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ESG Evolution: Navigating Challenges, Rebuilding, and Embracing a Sustainable Future

ESG Evolution: Navigating Challenges, Rebuilding, and Embracing a Sustainable Future

Issue 10.12
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Large energy companies are taking measures to become green in order to meet targets to reduce carbon emissions. The main stakeholders – investors, customers, rating agencies, and regulators – are pushing energy companies to set more environmental, social, and governance goals publicly. For these companies, the “E” in ESG should be the foundation of their strategy.

Energy Companies in Ukraine

Ukrainian energy companies face a different reality than their European counterparts. They are grappling with survival as Russia has destroyed or damaged more than 50% of Ukraine’s energy infrastructure.

Rebuilding this infrastructure cannot wait for the end of the war; it is happening now. Five priorities have been identified for funding rapid reconstruction, with energy being the first. Ukraine aims not only to restore the power grid but also to decentralize it, making it less vulnerable and guaranteeing the availability of electricity in Ukrainian homes and businesses.

The recent ReBuild Ukraine 2.0 conference in Warsaw underscored the genuine interest and commitments of representatives from both Ukrainian and foreign governments and businesses. The focus was on addressing issues related to the restoration of Ukraine’s energy infrastructure facilities, ensuring energy security, decentralizing energy generation, promoting the development of green energy, and formulating future plans for Ukraine to emerge as a prominent European energy hub.

New Legislation in Place

In June 2023, the Parliament of Ukraine adopted the new law On Amendments to Certain Laws of Ukraine Regarding the Restoration and “Green” Transformation of the Energy System of Ukraine. It aims to ensure the further development of green energy generation on a competitive basis, incorporating the best international practices. Notable provisions include an effective mechanism for issuing, using, and terminating guarantees of origin for electricity generated from renewable energy sources, an improved model for holding auctions for the distribution of support quotas for renewable energy producers, and the right of producers under a green tariff to switch to directly selling electricity on the market.

This law is a game-changer, opening up a new revenue stream and setting the stage for the growth of biomethane production, a sector with immense potential yet hindered by market limitations. The guarantees of origin scheme are particularly crucial for biomethane, offering a mechanism to separate and trade its carbon value. With this scheme, Ukraine could witness a boom in the biomethane industry, attracting investors and developers alike.

ESG for Ukrainian Companies During the War

Concurrently, businesses are implementing ESG approaches relevant to the current realities of the war, such as supporting the army, aiding internally displaced persons, and ensuring food supply. The demand to implement these standards comes not only from business owners and managers but also from society and consumers. Additionally, Ukraine is creating jobs and appropriate training programs for women to master professions traditionally male-dominated.

The EU’s Sustainability Reporting Requirements

Despite these initiatives, Ukraine lacks legislation on ESG monitoring and reporting. Many local players closely integrated into the European economy, some on regulated stock markets, will eventually be required to submit corporate sustainability reports. The EU regulates this requirement through the Corporate Sustainability Reporting Directive, Sustainable Finance Disclosure Regulation, and the EU Taxonomy.

On November 8, 2023, the European Commission adopted the 2023 Enlargement Package, recommending that the Council opens accession negotiations with Ukraine. EU accession implies that EU legislation, including corporate sustainability reporting requirements, will apply to Ukraine. However, there is still plenty of work to be done. Ukrainian companies are still grappling with the need for change, and the development of legislation may prove instrumental in addressing current critical social challenges. These challenges encompass the treatment of employees within organizations, with a focus on providing mental health support. Additionally, there is a need to establish principles of inclusion, taking into account the growing number of veterans with various types of injuries. Equality and fairness are also key aspects that require attention, along with considerations of value creation along the supply chain.

Despite the ongoing war, Ukrainian businesses are demonstrating resilience and adaptability through their ESG initiatives. As Ukraine moves toward EU accession, the looming EU sustainability reporting requirements present a challenge and an opportunity. We also recommend developing legislative initiatives to address social issues in Ukrainian companies that are in this transitional period. With aspirations to become a European energy powerhouse, Ukraine’s path encompasses more than just rebuilding infrastructure; it involves fostering a sustainable and inclusive energy landscape for the future.

By Marta Halabala, Head of ESG, Asters

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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