8. Responsible Business Conduct in Ukraine’s Energy Sector

Responsible business conduct (RBC) helps attract and retain quality investments, and ensures that business activities contribute to broader value creation. RBC centres on the expectation that all businesses – regardless of their status, size, ownership structure or sector – avoid and address negative impacts of their activities. A core element of RBC is ensuring that businesses carry out due diligence to mitigate potential and actual adverse impacts throughout their operations, supply chains and relationships. Moreover, enhancing RBC is integral for attracting quality investments, as outlined in the OECD Policy Framework for Investment. Ukraine’s energy sector has been associated with important RBC-related challenges, including social, environmental and governance risks, and creating an enabling environment for RBC has been particularly relevant for ensuring the sustainability of upstream, midstream and downstream activities in the sector. Further to mitigating adverse impacts and attracting quality investments, promoting RBC policies has been significant for meeting international commitments, particularly under the EU-Ukraine Association Agreement.

To create an enabling environment for RBC, Ukraine has adopted laws and regulations on environmental and social protection, and anti-corruption measures, which are applicable to its energy sector. In 2017, the country also became an adherent to the Declaration on International Investment and Multinational Enterprises, which entails promoting policies and practices outlined under the OECD Guidelines for Multinational Enterprises (MNE Guidelines) and establishing a National Contact Point, which was set up in 2018. It has also adopted RBC-related policies, including the National Strategy on Human Rights and an action plan, and a concept and an action plan on corporate social responsibility (CSR), while joining the Extractive Industries Transparency Initiative (EITI). Despite these efforts, further steps are needed to enhance RBC in Ukraine’s energy sector, including strengthening policy frameworks and enforcement to advance anti-corruption efforts, as well as environmental, labour and human rights protections. Other areas include improving transparency and disclosure practices in the sector, as well as strengthening the role of the National Contact Point, as further elaborated below.

Following the adoption of the 2030 Sustainable Development Agenda, many businesses, governments, and stakeholders have sought to enhance responsible business conduct (RBC). Related concepts include corporate social responsibility (CSR) and Business and Human Rights (BHR), which are often used interchangeably with RBC. Collectively, these concepts reflect the expectation that businesses should consider the impact of their operations and supply chains on people, the planet and society. A key characteristic of these concepts is that they call on businesses to contribute positively to sustainable development by going beyond domestic requirements, while managing risks and harms that may result from their operations, as well as throughout their supply chains and relationships. These concepts are not and should not be understood as philanthropy. To help enhance responsible conduct, there has been convergence on RBC across international instruments, as further outlined under Box 8.1.

The main OECD instrument for promoting and enabling RBC is the OECD Guidelines for Multinational Enterprises (the MNE Guidelines). To support the implementation of the MNE Guidelines, the OECD has developed due diligence guidance, which provides practical recommendations for businesses on how to identify and respond to risks and adverse impacts throughout company operations, supply chains and business relationships. While adopting a cross-sectoral Due Diligence Guidance for Responsible Business Conduct, specific instruments have also been adopted for agriculture, extractives, minerals, garment and footwear, and financial sectors.1

The MNE Guidelines have an implementation mechanism known as the National Contact Points (NCPs), which are agencies established by governments to fulfil a twofold mandate: (i) to promote the MNE Guidelines and related due diligence guidance, and (ii) to handle cases (referred to as “specific instances”) as a non-judicial grievance mechanism. Governments adhering to the MNE Guidelines have an obligation to establish an NCP, which, to date, has been achieved across all 50 adhering economies.

Considering that the MNE Guidelines provide a comprehensive coverage across thematic aspects to promote responsible conduct, their provisions and recommendations can also be used to improve RBC within the energy sector, including with regard to addressing environmental, social and governance issues.2 More specifically:

  • Environmental. Energy company operations often contribute to pollution and challenges in waste management, and greenhouse gas emissions, and can have a negative impact on land, water and biodiversity, as well as on human well-being. For example, companies operating in the hydrocarbons sector can witness improper drilling, extraction and resource management, which could lead to environmental degradation. In addition, producers of nuclear power may face hazards due to processing and storing radioactive waste, while hydro power plant operations may negatively impact rivers, reservoirs and communities. Moreover, a lack of energy efficiency measures often result in wasteful energy consumption, leading to excess emissions and high levels of pollution.

  • Social. Key social risks faced by energy companies relate to employee and industrial relations, and human rights. This is particularly relevant in facing hazardous working conditions, such as grid operations, exposure to toxic substances, and a lack of protective equipment. Certain sectors also carry higher risks of human rights violations, e.g. through forced and child labour. Moreover, activities carried out by energy companies (such as mining, drilling and infrastructure development) may negatively impact local communities and violate stakeholder rights. For example, energy company operations and infrastructure development without stakeholder consultation may result in the triggering of disputes, which could result in stalling operations.

  • Governance. Energy companies often face risks related to transparency and disclosure, and the presence of vested interests, and may experience corruption, bribery and extortion, particularly in the hydrocarbons sectors. Further governance risks, including conflicts of interest, can stem from improper separation of ownership, regulatory and policymaking functions, particularly among state-owned enterprises. More broadly, an absence of a risk assessment and mitigation mechanism in corporate governance frameworks may raise challenges in identifying and mitigating aforesaid risks not only in operations, but throughout business relationships and supply chains.

The aforementioned energy sector-related risks, however, are not exhaustive, and additional factors may need to be taken into consideration. These include potential or actual adverse impacts associated with low-carbon transition and efforts to promote digitalisation, among others (OECD, 2021[2]).

