Ukraine to launch green bonds market


Tetiana Revutska

Senior Associate, Attorney-at-Law

Energy and Natural Resources,
PPP and Procurement,
Real Estate and Construction,
Construction and Development,

This summer, Ukraine made its first steps towards creating a functioning green bonds market. Adopted on 19 June 2020 and effective from 01 July 2021, amendments to the Law of Ukraine ''On Capital Markets and Organized Commodity Markets" introduce the green bonds, define what projects are eligible for funding via placement of green bonds, who may issue them and what are the reporting rules for the issuers. Below we outline the key rules on the market and what further developments will be expected in the regulatory framework in the nearest future.

The green bonds regulations were introduced following the rising interest to the green bonds in the world, especially in the EU countries, since Ukraine aims to align its environmental initiatives with the EU trends. Currently, the green bonds are expected to become a prime instrument to finance Ukraine's debt for the feed-in tariff payments for the renewable energy for years 2020 and 2021. Yet aside from funding the feed-in tariff payments, green bonds may be used to fund a large variety of projects having environmental goals (the "projects") by private investors or the government.

Eligible issuers

Green bonds may be issued either by the project implementors or the project funders. The project implementor may be the state of Ukraine represented by a government authority, a local authority, or a company. The project funder may be a financial institution, an international financial organization or a special financial institution which will be created by Ukraine's government in the future.

Issue procedure

The green bonds are issued and registered according to the standard procedure applicable to state bonds or corporate bonds.

Project implementors may fund one project with one or multiple bonds issues, yet they are not explicitly allowed to have one bonds issue to fund several separate projects. The prospectus shall include the engineering and economic data on the project, estimate of its implementation term and calculation of its benefit for the environment.

Project funders, on the contrary, may fund one or multiple projects with one or multiple bonds issues, and they are not obligated to define which project they are funding before the issue. In the prospectus, they shall only describe the projects to be funded, the procedure for choosing the projects to fund and the procedure for calculating their benefit for the environment.

Both the project implementors and the project funders who have issued the green bonds must include data on the projects' status, amount of money attracted through the green bonds and then spent for the projects in the information that they annually publish on their websites.

Special rules for projects financed by state or local budget

Any project to be financed by the state or local budget shall be selected according to a procedure, which is to be approved by the Cabinet of Ministers. The procedure is now under development and is expected to be approved this year. Until the procedure is approved, no issue of green bonds by the state of the local authorities may take place.

Special rules for corporate and municipal green bonds

On 07 July 2021, the National Commission on Securities and Stock Market (the "Commission") adopted the Recommendations on implementation and financing of environmental projects (the "Recommendations"). The Recommendations' understanding of the sustainability goals are largely based on the Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment ("Regulation (EU) 2020/852"), and it relies on six environmental objectives and four criteria for environmentally sustainable economic activities adopted in Regulation (EU) 2020/852.

The specifics of the green bonds issue are based on the Report on EU Green Bond Standard (EU GBS) and set mandatory rules and optional recommendations for issue of the corporate and municipal green bonds.

The key mandatory rules are the following:

  • preparation and approval of the green bonds framework by the issuer;
  • creating a system of managing environmental and social risks;
  • publishing annual reports on the environmental impact of the project based on the Ukrainian laws and ICMA Handbook – Harmonized Framework for Impact Reporting; and
  • engagement of an external verifier, who will confirm that the issuer complies with all requirements for issuing the green bonds and will inspect the implementation of the project.

Noncompliance with the rules set out by the Recommendations may result in the bonds not being registered as green by the Commission, or the bonds being branded greenwashing by the Commission or the investors.

At this point, it is difficult to define what else would be regarded as greenwashing. By the general approach taken in the Recommendations, failure to use the funds to implement the projects, to inform the investors on how the funds are used, low sustainability impact of the projects and general lack of transparency may bear signs of greenwashing. Since there is no specific regulatory framework to identify what leads to green bonds being branded greenwashing, the projects implementors shall watch out for the new by-laws and practical approaches to form in future.

