SK sustainable development digest

What is ESG? ESG stands for environmental, social and governance factors, accounted for in a company’s operational activities. Such criteria are necessary for investors to identify socially responsible companies. Total investment related to considering ESG has already reached USD 40 trillion, and the relevant ratings are already being applied to companies that together account for 80 per cent of market capitalisation in 2020. Let’s analyse each component:

• environmental criterion. Reflects a company’s consumption of energy resources, volumes of waste produced, impact on environmental pollution, measures to preserve natural resources, and more. The criterion also reflects the degree of preparedness for potential environmental risks
• social criterion. Covers the state of relationships both within the company with employees and with external stakeholders: suppliers, local community, consumers. Working conditions, attention to diversity in employment policy, and social responsibility in cooperation with local producers are also taken into account
• governance criterion. Designed to ensure transparency in reporting on operational activities, avoid conflicts of interest, and safeguard stakeholders’ interests on important matters

Why is it important to consider ESG criteria? More than 90 per cent of global investors conduct at least an informal assessment of companies for compliance with ESG. On the other hand, negative conformity assessments will pose direct risks to some companies. Such companies will be blacklisted by investors or will be held responsible for violating social requirements. For example, the Government Pension Fund of Norway already sells assets that do not meet ESG criteria. According to the results of sustainability checks, the fund sold shares in 370 companies, while nine companies were blacklisted. The world’s largest national wealth fund, with shares in more than 9,000 companies worldwide, will base future investments on the results of an ESG pre-screening process.

Regulatory requirements for ESG criteria should also be considered. The European Union already has acts designed to promote sustainable investment: the Sustainable Finance Disclosure Regulation, the EU Sustainable Finance Action Plan, and the EU Taxonomy. ESG reporting may become mandatory for all organisations. To maintain a competitive advantage, anticipate potential regulatory pressures, and uncover the benefits of complying with ESG, companies need to integrate ESG criteria into their operations today.

Sectoral legislation

On 29 December 2021, the Cabinet of Ministers of Ukraine approved the National Action Plan for Energy Efficiency until 2030. The plan provides for an annual reduction in carbon emissions of 56.6 million tons. According to the plan, primary consumption should be reduced by 22,3 per cent by 2030, and secondary consumption by 17,1 percent by 2030.

On 23 December 2021, the Cabinet of Ministers of Ukraine approved the draft Law of Ukraine “On the National Register of Emissions and Transfer of Pollutants”. The draft law contains key principles of functioning of the national register of emissions and transfer of pollutants, including provisions on preparation and submission of operator reports, certificates on diffuse sources, as well as on the procedure for entering data on emissions and transfer of pollutants to the register.

On 20 December 2021, the President of Ukraine signed the Law of Ukraine “On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Ensuring Balance of Budget Revenues”, registered as draft law № 5600, dated 2 June 2021. The law amends the Tax Code of Ukraine and provides for:

• an increase in the tax rate on carbon dioxide emissions to UAH 30 per 1 ton from UAH 10 per 1 ton, and the gradual increase of the environmental tax rate from 1 January 2022
• proceeds from the environmental tax will be used for decarbonisation measures in the processing industry and in the field of electricity, gas, steam and air conditioning supply (not less than 70 per cent of the environmental tax payment of the relevant section)
• an increase in the tax rates for the discharge of pollutants into water bodies, for the placement of certain types of extremely hazardous waste, for the disposal of waste, which is classified depending on hazard class and level of waste hazard, for temporary storage of radioactive waste by their producers beyond the period established by the special conditions of the license

The changes come into force on 1 January 2022, except for certain provisions.

On 13 December 2021, the Ministry of Environmental Protection and Natural Resources of Ukraine published a draft resolution of the Cabinet of Ministers of Ukraine “On Approval of the Procedure for Labeling Plastic Bags”. The draft resolution provides for the establishment of a number of responsibilities of manufacturers, importers and distributors of biodegradable plastic bags.