As highlighted in this Review, Ukraine became the 47th country to adhere to the OECD Declaration on International Investment and Multinational Enterprises in 2017. In May 2018, Ukraine also adhered to the Recommendation of the Council on the OECD Due Diligence Guidance for Responsible Business Conduct that aims to provide practical support to enterprises on the implementation of the MNE Guidelines and seeks to promote a common understanding among governments and stakeholders on due diligence practices applicable to businesses. Moreover, to meet requirements as an adherent to the declaration and to further the effectiveness of the MNE Guidelines, Ukraine established a National Contact Point (NCP) under its Ministry of Economy. The NCP reports to the government and has an advisory body, and engages in awareness raising on RBC through events and information dissemination. However, the NCP currently has only part-time staff and remains under-resourced. Moreover, while the NCP engages with businesses, it does not currently engage with NGOs, trade unions, or other advisory bodies (OECD, 2020[3]).

Over the years, Ukraine has sought to enhance RBC through its policy framework. In 2015, the country adopted a National Strategy on Human Rights and its Action Plan for the period 2015-2020. The National Strategy and the Action Plan covered 25 sectors and included almost 200 actions (Government of Ukraine, 2015[4]). In March 2021, the President of Ukraine approved a new National Strategy on Human Rights, which aims to improve the framework governing responsible business conduct in the country. In particular, the new strategy has introduced Strategic Direction 16 that ensures respect for human rights when engaging in business activities. (This provision was proposed by the working group set up by the Ministry of Justice and was supported by Ukraine’s Business Ombudsman, the National Contact Point, and civil society organisations.) The new strategy also includes sections on labour rights protection and anti-discrimination practices, as well as on environmental protection (Ukrinform, 2021[5]) (Government of Ukraine, 2021[6]) (Danish Institute for Human Rights, 2021[7]).

To implement the National Strategy on Human Rights, in June 2021 the Ukrainian Government approved an action plan, which includes approximately 100 actions to be implemented in the next three years.3 The action plan cover areas related to preventing discrimination in the workplace, ensuring equal rights and opportunities for men and women, creating conditions for freedom of entrepreneurship and ensuring the right to work. It also contained a reference on strengthening social responsibility of businesses and incorporating CSR-related practices into their operations. However, the action plan includes limited aspects with regard to environmental and consumer protection, and anti-corruption measures (Ukrainian Helsinki Human Rights Union, 2020[8]).

In addition, in January 2019, the Ministry of Justice announced it would start developing a National Action Plan on Business and Human Rights. As part of the process, the Yaroslav Mudryi National Law University, in co-operation with the Ministry of Justice, prepared and published a National Baseline Assessment in mid-2019 (Danish Institute for Human Rights, 2021[7]) The assessment revealed that while Ukraine has ratified core international treaties on human rights,4 there is currently no guidance on how businesses can appropriately ensure protection of human rights, and determine social and environmental impacts of their operations. The assessment also revealed that the mining sector continued to witness significant human rights violations (as further examined in the following sections) (Yaroslav Mudryi National Law University, 2019[9]). While this action plan is still being developed, the provision on protecting human rights when carrying out business activities was incorporated under the current National Strategy on Human Rights, as mentioned above.

In January 2020, the Cabinet of Ministers of Ukraine approved the Concept for the Implementation of State Policy in the Field of Promoting Corporate Social Responsibility (CSR) for the period until 2030. The Concept references the MNE Guidelines, and it aims to promote CSR and sustainable practices in the country (Government of Ukraine, 2020[10]). The Concept and a subsequent action plan for implementation were developed by the Ministry of Economy, and they set the basis for creating policies and implementing actions that would advance RBC in Ukraine (European Business Association, 2020[11]). Moreover, the strategy and action plan have introduced specific targets, which include decreasing wage gaps and work-related accidents, and increasing minimum wage, while attracting FDI, among others. (Government of Ukraine, 2020[10]). While these indicators are RBC-related, the Concept does not integrate the full scope of RBC principles outlined in the MNE Guidelines, or related instruments and standards.

Further to adopting broader policies, Ukraine has sought to translate RBC-related measures in strategies applicable specifically to the energy sector. While the 2035 Energy Strategy of Ukraine (ESU), the Low Emission Development Strategy, and the Green Energy Transition Concept until 2050 do not directly reference RBC, they include provisions, such as improving disclosure and environmental protection. For example, the ESU seeks to enhance transparency in the extractives sector and to align with the Extractive Industries Transparency Initiative (EITI). It also requires all energy resources to be produced and supplied with high levels of environmental responsibility, while looking to promote energy efficiency and reduce greenhouse gas (GHG) emissions. Moreover, the Government of Ukraine has also sought to restructure the coal sector and avoid adverse social and environmental impacts by looking to develop mitigation plans for coal mines and generation plants (Government of Ukraine, 2017[12]).

Further to the aforementioned initiatives, broader RBC-related legal and regulatory frameworks are applicable to Ukraine’s energy sector. While the country has taken steps towards improving laws and regulations related to environmental protection, human and labour rights, anti-corruption and disclosure, it continues to witness challenges across these areas, as further examined below.

According to the National Anti-Corruption Bureau of Ukraine (NABU), Ukraine’s energy sector has been subject to one of the highest volume of corruption-related abuses, with estimated losses in the sector reaching UAH 3 billion in 2020 (NABU, 2021[13]). Challenges often stem from Ukraine’s weak institutional and governance structures, large rents from extractive activities, and market concentration among specific groups (Extractive Industries Transparency Initiative, 2019[14]) (Flaker, Sergi and Teichmann, 2021[15]). Enforcement is often constrained due to a lack of resources and undue interference with anti-corruption agencies through vested interests. For example, high levels of secrecy surrounding the extraction of oil and gas production create an impression that politically connected actors are affecting licensing processes (Chatham House, 2018[16]). Other challenges are related to conflicting legal and regulatory requirements, as well as issues related to the corporate governance of state-owned enterprises, which are heavily concentrated in the energy sector (Chatham House, 2018[16]) (Centre for Economic Strategy, 2020[17]) (OECD, 2021[18]). Previous OECD studies have also outlined corruption-related challenges in Ukraine’s energy sector, and a forthcoming Typology of Corruption Schemes is expected to document specific cases of (alleged) corruption (see Box 8.2).

