Billions for reconstruction: how not to finance projects that harm the environment

by Anna Rudzinska, Ukraine Reconstruction Campaigner, CEE Bankwatch

23 September 2026

EU experience that can be useful to Ukraine

Ukraine is rebuilding without waiting for the war to end. In the coming years, billions of euros in public investment, from state and local budgets, will be directed towards energy, transport, housing, hospitals and other public investment projects and programmes.

But it matters which projects receive funding, the criteria and rules under which they are prepared and evaluated, and how effectively these funds are used.

One of the important selection criteria should be the potential impact of projects on the environment. And this is not only about the natural environment, but also about whether the funds invested are used effectively: will the country then have to pay for the rebuilt facility a second time because of high energy costs or environmental and climate risks?

Taking environmental criteria into account when preparing projects that apply for public investment is also important because international partners are expected to finance most of the project portfolio. And for them, the environmental component is critically important.

For example, Poland was once taken to the Court of Justice of the EU after it began constructing a road around the city of Augustów through the Rospuda Valley wetlands, an area protected under EU environmental legislation (Natura 2000). Eventually, construction had to be halted and the road rerouted. The new construction took several more years.

In Ukraine, environmental criteria have not yet become a real filter for public investment. For example, of the 208 projects in the Single Project Pipeline for 2026, 101 were selected to proceed further. However, 68 of these had not undergone a basic assessment of the project's contribution to environmental and climate goals, or a basic analysis of compliance with the DNSH (Do No Significant Harm) principle.

The situation with investment programmes is similar. Of the 66 registered programmes, 37 were recommended for funding, but in 24 cases, economic, environmental and social risks were not identified at all, and in three cases they were only partially assessed.

At the same time, it cannot be said that environmental requirements are entirely absent from the Ukrainian system of project selection. The DNSH principle is mentioned in the public investment management reform. DREAM (Digital Restoration Ecosystem for Accountable Management), a digital system for submitting, evaluating and tracking reconstruction projects, is also in operation.

However, environmental safeguards in the system remain largely a formality.

What does the "Do No Significant Harm" principle mean?

The DNSH principle is an EU screening tool that, at an early stage, helps to determine whether public funds should be directed towards a particular project by assessing whether it could harm the EU's key environmental objectives. There are six of them:

• climate change mitigation;

• climate change adaptation;

• the sustainable use and protection of water and marine resources, without depleting or polluting natural resources;

• the transition to a circular economy (reusing resources and reducing waste);

• the prevention and control of environmental pollution;

• the protection and restoration of biodiversity and ecosystems.

The DNSH principle should not be confused with environmental impact assessment (EIA). DNSH should screen out potentially harmful projects at an early stage, while EIA assesses the impact of a particular project in detail before its approval. These tools complement, but do not replace, each other.

The Romanian government planned to raise EU funds for a gas infrastructure project, presenting it as green energy on the basis that hydrogen would be blended into the gas supply. The European Commission and environmental organisations applied DNSH principles and rejected the project at the selection stage, as it contradicted climate change mitigation objectives.

However, assessing environmental risks at an early stage does not necessarily lead to a project's rejection. It provides an opportunity to modify it. For example, the Czech National Recovery Plan included a project to modernise and improve the efficiency of district heating networks. Formally, it met energy-efficiency requirements. However, environmentalists, using DNSH screening, drew attention to the fact that modernising the networks could, in practice, prolong the operation of systems that remained dependent on fossil fuels, particularly natural gas. As a result, the European Commission required an additional condition to be included in the project: funding would be available only if there were a mandatory transition to renewable or low-carbon energy sources.

How environmental criteria work in the EU, and what Ukraine can learn from them

European experience offers several approaches to the environmental assessment of projects that Ukraine should take into account.

1. How to check projects in practice

A practical example of the DNSH principle is the new EU Social Climate Fund. It was created to mitigate the social consequences of the EU's transition to stricter climate rules. In particular, the EU has introduced the ETS2 system, which will increase the cost associated with greenhouse gas emissions. This increase will apply, in particular, to fuels used to heat buildings and for road transport. The fund is intended to support the most vulnerable households and micro-enterprises during the green transition. The Fund's budget for the period 2026–2032 is at least €86.7 billion. These funds can be directed, in particular, towards the renovation of buildings, the installation of cleaner heating and cooling systems, the use of renewable energy, low- or zero-emission transport and cycling infrastructure.

For Ukraine, this experience is important not only because of the areas it finances, which largely coincide with the priorities of reconstruction.

Here is how the Fund assesses projects applying for financing:

• Clear criteria are defined in advance for each sector.

• Activities that are clearly harmful are immediately placed on a list of prohibited activities.

• EU Member States do not receive money from the Fund automatically; funding depends on demonstrating progress in implementing the measures set out in their plans and achieving specified results.

This approach shows that environmental assessment does not need to be equally detailed for all projects. The greater the potential environmental risk, the more detailed the assessment should be.

