (ii) small and medium-sized enterprises (except micro-enterprises) if their securities are admitted to trading on regulated capital markets.

These entities shall include in their management report a separate section on (i) how they contribute to sustainable development and (ii) how sustainable development affects the entity (the principle of “double materiality”). Notably, the reporting information shall include greenhouse gas emission reduction targets for 2030 and 2050 and a description of the progress made. The report shall also include information about the company’s own operations, as well as its value chain, business relationships and supply chain.

The sustainability reporting requirements apply to companies from third countries (including Ukraine) if the company (group) has generated net turnover in the EU of more than EUR 150 million in each of the last two consecutive financial years and if such company (group) has in the EU:

• a subsidiary undertaking that is a large undertaking or medium/small undertaking with securities admitted to trading on regulated markets in the EU;
• a branch with net turnover in the EU for the previous financial year of more than EUR 40 million.

Requirements of the directive on sustainability reporting come into force gradually for third-country companies – in 2029 with information for the 2028 financial year.

Sustainability reporting is performed according to the European Sustainability Reporting Standards (ESRS) the first set of which the European Commission adopted in 2023. By 30 June 2026, the European Commission shall adopt a delegated act providing standards for third-country entities.

The CSRD also requires companies from third countries to prepare sustainability reports if their securities are admitted to trading on a regulated market in the EU (they are issuers in the meaning of Directive 2004/109/EC of 15 December 2004).

Detailed explanations of interpreting of the CSRD provisions are set in the Notice of the European Commission.

• Directive 2024/1760 of 13 June 2024 on corporate sustainability due diligence (CSDDD)

The Directive establishes an obligation for large entities to implement procedures for the comprehensive verification of how their operations impact the environment (E-component) and social area (S-component). It is noteworthy that the area of governance (G-component) is not directly addressed in the text of the Directive. However, it is mentioned in the Recitals, which notes the importance to consider negative impact of corruption and bribery on the proper management of procedures under E- and S-components.

It regulates: (i) the due diligence obligations for companies if adverse human rights/environmental impacts arise/may arise from their activities, activities of their subsidiaries, and business partners; (ii) liability for breach of the above obligations; and (iii) obligation for companies to adopt and implement a transition plan for climate change mitigation to ensure that the company’s activities are compatible with the transition to a sustainable economy and with the limiting global warming to 1.5 ^оC.

It applies to:

• companies established under the EU law:
  • with more than 1,000 employees and a net worldwide turnover of more than EUR 450 million in the last financial year or an ultimate parent company of a group that cumulatively reached these thresholds;
  • companies with a net worldwide turnover of more than EUR 80 million in the last financial year, and which entered into franchising/licensing agreements in the EU with independent companies in exchange for royalties exceeding EUR 22.5 million an ultimate parent company of a group which falls under these criteria;
• companies established under the laws of third countries, including Ukrainian companies (the linkage is made to the indicators of the penultimate financial year):
  • with a net turnover exceeding EUR 450 million in the EU or an ultimate parent company of a group that has cumulatively achieved the above threshold;
  • companies with a net turnover in the EU exceeding EUR 80 million which entered into franchising/licensing agreements in the EU with independent companies in exchange for royalties exceeding EUR 22.5 million or an ultimate parent company of a group which falls under these criteria.

The companies from the EU and from the third countries shall demonstrate the specified identifying criteria for two consecutive financial years relevant to the corresponding company. Otherwise, the requirements of the Directive do not apply;

• indirectly – to other companies that do not directly fall under the specified criteria but which are in the activity chain of the regulated company (suppliers of raw materials or required services, business partners engaged in transportation, storage, and distribution of products manufactured by the company which fall under the framework of the Directive). If the indirectly involved business partner is a micro-, small or medium-sized enterprise, the Directive provides for additional measures and tools that the regulated company shall take/apply in relation to such partners.

Therefore, the Directive applies to Ukrainian businesses: (i) operating in the EU and falling under the identifying criteria – they are obliged to comply with the requirements set out in the Directive and the requirements of the national legislation of the respective EU Member State; (ii) which is in the activity chain of the regulated company – in this case the regulated company shall apply measures to comply with the Directive, otherwise respective partnership shall be terminated.