Ukraine has taken important steps to enhance its institutional capacity to fight corruption through the creation of specialised agencies. These include Special Anti-Corruption Prosecutor’s Office (SAPO); the National Agency for the Prevention of Corruption (NAPC), responsible for the development of anti-corruption policy and the prevention of corruption; and the National Anti-Corruption Bureau of Ukraine (NABU), responsible for preventing, exposing, stopping, investigating and solving corruption-related offences committed by high-level officials. The establishment of the High Anti-Corruption Court in 2018, and the launch of its operations in 2019 as a specialised judicial body with nationwide jurisdiction over high-level corruption cases helped improve efficiency in addressing corruption-related cases.

Ukraine has also introduced the Law on “On Prevention of Corruption”, which mandates companies to assess corruption risks and implement anti-corruption measures. Although the Law prohibits bribery by officials of legal entities, it does not impose liability on corporations. Further to the Law on Prevention of Corruption, the Criminal Code of Ukraine establishes that legal entities, as well as employees and officers, may face sanctions for corruption offences. Efforts have also been made to strengthen whistleblower protection and to remove liability for disseminating information related to criminal offences.

Moreover, as indicated in the previous chapter of this Review, in order to strengthen anti-corruption measures and as a follow up to the 2014-2017 Anti-Corruption Strategy, in June 2020 the National Agency for the Prevention of Corruption (NAPC) released the National Anti-Corruption Strategy for the period 2020-2024. The new strategy seeks to fill the gaps identified in the previous version, particularly since NAPC considered that it was unable to achieve its objectives due to constraints on its operations (Government of Ukraine, 2020[19]). Despite improvements, concrete results in reducing corruption in the energy sector remain to be achieved (International Monetary fund, 2020[20]).

The adoption of the Law on Public Procurement in 2015 and the introduction of ProZorro, an e-procurement platform, helped improve transparency of public procurement contracts in Ukraine’s energy sector (Synyutka, 2019[21]). Public procurement requirements generally apply to state agencies and majority-owned commercial SOEs that engage in certain activities, including gas transportation, though many other SOEs use ProZorro as a procurement platform (OECD, 2021[18]). As mentioned in Chapter 2, energy SOEs, including Ukrenergo and Naftogaz, were some of the first entities in Ukraine that started using ProZorro, allowing them to generate savings (Ukrenergo, 2019[22]) (Naftogaz, 2020[23]).

Despite these improvements, corruption in public procurement still remains prevalent. For instance, NABU uncovered a scheme involving three state-owned coal companies that took place between 2016 and 2018 and resulted in UAH 51.2 million in losses. NABU identified that tenders were organised on behalf of the Selydivvuhilya, Myrnohradvuhilya, and Shakhtopravlinnya state-owned mines and 70 tender contracts were established with a single company, in which the organisers had vested interests. Tenders included the supply of mining equipment, metal products and mining cables. The company re-sold products to the state-owned mines at inflated prices after purchasing them on the open market (Government of Ukraine, 2020[24]). Another case was related to the embezzlement of UAH 14.33 million, which was allocated by the CMU in 2018 to coal mines located in Luhansk to introduce technology for preventing accidents (NABU, 2020[25]).

State-owned enterprises (SOEs) in the energy sector have continue to face particular challenges with regard to corruption, and have sought to take steps to mitigate corruption-related risks. Notably, they report to the NAPC and, depending on their activities and number of employees, are required to develop anti-corruption programmes that evaluate corruption risks, resolve conflicts of interest, protect whistle-blowers and ensure due diligence in procurement processes. Some SOEs, including Naftogaz, Energoatom, Ukrenergo, and Ukrhydroenergo have developed such programmes, while adopting ethics codes and implementing anti-corruption policies. Compliance with ISO standards relative to anti-bribery management systems is also gaining foothold among companies (OECD, 2021[2]). However, conflicting legal and regulatory provisions have contributed to weakening anti-corruption efforts in SOEs. For example, legislation stipulates that the CEO of an SOE needs to appoint an anti-corruption officer, which creates potential conflicts of interest and could hamper anti-corruption efforts. Moreover, the NAPC lacks resources, capacity and mandate to effectively monitor implementation of anti-corruption programmes across the SOE portfolio (OECD, 2021[18]).

Ukraine continues to witness environmental challenges stemming from its energy sector, not least because its energy consumption is nearly three times the OECD average per unit of GDP (OECD, 2019[26]). Considering the composition of Ukraine’s energy mix and dependence on hydrocarbons, companies engaged in oil, gas, and coal sectors are often responsible for air pollution, greenhouse gas emissions, decreased quality of water resources and land degradation, as well as human health issues associated with environmental risk factors (World Bank, 2016[27]) (International Finance Corporation, 2017[28]). The operation of coal mines in Ukraine has often resulted in challenges due to water pollution, wastewater treatment and flooding, and air pollution and emissions due to the burning of waste heaps (including in both government and non-government controlled territories). Further to extraction, risks are also posed by the operation of thermal power plants (TPP) and combined heat and power plants (CHP) that require coal and/or gas as inputs (International Finance Corporation, 2008[29]). As of December 2020, Ukraine had a total installed capacity of the power system reaching 54 498 megawatts (MW), of which, 21 842 MW were generated by TPP and 6 069 MW were produced by CHP plants (STATISTA, 2020[30]). In 2019, two-thirds of greenhouse gas emissions in the country were energy-related, of which power and heat generation represented 47% (Government of Ukraine, 2020[31]).

