Ecological, social, and corporate governance reporting (ESG) is a report published by a company or organization about the environmental, social and managerial consequences of the activities of this company or organization (hereinafter – the ESG report). In the Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 as regards disclosure of non-financial and diversity information by certain large undertakings and groups (NFRD), this report is called “the management report”, and in Ukrainian legislation its counterpart is the “report on managing”. Among the criteria evaluated in the ESG report are, in particular, the impact on the environment (air, water, soil), social (treatment of employees, absence of discrimination based on gender, race and other grounds, as well as the impact on the population of the communities where the organization is operating), management (transparency and accountability, corporate governance, practices of working with state and regulatory bodies, compliance with legislation, combating corruption).
The ESG report is widely being used all over the world and in different fields of activity. In the field of subsoil use, the ESG report is particularly important, because companies operating in this sector directly affect the environment, the quality of life of the communities in which they operate, and the employees of such companies often work with increased risks to life and health. Moreover, natural resources attract those willing to circumvent the law in search of big money, and this increases the risks of corruption. Accordingly, the ESG report is a tool that allows honest companies to be transparent and open.
What are the benefits of ESG reports?
- Greater confidence of investors, creditors and customers.
In line with international best practice, most monetary transactions take place only after an ESG report has been reviewed. In this way, investors receive complete information about the company, the level of its corporate, social, and environmental responsibility, and based on this they decide whether to invest in it or not. Therefore, if a company reports on ESG issues, its chances of attracting investment increase.
- Through the ESG reporting tool, governments, regulators, NGOs and civil society can audit and monitor companies.
In the international arena, internal and external stakeholders are demanding transparency and efficiency on ESG issues. For example, mining and extractive industry enterprises and their stakeholders are under increasing attention of society and government bodies, especially regarding the reduction of environmental pollution, sustainable development, health protection of both employees and ordinary citizens, development of local infrastructure, etc. Therefore, the ESG report gives the company an advantage due to effective interaction with regulatory bodies and society, as well as, due to transparency, it is an important tool for attracting the necessary financial resources for long-term business development.
- The use of the ESG report provides such opportunities as access to resources, financing, customers, cost reduction due to more efficient use of natural resources, and attraction of the best professionals due to the good and proactive reputation of the company.
An ESG report is an effective tool that allows companies to answer a wide range of questions that stakeholders may ask, in one document. However, creating an ESG report can be challenging as it must meet the requirements of the reporting methodology.
How is ESG used in Europe and the world?
In the European Union and the UK, ESG reporting is mandatory for most large companies. EU companies with more than 500 employees must prepare an annual ESG report (See Article 19a of Directive 2013/34/EU as amended by NFRD). The current requirements will soon also be extended under the Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 as regards corporate sustainability reporting (CSRD), which has already entered into force but requires national legislative measures by EU Member States to implement it.
Outside of Europe, many countries are also introducing ESG reporting. In the US, ESG reporting is not currently a legal requirement for companies, but the Securities and Exchange Commission has proposed reporting on climate impacts to a select list of companies.
Does ESG reporting work in Ukraine in the subsoil use sector?
In Ukraine, there is a legislative framework for keeping ESG reports. Taking into account their increasingly widespread use, in particular in the European Union, to which Ukraine is on its way to membership, and the advantages of using them, the experts of the “Development of Ukraine’s new Subsoil Code” project analyzed the best practices of ESG reporting and the European legal framework. Based on the analytical report, the experts provided several recommendations on how the ESG reporting process can be improved in Ukraine and what needs to be done to make these reports mandatory for all mining companies in the Ukrainian subsoil sector.
- To introduce changes in the Ukrainian legislation to improve the legislative mechanism for ESG reporting.
In the EU, CSRD replaced the Non-Financial and Diversified Disclosures Directive by Large Enterprises and Groups (NFRD) to structure ESG/sustainability reporting by EU companies from 2024. The mining sector in Ukraine already has legal obligations to comply with ESG reporting (based on NFRD) under the Association Agreement between Ukraine and the EU (Article 387 (1)(b), Annex XXXV). Based on this, it is recommended that after three years (and/or after mining companies in the EU have learned any lessons/experiences from CSRD implementation in 2023) Ukraine amends and updates its NFRD implementing legislation, including all CSRD requirements.
- Review the current procedures and methodologies regarding the content and structure of the ESG report.
The Government of Ukraine (through the Ministry of Natural Resources and Environmental Protection) has been recommended to develop or revise the existing methodological recommendations specifically for the subsoil sector by further developing an instruction that describes in detail the principles of investor-oriented reporting, outlines a “step-by-step” or systematic approach to the implementation of the ESG reporting process, and the ESG matrix or metrics that will be used for the reporting process. After the provisions of the CSRD are transposed into Ukrainian legislation, the guidelines should be updated accordingly.
- Incorporate the mining principles of the International Council of Mining and Metals (ICMM) into the Ukrainian subsoil sector voluntarily.
The world is being attentive to the decarbonization of the global economy, the achievement of the climate goals of the Paris Agreement and the implementation of the UN Sustainable Development Goals which require sustainable demand for metals and minerals over the coming decades. This has led to greater scrutiny of where these materials come from and whether they are produced responsibly.
To achieve this goal, the ICMM has introduced ten principles for the subsoil sector, designed to strengthen social and environmental demands on issues such as labor rights, gender equality, access to grievance mechanisms, mine closures, pollution and waste:
- 1 – Ethical Business
- 2 – Decision-Making
- 3 – Human Rights
- 4 – Risk Management
- 5 – Health and Safety
- 6 – Environmental Performance
- 7 – Conservation of Biodiversity
- 8 – Responsible Production
- 9 – Social Performance
- 10 – Stakeholder Engagement
The Ukrainian government is invited to endorse these principles and encourage the subsoil sector to use them voluntarily. As such, it should also improve ESG reporting and scoring against the relevant metrics.
The Project “Development of Ukraine’s new Subsoil Code” is implemented by the Consortium consisting of experts from Projekt-Consult (Germany), MinPol (Austria) and the Better Regulation Delivery Office (Ukraine). This publication was produced with the financial support of the European Union. Its contents are the sole responsibility of the Project and do not necessarily reflect the views of the European Union.