It is being implemented gradually: 1) companies with more than 3,000 employees and a net worldwide turnover exceeding EUR 900 million – in 2026 – 2028; 2) all companies within the scope of the Directive – in 2029 and where 2030 is the first financial year for which an annual notification (report) on the issues covered by the Directive shall be published.

The key obligation of companies within the scope of the Directive is to conduct risk-based human rights and environmental due diligence, and it requires to:

• integrate due diligence of those issues into corporate policies and risk management systems;
• identify and assess actual/potential adverse impacts and prioritise them;
• prevent/mitigate potential adverse impacts, bring to an end actual adverse impacts and minimise their extent;
• compensate for actual adverse impacts;
• interact with stakeholders at different stages of the process;
• establish and maintain a notification mechanism and complaints procedure;
• monitor the effectiveness of the due diligence policy and measures;
• publicly communicating on corporate sustainability due diligence.

The Directive provides for penalties for violations. They are set by EU Member States when transposing the Directive. The maximum penalty level shall be at least 5% of the company’s net worldwide turnover for the financial year.

• Regulation 2024/3005 of 27 November 2024 on the transparency and integrity of ESG rating activities

Requirements of the regulation are also relevant, as ESG ratings play an important role in capital markets and investors, borrowers, and issuers use ESG ratings to make informed decisions on sustainable investments and financing.

The regulation sets rules on the issue, distribution and publication of ESG ratings without aiming to regulate their use. Therefore, it introduces a common regulatory approach to enhance the integrity, transparency, comparability, responsibility, reliability, good governance and independence of ESG rating activities, thereby contributing to the transparency and quality of ESG ratings and sustainable finance in the EU.

It applies to: the EU and non-EU-based ESG rating providers. Even if ESG rating providers are based outside the EU, they are considered operating in the EU and, therefore, subject to the regulation when they issue and distribute their ESG ratings by subscription or other contractual relationships to the same entities as ESG rating providers established in the EU.

An ESG rating means an opinion/score regarding a rated item’s profile/characteristics with regard to environmental, social and human rights, or governance factors, regarding a rated item’s exposure to ESG-risks or its impact on ESG-factors.

The rated item could be an entity, a financial instrument/financial product, a public authority or a body governed by public law, which is explicitly or implicitly rated in the ESG rating.

EU providers are subject to an authorisation procedure with the European Securities and Markets Authority (ESMA), while foreign providers are subject to one of the following regimes: (i) equivalence, (ii) endorsement, (iii) recognition.



Initiatives to simplify regulatory requirements in the field of sustainable development (Sustainability Omnibus)

On 26 February 2025, the European Commission published initiatives to ease the regulatory burden related to the CSRD and CSDDD, as well as the EU Taxonomy.

The key changes are expected to include an 80% reduction in the number of companies reporting on sustainability issues (the obligation potentially shall not apply to large companies with up to 1,000 employees, as well as listed SMEs); revision of the first set of reporting standards (ESRS); postponement of CSRD and CSDDD reporting; and simplification of due diligence requirements under CSDDD.

The first proposals to defer the CSRD and CSDDD reporting requirements have already been adopted within Directive 2025/794 of 14 April 2025.



Conclusions

European legislation on ESG regulates the activities of EU companies and impacts companies outside the EU borders. In the context of business development, as well as within the framework of Ukrainian integration in the EU, it is crucial for both the state and business to adapt to European regulatory requirements in the field of ESG regulation.

Although the current trend towards simplifying the administrative burden in the area of sustainable development may give an impression that ESG regulation is no longer relevant, we see these changes as an effort to find a balance between the established goals of environmental and climate, social and corporate development, on the one hand, and the reasonable regulatory requirements that are fairly required to achieve these goals, on the other.

If you would like to discuss the issues raised in this paper in more detail, please contact the SK team.

Information contained in this legal alert is for the general informational purposes only, does not constitute legal or other professional advice and should not be relied upon as a substitute for specific professional advice adapted to the specific circumstances.