The main operators of coal and gas-fired power plants are DTEK and Centrenergo. In 2019, their total GHG emissions amounted to 9.6 million tonnes and 5.2 million tonnes in CO2 equivalent, respectively (DTEK, 2020[32]) (Centrenergo, 2019[33]). In 2020, Burstyn power plant (operated by DTEK) was responsible for emitting 123 000 tonnes of sulphur dioxide, 26 000 tonnes of dust and 11 000 tonnes of nitrogen oxides, while its fuel efficiency and sulphur dioxide emissions per kWh were 1.5 times higher compared to Polish and German counterparts (BOELL, 2020[34]). As indicated in Chapter 2 of this Review, to decarbonise its electricity mix and reduce the adverse environmental impacts of coal, Ukraine is planning to increase its share of renewables and to align policies with the European Green Deal (See Box 8.3).

Further environmental risks may be affiliated with low-carbon sources, including potential discharges from nuclear plants, as well as the construction and operation of hydro power plants, which may negatively impact water resources and biodiversity (OECD, 2021[2]). In addition, solar and wind power plants can pose risks to biodiversity derived from land clearing and operation of turbines (International Finance Corporation, 2008[29]). In Ukraine, RES producers have substantially increased their generation capacity, reaching 12% of the total installed capacity of the power system. As of June 2021, renewable projects built and operating in Ukraine had not reported negative environmental impacts (State Statistics Service of Ukraine, n.d.[37]). (However, as further outlined in Box 8.4, this may result from the classification of certain renewable projects, some of which may be exempt from examination).

Following the recommendations of the Secretariat of the Energy Community on improving environmental performance and meeting international obligations, Ukraine adopted the Law “On Environmental Impact Assessment (EIA)”, which entered into force in December 2017. The Law on EIA is aligned with the obligations under the EU-Ukraine Association Agreement. More specifically, it transposed the requirements of Directive 2011/92 on the assessment of the effects of individual public and private projects on the environment, as well as the relevant provisions of Directive 2003/4 on access to environmental information (Energy Community, 2016[38]). By setting legal and organisational policies for environmental impact assessments, the Law on EIA seeks to avoid and prevent environmental damage, while ensuring environmental protection, rational use and restoration of natural resources, and taking into account public and private interests.

Since the introduction of the Law on EIA, it has become mandatory to perform environmental impact assessments to obtain permits authorising all types of energy projects, including construction, modernisation and operation of facilities (Verkhovna Rada, 2017[39]). This Law groups activities in two categories. The first category includes gas and oil refineries, thermal power stations, extraction of oil and natural gas on the continental shelf, construction of gas pipelines with a diameter of 0.8m or greater and over 40 km in length, and aerial electricity lines with a voltage of 220kV or more and over 15 km in length. The second category includes deep drilling, certain agriculture and infrastructure projects, certain mining and extraction industries, hydropower plants, wind power plants with two or more turbines or where their height is 50m or more. For activities falling under the first category, the Ministry of Environmental Protection and Natural Resources (MEPR) is responsible for issuing opinions on EIA. For the second category, environmental departments of local state administrations are responsible for issuing opinions on the EIA. Temporary suspension or termination of business activity can be ruled by court in case of failure to comply with the Law on EIA (Verkhovna Rada, 2017[39]).

To improve transparency, a unified EIA register was developed, which is administered by the Ministry of Environmental Protection and Natural Resources of Ukraine (Government of Ukraine, 2021[40]). The registry is aimed at simplifying the process of conducting the EIA procedure for new projects, raising public awareness of potential projects and related risks, and ensuring transparency in the decision-making process. It records and discloses the assessment of the potential environmental effects of the project, as well as decisions and measures taken to reduce potential negative environmental impacts of planned activities (OECD, 2021[2]). Further to disclosing EIA-related filings online, the overall process involves mandatory consultations with local communities. While completion of the EIA and consultations are required, in July 2020 Ukraine amended the Law on EIA to temporarily suspend public discussions of the EIA reports with local communities due to Covid-19 and substitute them with written comments and suggestions from the public until the end of quarantine (Verkhovna Rada of Ukraine, 2020[41]).

While the introduction of EIA has contributed to improving environmental protection, challenges remain. In particular, air pollution is still a major issue in Ukraine, with energy generation from fossil fuels contributing to almost one third of the total air pollution in the country (State Statistics Service of Ukraine, 2019[43]). Coal-fired power plants release particularly high levels of sulphur dioxide and nitrous oxide, which makes Ukraine one of the top air polluters in Europe (Environmental Performance Index, 2020[44]). The reported sulphur dioxide emissions of 20 Ukrainian coal power plants in 2019 were 589 557 tonnes, which was close to emissions by 16 power plants operating across Western Balkans that emit more sulphur dioxide than all power plants in the EU combined (Bankwatch Network, 2020[45]).

State Environmental Inspection Agency carries out environmental inspections in Ukraine’s energy companies. Its activities are directed and co-ordinated by the MCU through the MEPR, and its tasks include supervising environmental protection and ensuring rational use, recovery and protection of natural resources (Government of Ukraine, 2018[46]). Based on the Law “On the State Ecological Inspection of Ukraine” and the Law “On Basic Principles of State Supervision”, it has the mandate to evaluate if entities comply with legislation (i) on environment safety, including the fulfilment of conditions prescribed by EIA opinions; (ii) on use and protection of lands and subsoil; (iii) on the availability of permits, limits and quotas for special use of natural resources; and (iv) on waste management. Further to carrying out inspections and checking legal and regulatory compliance, the Agency has the ability to issue fines (Extractive Industries Transparency Initiative, 2020[47]). Since 2020, discussions have been held regarding the draft law "On State Environmental Control", which aims to strengthen the role of the State Environmental Inspection Agency. According to the head of the Agency, the adoption of this draft law would increase fines for non-compliance and refusal to conduct inspections.

