Who needs ESG reporting during the war and why?

Despite all concerns, the full-scale invasion of Ukraine did not cancel the requirements and needs for achieving the 17 UN Sustainable Development Goals or the 86 national Sustainable Development Goals outlined in the Decree of the President of Ukraine No. 722/2019, integrated into the country's social and economic state policy until 2030. Furthermore, the problems that have arisen or intensified since February 2022 have only increased attention to the three aspects of sustainability encoded in the letters ESG (Environmental, Social, Governance).

The full-scale war became the next factor that raised ESG issues to an even higher level of priorities," said Kateryna Chechulina, a qualified English and Ukrainian law counsel at CMS Cameron McKenna Nabarro Olswang Ukraine and ASDE member, opening the webinar "Economic Recovery in the War and Post-War Period through the ESG Focus Approach "*. The humanitarian catastrophe caused by the invasion has intensified focus on the social aspect (letter S). The state of war in Ukraine has forced businesses to review and find new management approaches (letter G) and, moreover, to start making decisions that take ethical aspects into account. The environmental damage currently experienced by Ukraine further demonstrates that war is a recognized ecological disaster (letter E). Therefore, it is not surprising that the war has not pushed the ESG topic to the background but, on the contrary, has significantly propelled the mandatory consideration of ESG considerations in addressing almost all matters related to the activities of individual businesses and the country as a whole. In particular, ESG aspects have been integrated into the foundation of the national post-war recovery plan."

Through the popularisation of sustainable development ideas, more and more companies are considering their implementation at all levels of operation and reporting on ESG. Participants in the webinar organised by the Association of Sustainable Development Experts (ASDE)** as part of the Sustainability Recovery Guidance shared practical insights on how this is happening and discussed the plans of the National Bank of Ukraine regarding sustainable financing, as well as the purpose of companies disclosing non-financial reports, among other topics.

What is the basis of the National Bank of Ukraine's (NBU) sustainable development policy until 2025?

Step 1: In 2021, the NBU focused on the principles of sustainable finance by creating and approving a policy in collaboration with the International Finance Corporation (IFC). The aim of this policy is to popularise sustainable finance products and develop requirements for green bonds. On July 1, 2021, a new edition of the Law "On Capital Markets and Organised Commodity Markets" came into effect, introducing green bonds as a separate type of securities. Thus, by the beginning of 2022, the country was preparing the green bond market for launch.

Step 2: In 2022, a decision was made to reassess this strategy in accordance with:

the full-scale invasion and the readiness of the financial system to implement the stated changes;
the new status of a candidate for EU membership, which also imposes obligations on Ukraine regarding the implementation of sustainable finance aspects.

At the beginning of 2022, of course, the focus of financial institutions was more on survival and preserving jobs. However, gradually, activity in the ESG direction was restored. By the end of 2022, Ukraine even had examples of issuing green bonds. Currently, the government and the NBU consider these bonds as a promising instrument for attracting funds for the post-war reconstruction of Ukrainian cities.

Step 3: During the third quarter of 2023, the NBU plans to develop an updated policy with clear deadlines and an updated scope of work on how the financial sector will develop in terms of the regulatory landscape of sustainable finance and adaptation to ESG. Mykyta Lazarenko, Head of Programmes at the Strategy and Development Department, told about this.

"Our achievements in this matter include the introduction of changes to the corporate governance of banks with regard to ESG aspects, the promotion of ESG principles among market participants, the improvement of banks' risk management systems and transparency in information," he explained. "The green portfolio of banks is a key goal within these directions.

How ESG reporting rules will change in connection with Ukraine's European aspirations

“New regulations have been adopted that significantly expand at the European Union level”:

• the list of companies required to report,
• the amount of information that companies are required to disclose," says Valeriy Mikhailovsky, ESG Manager at PricewaterhouseCoopers Ukraine.

"- There are two main directives worth highlighting:

• the directive on corporate sustainability reporting, which has already been adopted and is in effect. Its main function is to standardise the approach to disclosing non-financial information.
• the directive on the verification of a company's sustainability activities (currently in the final stage).

These directives meet the requirements of data users, especially financial organisations such as banks and investors."

According to the expert, with the adoption of these directives within the European Union, a similar approach to non-financial reporting is being applied to as in financial reporting:

1. Non-financial reports have significantly expanded the amount of disclosed information.
2. There is a mandatory requirement for the audit of such reports. At the initial stages, the reports are required to have a level of limited assurance, but over time, the level of assurance will be increased, and companies will be required to provide reports with a level of reasonable assurance.

Additionally, this regulation includes 12 standards: two of them are universal, and the other 10 are distributed among the Environmental, Social, and Governance categories.

In total, the complete list comprises over 1000 points that companies need to disclose information on."

Is it possible to adhere to ESG principles during the war, and who needs it?

Currently, Ukrainian businesses are already demonstrating the practical application of ESG principles – ensuring the stability, sustainability, and adaptability of companies during times of high turbulence," says Marta Trofimova, who implements sustainable development principles at KERNEL company. "Interestingly, many companies are often unaware that their approaches and decisions actually align with the best global ESG practices, as these steps are quite evident in the current circumstances. This includes flexible management systems, decentralisation, quick decision-making, efficient management of natural resources, adaptation, support, and training of employees, and investment in social capital."

In addition to being one of the guarantors of global food security, Marta believes that the agricultural sector in Ukraine has a great opportunity to contribute to decarbonization and the development of bioenergy, particularly in biogas production. These topics are becoming increasingly important for national security, indicating that climate issues are not detached from the overall societal context. They are relevant for businesses, as well as for the country and the world.

Therefore, adherence to ESG principles is necessary for everyone, even now. "It's not just about meeting the expectations of your investors and stakeholders; the implementation of these principles primarily helps your company to withstand challenging conditions," says Ms. Trofimova. "Another motivation to develop a business based on sustainability principles is the research on company capitalization drivers. Here, the focus is also on business opportunities related to climate change mitigation and low-carbon development."

"It is difficult for a bank to find a formula that correlates ESG investments with specific profits. Therefore, for us, adhering to these principles has long become a voluntary and integral part of our activities," says Andriy Melnyk, Head of Sustainable Development Programmes at Bank Lviv, Director of the Bank Lviv Charitable Foundation, and an expert in sustainable financing at ASDE. "Everything we do, we try to do through the lens of environmental sustainability: from reducing carbon emissions to the principle of 'green procurement', from caring for employees to 'green financing' to support small and medium-sized businesses in acquiring energy-efficient technology and equipment. We have established the charitable program Free Land, which is dedicated to demining the liberated territories of Ukraine. Currently, the humanitarian and economic aspects of the process are in our focus. However, we are already thinking about overcoming the environmental consequences of the mine threat. We closely cooperate with the government in this direction, and I see it as the mission of responsible business. It's not just about reputation; it's about creating a world around us."

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* On April 27, 2023, the fourth webinar series titled "Recovery of the Economy in the War and Post-War Period through the ESG Focus Approach" took place as part of the Sustainability Recovery Guidance. This is the largest educational project of the Association of Sustainable Development Experts (ASDE), aimed at supporting businesses and economic development for the sustainable recovery of the country. Within the project, a Sustainability Recovery Handbook has been developed. This unique webinar series aims to bridge the information gap regarding ESG best practices and methods for accessing green financing, taking into account regional business needs.

** The organiser of the webinars, the Association of Sustainable Development Experts, became the first public organisation in Ukraine to compile an ESG report in accordance with the reporting principles and standards of GRI and SASB.