On 2 December 2021, the Ministry of Environmental Protection and Natural Resources of Ukraine published a draft resolution of the Cabinet of Ministers of Ukraine “Some Issues of Submitting a Declaration on Waste.” The draft resolution regulates the procedure for submitting a declaration on waste through the unified state web portal of electronic services “Portal Diia”. Also, it approves the form for a declaration on waste.

International experience

On 15 December 2021, the European Commission published two legislative proposals to create the conditions for the transition to low-carbon gases, including biomethane and hydrogen, and to strengthen the resilience of the gas system. Draft regulations and directives provide for:

• the establishment of the hydrogen market (market rules will be applied in two stages: before and after 2030)
• national network development plans to be based on a joint scenario for electricity, gas and hydrogen
• the removal of tariffs for cross-border interconnections and reduction of tariffs at injection points to facilitate access of low-carbon gases to the existing gas network

On 15 December 2021, the European Commission published the proposal for a regulation on methane emissions reduction in the energy sector. The proposal contains requirements for reporting and verification of methane emissions along with rules on detecting and fixing methane leaks. The act also sets limitations on venting and flaring.

On 9 December 2021, the EU Taxonomy Commission Delegated Regulation on Technical Screening Criteria was published. The document confirms the adoption of Technical Screening Criteria for economic activities that significantly contribute to the achievement of climate change mitigation and adaptation objectives. The act will serve as a benchmark for measuring the environmental performance of investors, companies, and other stakeholders.

The European Commission has approved a scheme to support investments in the renewable hydrogen production in third countries. The “H2Global” scheme provides for the allocation of EUR 900 million to support renewable hydrogen projects in non-EU countries for later import to the EU.

The German government has approved an additional budget to provide an additional EUR 60 billion to the climate and transformation fund. The funds will be used to finance climate protection measures: the digitalisation of the economy, thermal modernisation of buildings, and installation of charging stations for electric vehicles.

Sustainable development in Ukraine

Ukraine ranked 21st in the Climatescope ranking of the investment climate for energy transition. According to the evaluation conducted by the BloombergNEF think tank, Ukraine received 1,74 out of 5 points, ranking 48 worldwide in terms of conditions for green investments. The achievement of the goal of increasing the share of renewable energy, as well as successful implementation of the first Nationally Determined Contribution, were noted.

The Ministry of Environmental Protection and Natural Resources of Ukraine presented new services on the EcoSystem web portal. These new services provide for the automation of existing permitting procedures:

• the submission of electronic declarations on waste
• the introduction of an electronic register of conclusions on transboundary movement of environmentally-friendly waste
• the generation on request of QR-extract from environmental information registers

Outcomes of the year:

• implementation of the Association Agreement between Ukraine and the EU has increased to 60 per cent in the field of environmental protection;
• an updated Nationally Determined Contribution with the aim of reducing GHG emissions by 65 per cent in 2030 from 1990 levels was approved;
• the Environmental Security and Climate Adaptation Strategy until 2030 was adopted
• the Marine Environmental Strategy was approved, establishing the principles of state marine environmental policy for the period up to 2034;
• the National Action Plan for Environmental Protection until 2025 was approved.
• the national portal “EcoSystem” was presented – the only online platform in the field of environmental protection which already has nine services, 90 open registers, and three information resources;
• Ukraine participated in the Glasgow Climate Change Conference (COP26) and joined the Global Methane Pledge;
• the framework Law “On Energy Efficiency” was adopted, establishing the principles of state policy in the field of energy efficiency and removing obstacles to the conclusion of ESCO contracts;
• the Law “On Amendments to Certain Legislative Acts of Ukraine on the Development of Biomethane Production” (the “Law on Biomethane”) was adopted, which gives impetus to the biomethane market development;
• the Green Country program was launched. More than 59 million trees have already been planted, which is 40 per cent more than was initially planned.

Information contained in this article 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.

 Authors: Maryna Hritsyshyna, Nataliia Hutarevych, Sergiy Bovkunovych