However, moratoria imposed by Ukrainian authorities have prevented environmental inspections across energy companies, particularly between 2014-2019. The rationale for exempting businesses from inspections was to minimise requirements for investors to operate in the country, increase investment attractiveness and facilitate entrepreneurship (World Bank, 2016[27]) (OECD, 2021[2]). To remove the moratorium on environmental inspections, in early 2020, the State Environment Inspection Agency was explicitly tasked by the Prime Minister to tackle environmental pollution by conducting a comprehensive inspection of entities suspected of pollution, including thermal power plants (Vasil Kisil & Partners, 2020[48]). As a result, in early 2020, the Inspection Agency performed more than 30 000 inspections, for which 28 500 people faced administrative responsibility and 508 criminal proceedings were opened. The overall damages caused by violation of the legislation estimated by the Inspection Agency amounted to more than UAH 2 billion (Government of Ukraine, 2021[49]). For instance, in August 2020, the Inspection Agency fined Darnytsia Heating Plant in Kiev for UAH 1 million for violating environmental laws. However, in mid-2020, a new moratorium on inspections was introduced for the duration of the COVID-19 measures, which also suspended planned inspections (EU4Climate, 2020[50]).

In the 2016 IPR, the OECD recommended that Ukraine enhance transparency and clarify (non-financial) disclosure requirements for companies. Since then, Ukraine has strengthened transparency and disclosure requirements, which are applicable to its energy sector. These requirements are outlined under the Law on Accounting and Financial Reporting, and supplementary regulations and recommendations. Disclosure requirements are more strictly applicable to large companies or those operating in specific sectors, including extractives (see Table 8.1). Moreover, companies required to submit consolidated financial statements are also required to issue consolidated annual reports, though the coverage of non-financial information is often voluntary. Based on the recommendations issued by the Ministry of Finance, non-financial reports should cover information related to environmental liabilities, social issues, personnel policy, risks, development prospects and corporate governance structure (OECD, 2021[18]).

Further to general transparency and disclosure requirements applicable to companies, those operating in the extractives sector are also expected to meet requirements under the Law on Ensuring Transparency in Extractive Industries (EITI Law), which was adopted in November 2018 (see Figure 8.1). The law has been regarded as a milestone for promoting transparency and accountability in the country’s oil, gas and mining sectors (DiXi Group, 2018[51]). It is aligned with requirements under the EU and the Extractive Industry Transparency Initiative, and outlines requirements for the collection, disclosure and dissemination of data on Ukraine’s extractive industries. Despite its adoption, secondary legislation remains to be introduced to ensure implementation.

One of the key aspects of the law focuses on the disclosure of payments, as well as the ultimate beneficial owners of companies and material elements related to the extractive industry, such as social obligations, building infrastructure and barter arrangements (Extractive Industries Transparency Initiative, 2018[52]). With regard to payments, EITI identified that companies operating in oil and gas extraction in Ukraine contributed 85.14% of revenues received by the government, while 6.6% of revenues came from coal mining companies (Extractive Industries Transparency Initiative, 2020[47]). EITI also recognises that Ukraine has made progress on the beneficial ownership disclosure requirement, as the government improved verification procedures through the Unified State Register of Legal Entities, Individual Entrepreneurs, and Public Organisations (Extractive Industries Transparency Initiative, 2021[53]). However, real owners are often unknown because they are hidden through shell companies and involve vested interests (Extractive Industries Transparency Initiative, 2019[14]).

Furthermore, an EITI working group began collaborating with the governments of Ukraine and Germany in 2019, and, for the first time, pilot communities in extractive regions were identified where companies in the extractives sector would disclose their contributions, as part of meeting requirements under Ukraine’s budget code on rent payments (Extractive Industries Transparency Initiative, 2020[47]). Some of the rent payments are affiliated with production, non-production and transport-related royalties, as well as with fees for water use.

On a broader scale, energy companies in Ukraine have yet to improve transparency and disclosure practices, particularly in terms of non-financial reporting. Some of the key energy companies, including Naftogaz, Ukrhydroenergo, Ukrenergo, Energoatom and DTEK, among others, have significantly improved their non-financial reporting practices, as they issue annual reports containing RBC-related information. In addition, these companies have also started using frameworks, such as GRI, in presenting their non-financial performance. However, according to the Ukraine Company Transparency Index developed by the Corporate Governance Professional Association (CGPA) and the Centre for CSR Development Ukraine, such practices still remain limited. For example, in 2018, only 13% of companies in Ukraine across all sectors produced reports showing indicators of corporate social responsibility (CGPA, 2020[54]). Moreover, where they exist, the publication of non-financial reports can often be intermittent, including among both private and state-owned companies (OECD, 2021[2]). Moreover, while companies in the extractives sector are subject to disclosures based on EITI, practices vary and remain to be enforced on a broader scale. For example, Naftogaz is strictly required to ensure transparency and accountability regarding its operations in the oil and gas sector. While similar requirements are applicable to state-owned coal companies, information is often not fully disclosed or accessible (OECD, 2021[18]).

Ukraine has developed legal and regulatory frameworks to protect labour rights, which is applicable to the energy sector. The country’s Labour Code has been the main legal basis for employer-employee relations. Along with outlining labour rights, it contains provisions regarding collective agreements, trade unions, employee contracts, occupational health and female employment, among others. In addition, the rights of trade unions and associations are outlined in the Constitution and in other normative acts. The unions may conduct inspections, demand information from companies and communicate with employees. Employees belonging to trade unions may engage in collective bargaining and disciplinary action. Moreover, Ukraine has introduced sector-specific legislation regarding occupational safety measures, particularly in nuclear and hydrocarbons sectors, and the operation of specialised equipment (OECD, 2021[18]).

Despite these requirements, there have been challenges in ensuring implementation and protecting workers’ rights due to existing contradictions in the legal framework. Notably, while the Labour Code provides for the right to strike “to defend one’s economic and social interests”, the Mining Law prohibits strikes (Verkhovna Rada of Ukraine, 1999[55]). Regardless of these contradictions and, as further outlined in the subsequent section, in recent years coal miners have held strikes due to wage arrears.