Eligible projects

To be eligible for funding via green bonds, a project may be implemented in a large variety of spheres which have certain environmental effect, as long as it is aimed at environmental protection, implementation of the ecological standards or emissions reduction, etc.

The Ukrainian laws do not offer a unified mandatory taxonomy – that is a classification system for sustainable activities – which shall be applied by the project implementors or project funders to define whether their project is indeed beneficial to the environment. The Recommendations advise to use any official or market taxonomy that is accepted in the foreign markets, and also recommend adverting to the technical screening criteria for the first two environmental objectives our of six, which were defined by the Delegated Regulation (EU) dated 04 June 2021 supplementing Regulation (EU) 2020/852. 

Below we outline the spheres that may be first to attract investment by issue of green bonds.

Alternative energy

Green bonds may be used to fund any project that involves producing or using energy from alternative sources, including solar and wind.

The first issue of green bonds is expected to be aimed at funding Ukraine's debt for the feed-in tariff payments. Ukrenergo's debt for the green energy towards the Guaranteed Buyer now amounts to UAH 24.7 billion, which is approximately EUR 810 million. The Guaranteed Buyer is the contractual party to the green energy producers and is responsible for payments for the renewable energy produced by them with the funds received from Ukrenergo.

This summer, Ukrenergo has reported its intention to issue 5-year green bonds for approximately EUR 500 million before the end of 2021, and the Ministry of Energy has confirmed that they are working on this as well.

Per Ukrainian laws, the variety of alternative energy sources goes beyond just solar and wind. Thus, apart from funding the solar and wind projects, the green bonds may be issued to fund hydropower, tidal, biogas, canalization gas projects etc.

Energy efficiency

The State Agency on Energy Efficiency and Energy Saving has recently announced their own initiative to support issue of corporate and municipal green bonds by creating a technical office to support implementation of the projects and developing a framework for classification if the projects as green.

A draft law "On Energy Efficiency" is now undergoing a second reading in the Parliament, and if adopted, will define energy efficiency measures as any measures aimed at decreasing the specific use of energy for any activity, thus allowing quite many projects to be classified as energy efficient.

Other projects

In general, the green bonds may be issued in Ukraine for the same projects as listed by most taxonomies available on the markets. Aside from renewable energy projects, the ones which may be most lucrative are related to waste management and disposal, including waste-to-energy disposal, production of greener steels, decarbonization projects, etc.

The laws will even allow to issue green bonds for the projects involving natural gas, oil, and coal extraction, which is different from many counties where these projects are not considered green. The only rule is that they shall contribute to emissions reduction or Ukraine's sustainability goals in general. The program for transformation of Ukraine's coal industry is now under development based on the general concept, approved by the Cabinet of Ministers on 22 September 2021, and is expected to allow all ways of financing not prohibited by the laws.

Impact and further developments

Ukraine has adopted the law setting base for issue of green bonds. Corporate bonds may be issued already, yet the bonds for projects funded by the state or local budget may be issued after they are selected according to a procedure, which is now being developed.

The first issue of green bonds is expected to be initiated by Ukrenergo to fund the feed-in tariff debt to the renewable energy producers. Projects aiming at energy efficiency may follow up, yet their launch may require adoption of necessary by-laws first.

For private project implementors, investors or financing banks, green bonds may become a key or an additional way to finance their environmental projects in Ukraine. The list of spheres where the projects may be implemented is extensive and includes projects that contribute to environmental protection, implementation of the ecological standards or emissions reduction.

We may recommend watching out for any practice for classifying the projects as contributing to specific spheres, like renewables, energy efficiency, emissions reduction etc., which shall eventually form in the process of green bonds market working in Ukraine. The issuers shall also stay alert to any further classifications of bonds as greenwashing, especially since the laws do not offer a taxonomy for defining if the project is green enough.

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