2. The higher the risk, the more thorough the assessment

The European Bank for Reconstruction and Development, one of the main international financial institutions involved in Ukraine's reconstruction, follows a similar logic. The EBRD classifies activities according to high, medium or low levels of environmental and social risk. The depth of the assessment depends on the level of risk. The bank also has lists of sectors and activities that it does not finance. In particular, these include projects related to the extraction of oil, gas and coal, the use of ozone-depleting substances and other environmentally harmful activities.

For Ukraine, this experience is particularly relevant in practical terms: the EBRD, like other international financial institutions, is already applying such standards to a significant share of the financing for Ukraine's reconstruction.

3. Assess comprehensively: the Estonian lesson

Having environmental criteria does not in itself guarantee that they will be applied effectively. The DNSH principle has only been used in the EU since 2021, so the practice of applying it is still evolving and revealing weaknesses. For example, in 2024, the European network of environmental NGOs Bankwatch examined the application of DNSH requirements in Central and Eastern Europe.

The review showed that environmental assessments were often superficial, without adequate verification or transparency. An illustrative example is the Rail Baltica railway in Estonia. Several "green bridges" (ecoducts) were built with EU funding. The DNSH assessment was carried out only for these structures, while the construction of the entire railway involved the clearance of 860 hectares of forest. More than 63 hectares, which were home to capercaillies, were cleared in an area that was supposed to compensate for the environmental damage caused by construction.

This is an example of why it is necessary to evaluate the project as a whole, rather than only individual elements of it. However, these mistakes do not call the DNSH principle itself into question. This mechanism will continue to evolve and improve in the coming years.

What is the current situation in Ukraine?

The public investment management reform establishes a single procedure for managing projects at all stages, from preparation and evaluation to prioritisation and subsequent monitoring at national, regional and local levels.

All project proposals must be submitted through the DREAM platform. Each project receives a unique identifier, which can be used to track it from submission to implementation. Projects involving international partners can also be coordinated through the platform.

This system already contains some elements of environmental screening, including a direct reference to the DNSH principle. However, in practice, the assessment is carried out by the project initiator, whether a state body, local self-government body, or state- or municipally owned legal entity.

The initiator independently answers environmental and climate questions on the basis of methodological recommendations issued by the Ministry of Economy. These responses are subsequently reviewed only as part of the internal sectoral assessment. The procedure does not provide for independent or external verification.

In addition, screening is mainly based on "yes" or "no" questions. For example: "Has a basic analysis of compliance with the DNSH principle been carried out?" A positive answer only confirms that an assessment has supposedly been carried out. It does not show what the outcome was, whether the project was found to comply with environmental requirements, or whether the assessment identified significant risks.

Therefore, because of broadly worded requirements and the absence of clear thresholds, even an environmentally harmful project can be approved if the necessary documentation has been formally completed.

How to make environmental safeguards real

Ukraine needs to move towards clear environmental criteria that genuinely influence project selection.

• Introduce clear project assessment criteria instead of general "yes/no" questions. Such screening should contain clear definitions and practical examples so that the rules are applied consistently across different sectors and communities. Projects must also be assessed as a whole, rather than element by element, to avoid repeating the problems seen in the Estonian railway example involving ecoducts.

• Define what cannot be funded. Ukraine needs a clear list of activities that cannot receive public funds because they cause significant environmental harm. Initially, this could be a single list of clearly harmful activities applicable across all sectors. Subsequently, it could be supplemented with sector-specific criteria for energy, transport, construction and other sectors.

It is important that such preliminary screening takes place at an early stage, before the state or a hromada spends money and time on a detailed feasibility study.

• Align the rules with EU approaches. Each project should contribute to at least one environmental objective while causing no significant harm to the others. This is important for both European integration and Ukrainian projects' access to European funding.

• Provide for independent verification of each project's environmental indicators. Instead of formal questions about whether an assessment has been conducted, the criteria should show the outcome of that assessment: which risks have been identified, whether the project complies with the DNSH principle, and which conditions need to be met.

Reconstruction should not create new environmental problems

The principle of "do no significant harm" can sound like a complex technical concept. In fact, its logic is simple: public money should not be directed towards projects that will create new environmental problems or conflict with Ukraine's climate and European integration goals.

For citizens, this means something very tangible: hospitals, housing, heating systems, roads and other facilities that Ukraine is building and restoring today should last for decades rather than requiring additional expenditure after only a few years because of unsustainable solutions or the use of outdated technologies and materials, problems that could have been anticipated.

EU experience shows that environmental safeguards can be simple and practical if they are not reduced to a box-ticking exercise. Ukraine must take into account the mistakes of its neighbours and not repeat them. We already have the foundations for introducing effective environmental criteria, so the DNSH principle must now become a genuine mechanism for the preliminary assessment and selection of public investment projects.

This opinion piece was originally published in Ukrainian on the website of Dzerkalo Tyzhnia (ZN.UA).