The State Labour Service, under the supervision and control of the Ministry of Social Policy, is responsible for implementing the regulatory framework on labour inspection and enforcing laws relating to labour conditions, employment, safety and health. It is a central executive body established in accordance with the requirements of the Resolution of the CMU of September 10, 2014 "On optimising the system of central executive bodies" as a result of merging the State Mining Supervision Service and Industrial Safety with the State Labour Inspectorate. However, due to moratoria on state inspection of activities in coal mines, there have been challenges in ensuring workplace safety (ILO, 2018[56]) (US Department of State, 2020[57]).

According to the National Baseline Assessment on Business and Human Rights, mining sector in Ukraine continues to witness significant health and safety challenges. Specific problems in coal mining include workplace accidents, deriving from coal miners often lacking protective equipment and operating in hazardous conditions (OECD, 2021[2]) (Yaroslav Mudryi National Law University, 2019[9]). In addition, state-owned mines do not provide timely payments of salaries, which has resulted in protests due to considerable wage arrears (Yaroslav Mudryi National Law University, 2019[9]). In June 2020, coal miners, in co-ordination with the Independent Trade Union of Miners of Ukraine, held strikes due to wage arrears amounting to UAH 1.2 billion. While the Ministry of Energy allocated UAH 340 million to repay debts owed to miners of state-owned mines, challenges have continued (Industriall Global Union, 2020[58]). Special attention should be also paid to forced labour and child labour in coal mines, including in loading, transporting and sorting coal (Yaroslav Mudryi National Law University, 2019[9]). In addition, coal mines in non-government controlled territories have witnessed cases of forced labour and exploitation, especially of internally displaced persons (OECD, 2021[2]).

In addition to challenges witnessed across coal mines, Ukrainian energy unions have expressed concerns about financial imbalances in the energy sector, which worsened during the Covid-19 pandemic due to drop in energy demand. In an event organised by IndustriAll, representatives from different Ukrainian energy unions, participants (i) called for an inclusive dialogue to achieve the goals of decarbonisation, (ii) agreed on the need to develop a common position, and (iii) stood in favour of an updated strategy to defend workers’ rights (IndustriAll, 2020[59]). Union representatives also noted a lack of state control and co-ordination within the energy sector and transparency in decision-making. These issues were also identified in the National Baseline Assessment on Business and Human Rights, which stated that coal miners are normally not consulted by their employers before making important management decisions (Yaroslav Mudryi National Law University, 2019[9]).

The Government of Ukraine, in collaboration with the European Commission, is looking to implement an initiative to help coal regions in Ukraine and in the Western Balkans to transition from coal towards a carbon-neutral economy (Box 8.5). The initiative aims to alleviate socioeconomic consequences of transition, while promoting the development of new, future-oriented economic activities. The funding and technical assistance will come from the European Commission, the World Bank, the European Bank for Reconstruction and Development, the Energy Community Secretariat, Poland’s National Fund for Environment Protection and Water Management, and the College of Europe in Natolin (European Investment Bank, 2021[60]). As of July 2021, however, the Government of Ukraine did not have a national policy or strategy to promote just transition across coal regions and lacked public policies to respond to the needs of coal miners.

Further to the National Strategy on Human Rights mentioned above, Ukraine has ratified major international instruments on human rights, consisting of the Universal Declaration of Human Rights and ILO standards. It has also created an office for Ukrainian Parliament Commissioner for Human Rights to ensure the observance of human rights and freedoms, while providing citizens with an opportunity to appeal in case of infringements. While these developments have presented positive steps, Ukraine has continued to experience human rights challenges, which can also be affiliated with Ukraine’s energy sector. Although the constitution guarantees freedom of speech and expression, journalists and civil society activists continue facing threats, intimidation and violence. Moreover, numerous rights, including freedom of expression, assembly and association remain restricted in the non-government controlled areas. Notably, outspoken critics and minorities (including members of the Crimean Tatar community) in these areas have been subject to intimidation, harassment and politically motivated arrests. Further challenges are faced by internally displaced persons, who are vulnerable forced labour and exploitation (OECD, 2021[2]).

More than 90% of coal resources in Ukraine are located in the Donetsk coal basin, while nearly half of the country’s coal supply previously came from Donetsk and Luhansk (the Donbass). However, following the 2013-2014 Euromaidan protests and Russia’s occupation of Crimea, armed groups seized control of parts of the Donbass region. The eruption of an armed conflict with Russian-backed separatists in the East of Ukraine further exacerbated economic conditions of the region and resulted in seizure of assets, damaged public infrastructure and loss of individual and corporate property (OHCHR, 2019[62]). These challenges resulted in supply chain disruptions in Ukraine’s energy sector. While Ukraine produced 65 million tonnes of coal in 2014, its output amounted to 33.3 million tonnes by 2018, which introduced challenges with regard to Ukraine’s energy security (OECD, 2019[26]). Some of the coal mines in the East halted or reduced operations – for example, out of seven mines located in the Toretsk city situated in the Donbass, only two, the Tsentralna and the Toretska mines, are still operational (NBC news, 2021[63]).

This situation significantly impacted the workers in the Donbass. Further to facing irregular employment and significant reduction (and, at times, absence) of wages, active combat has contributed to the loss of electricity and damages to mines and plants, which have posed safety risks. Notably, shelling has resulted in mine collapses, emergency power outages and shutdowns of ventilator systems, and difficulties in evacuating miners working underground. Workers often lack protective gear and face moratoria on inspections, while having limited opportunities to defend their rights due to severe restrictions on freedom of expression and assembly. In parallel, the region has also witnessed illegal coal mining and forced labour, with a monthly coal supply to government-controlled areas amounting to approximately 600,000 tonnes. (However, since coal transit ended between the government and non-government controlled territories in 2017, coal supplies from the latter have been redirected towards other economies. Also see Box 8.6 regarding the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas) (OECD, 2021[2]) (OHCHR, 2019[62]). Further to coal mines, other companies engaged in coal production industry associations, mine construction departments and machine-building have experienced challenges in their operations, though there is limited information regarding their activities (ILO, 2018[56]).

The Office of the High Commissioner of Human Rights has also identified that retirees of extractive and energy companies residing in the Donbass have limited access to pensions and social security benefits. In particular, those looking to obtain pensions are required to regularly travel to government-controlled territories, which provides a challenge for those facing health and mobility issues (Human Rights Watch, 2021[64]).

In 2005, a Law “On ensuring equal rights and opportunities for women and men” was introduced in Ukraine, which aims to avoid gender-based discrimination, including in the energy sector. However, Gender Inequality Index positions Ukraine 52nd out of 162 countries. As in many countries, Ukraine’s energy sector continues to witness a gender wage gap and limited participation of women. This partly stems from lack of women obtaining tertiary education in Science, Technology, Engineering and Mathematics (STEM), as they represent less than one-third among the total number of graduates.5 However, according to a 2019 study, one-third of women encountered discrimination in the workplace, while 19% stated that they were denied employment due to their gender and 23% stated that they earned less than men. A comparison of average monthly wages of men and women revealed that while the average gender wage gap in Ukraine’s labour market is approximately 25%, the gap is wider (approx. 40%) in the mining sector and slightly narrower in the supply of power, gas, steam and air conditioning (approx. 20%) (BOELL, 2019[66]) (BOELL, 2019[67]).

Despite progress in recent years, Ukraine should continue efforts in improving RBC framework across areas, including social and environmental protection, disclosure, and anti-corruption within its energy sector. Further to attracting quality investments and meeting international commitments, stronger RBC policy framework can enable energy companies to mitigate adverse RBC impacts throughout their operations, supply chains and business relationships, and contribute to sustainable development. Specific recommendations are as follows:

  • Further streamline the existing policy frameworks on RBC and ensure applicability to Ukraine’s energy sector. Over the years, Ukraine has adopted RBC-related policies, including the Concept on CSR and the National Strategy on Human Rights, which introduced provisions related to business and human rights. However, further steps are needed to streamline these policies and ensure alignment with the OECD Guidelines for Multinational Enterprises and related guidance, while continuing efforts to develop a national action plan on business and human rights. Moreover, RBC policies should be translated within legal and regulatory frameworks applicable to Ukraine’s energy sector and efforts should be made to ensure their implementation.

  • Ensure protections and enforcement to prevent RBC-related infringements in the energy sector. This includes strengthening human and labour rights protections, particularly in addressing challenges in the state-owned coal sector, preventing discrimination against women and vulnerable groups, and encouraging just transition. Further efforts are needed to improve environmental protection, paying attention to air pollution and emissions, and low energy efficiency, as well as engaging in climate action. Furthermore, moratoria on inspections should be removed.

  • Encourage energy companies to carry out due diligence to address and mitigate RBC-related risks throughout their operations, as well as in their supply chains and business relationships. Although a number of companies have started embedding RBC due diligence frameworks, practices should be encouraged on a broader scale. In particular, efforts should be made to align with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas for companies operating or engaged in the coal sector.

  • Strengthen anti-corruption efforts in the energy sector. In particular, Ukraine should ensure that anti-corruption institutions, such as SAPO, NABU and the High Anti-Corruption Court are sufficiently empowered, staffed and resourced to carry out investigations. In parallel, anti-corruption regulations and requirements should be further streamlined to avoid potential conflicts and ensure enforcement. In parallel, both state-owned and private companies should be expected to implement high standards of disclosure and transparency, and develop risk management systems, while improving internal controls, ethics and compliance measures.

  • Enforce transparency and disclosure in the energy sector, and strengthen non-financial reporting requirements so that companies disclose information on human rights, environment protection, labour rights and risk mitigation, among other areas. Further efforts are needed to implement laws and regulations, and ensure compliance with EITI requirements.

  • Strengthen the role of Ukraine’s National Contact Point. The NCP can play a key role in promoting the OECD MNE Guidelines and in raising awareness among energy companies, civil society organisations and trade unions to promote RBC practices. The NCP can also act as an effective non-judicial grievance mechanism with which stakeholders in the energy sector can engage.


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[34] BOELL (2020), European Green Deal and the contest against corruption: what is at stake in Ukraine?, Heinrich Boell Stiftung: Gunda Werner Institute, https://ua.boell.org/en/2020/09/29/european-green-deal-and-contest-against-corruption-what-stake-ukraine.

[67] BOELL (2019), Women and Men in the Ukrainian Energy Sector: Equal Rights and Opportunities or a Sector of Discrimination?, Heinrich Boell Stiftung: Gunda Werner Institute, https://www.gwi-boell.de/en/2019/07/22/women-and-men-ukrainian-energy-sector-equal-rights-and-opportunities-or-sector.

[66] BOELL (2019), Women in Ukraine’s Energy Sector, https://ua.boell.org/uk/2019/06/13/zhinki-ta-choloviki-v-energetichnomu-sektori-ukrayini-0.

[17] Centre for Economic Strategy (2020), Lack of trust in judiciary majority obstacle to foreign investment in Ukraine, https://ces.org.ua/en/lack-of-trust-in-judiciary-major-obstacle-to-foreign-investment-in-ukraine/.

[33] Centrenergo (2019), Environmental protection activities, http://www.centrenergo.com/en/env-protection/.

[54] CGPA (2020), Ukraine Company Transparency Index 2019, Corporate Governance Professional Association, https://cgpa.com.ua/en/novini/index/.

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[7] Danish Institute for Human Rights (2021), National Action Plan on Business and Human Rights, https://globalnaps.org/country/ukraine/.

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[11] European Business Association (2020), Government has legalised the development of CSR for the first time in Ukraine, https://eba.com.ua/en/vpershe-v-ukrayini-uryad-legalizuvav-rozvytok-ksv-napryamku/.

[61] European Commission (2020), Just Transition Platform Meeting - coal regions in transition virtual week 16-19 November 2020, https://ec.europa.eu/info/events/just-transition-platform-meeting-16-19-november-2020_en.

[60] European Investment Bank (2021), EIB records high investments in Ukraine in 2020: over €1 billion for infrastructure, environment, innovation and post-COVID-19 recovery, https://www.eib.org/en/press/all/2021-042-eib-records-high-investments-in-ukraine-in-2020-over-eur1-billion-for-infrastructure-environment-innovation-and-post-covid-19-recovery#.

[53] Extractive Industries Transparency Initiative (2021), Board decision on the second validation of Ukraine, https://eiti.org/scorecard-pdf?filter%5Bcountry%5D=26&filter%5Byear%5D=2020.

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[4] Government of Ukraine (2015), National Action Plan on Human Rights, https://www.coe.int/t/commissioner/source/NAP/Ukraine-National-Action-Plan-on-Human-Rights.pdf.

[64] Human Rights Watch (2021), Ukraine Events of 2020, https://www.hrw.org/world-report/2021/country-chapters/ukraine#.

[56] ILO (2018), Occupational safety and health in the mining industry in Ukraine, International Labour Organization, https://www.ilo.org/wcmsp5/groups/public/---europe/---ro-geneva/---sro-budapest/documents/publication/wcms_670764.pdf.

[59] IndustriAll (2020), Ukrainian energy unions demand dialogue for Just Transition, http://www.industriall-union.org/ukrainian-energy-unions-demand-dialogue-for-just-transition.

[58] Industriall Global Union (2020), Ukrainian coal miners win after 11-day protest, Industriall Global Union, http://www.industriall-union.org/ukrainian-coal-miners-win-after-11-day-protest.

[28] International Finance Corporation (2017), Environmental, Health, and Safety Guidelines for Onshore Oil and Gas Development.

[29] International Finance Corporation (2008), Environmental, Health, and Safety Guidelines for Thermal Power Plants, https://www.ifc.org/wps/wcm/connect/9ec08f40-9bc9-4c6b-9445-b3aed5c9afad/Thermal+Power+Guideline+2017+clean.pdf?MOD=AJPERES&CVID=lNwcJZX.

[20] International Monetary fund (2020), Ukraine: request for stand-by arrangement-press release; Staff Report; and Statement by the Executive Director of Ukraine, https://www.imf.org/en/Publications/CR/Issues/2020/06/10/Ukraine-Request-for-Stand-by-Arrangement-Press-Release-Staff-Report-and-Statement-by-the-49501.

[35] International Renaissance Foundation (2020), European Green Deal: opportunities and threats to Ukraine, https://www.irf.ua/wp-content/uploads/2020/09/web_european-green-deal_2020_en.pdf.

[13] NABU (2021), NABU investigation into the fuel and energy sector, https://nabu.gov.ua/open-office/biblio/infographics/rozsliduvannya-nabu-v-galuzi-pek.

[25] NABU (2020), 4 persons were given notices of suspicion of UAH 14.33 million funds embezzlement allocated on coal mines, https://nabu.gov.ua/en/novyny/4-persons-were-given-notices-suspicion-uah-1433-million-funds-embezzlement-allocated-coal.

[23] Naftogaz (2020), Annual Report 2019, Naftogaz Group, http://www.naftogaz.com/files/Zvity/Naftogaz_2019_EN.pdf.

[63] NBC news (2021), Ukraine’s war-torn Donbas region is on the verge of environmental disaster, https://www.nbcnews.com/news/world/ukraine-s-war-torn-donbas-region-verge-environmental-disaster-n1266372.

[18] OECD (2021), OECD Review of the Corporate Governance of State-Owned Enterprises: Ukraine, https://www.oecd.org/corporate/soe-review-ukraine.htm (accessed on 12 May 2021).

[2] OECD (2021), Responsible Business Conduct and Due Diligence Practices in Ukraine’s Energy Companies, http://mneguidelines.oecd.org/responsible-business-conduct-due-diligence-practices-in-ukraine-energy-sector.htm.

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← 1. Further to the cross-sectoral OECD Due Diligence Guidance for Responsible Business Conduct, sector-specific instruments include: OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas minerals; the OECD-FAO Guidance on Responsible Agricultural Supply Chains; the Due Diligence Guidance for Meaningful Stakeholder Engagement in the Extractive Sector; the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector; and the OECD Due Diligence Guidance for Responsible Corporate Lending and Securities Underwriting.

← 2. See Ten Human Rights priorities for the power and utilities sector available at https://www.bsr.org/en/our-insights/primers/10-human-rights-priorities-power-and-utilities-sector and Renewable Energy & Human Rights Benchmark available at https://www.business-humanrights.org/en/from-us/briefings/renewable-energy-human-rights-benchmark/

← 3. See https://www.ua.undp.org/content/ukraine/en/home/presscenter/articles/2021/ukraines-government-approves-action-plan-for-new-national-human-rights-strategy.html.

← 4. More specifically, these include the International Covenant on Civil and Political Rights, International Covenant on Economic, Social and Cultural Rights, International Convention on the Elimination of All Forms of Racial Discrimination, Convention on the Elimination of all Forms of Discrimination Against Women, Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, Convention on the Rights of the Child, Convention on the Rights of Persons with Disabilities, core International Labour Organisation (ILO) Conventions, European Convention on Human Rights and Fundamental Freedoms.

← 5. According to (BOELL, 2019[66]), on a global level, women take up 20% of jobs in the energy sector, though represent 1% in senior management positions.

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