The application of the principles of environmental, social, and corporate governance (ESG) is especially important for ensuring the transition to a "Green Economy." In total, the principles of ESG (Environmental, Social, and Governance) typically refer to the extent to which companies demonstrate their environmental considerations under the E Component, including their climate policy, energy use, waste disposal, and measures taken by companies regarding the protection of natural resources. The other two elements of ESG, S and G, cover issues such as the company's treatment of its employees, suppliers, and customers; the use of accurate and transparent accounting methods; fair and equitable leadership selection; and accountability to shareholders. Legislation on each ESG component stipulates a range of benefits, privileges, and support measures. We present these privileges and benefits for your attention.
Benefits under the E Component (ecology, environmental protection)
The main source of air pollution in Azerbaijan is the transport sector. In the recent years, the number of vehicles has been rapidly increasing amid growing economic activity. It worht noting that the operation of old vehicles adversely affects air quality in Baku and other major cities. To avoid this trend, tax incentives for electric and hybrid vehicles, charging stations, and compressed gas buses have been gradually introduced since 2019.
According to the Tax Code, the import of vehicles equipped with electric engines has been exempted from value-added tax (VAT) since 2019. Since January 1, 2022, the import and sale of level 2 and level 3 electric vehicle charging devices have been exempted from VAT for a period of 3 years, as well as the import of hybrid vehicles with a production date of 3 years or less and an engine capacity of no more than 2500 cube is exempt from VAT for 4 years. Since January 1, 2020, the import of compressed natural gas buses designed to carry more than 10 people, including the driver, has been exempted from VAT for a period of 5 years. In accordance with the relevant decree of the Cabinet of Ministers, the import of passenger cars with a service life of no more than 3 years, as well as secondary and tertiary charging devices for passenger cars that operate exclusively on electric engines, is exempted from customs duties.
Active users belonging to a specific population group are exempt from income tax on the income derived from the sale of electricity generated from renewable energy sources (with a capacity of up to 150 kilowatts, inclusive) to the electricity grid. In accordance with the "State Program for the Socio-Economic Development of Baku and its Settlements for 2011-2013," approved by the Decree of the President of the Republic of Azerbaijan dated May 4, 2011, the Balakhani Industrial Park was established to promote domestic production. The main goal of creating the industrial park is to provide favorable conditions for potential entrepreneurs and investors interested in the processing industry. Residents of the industrial park are exempted from profit, land, and property taxes for a period of 10 years. Additionally, according to the Tax Code, the import of machinery, technological equipment, and installations is exempted from taxes for 10 years from the date of registration of the industrial park resident, based on a document issued by the relevant executive authority.
What concessions apply to component S (social issues)?
One of the components of S is related to privileges and benefits for employees. National labor legislation provides various benefits and additional guarantees for employees in socially vulnerable positions. For example, it is established that people with disabilities are entitled to engage in work activities on an equal basis along with everyone else. Discrimination based on disability in employment relationships is prohibited, as well as limiting the labor rights of individuals with disabilities in collective agreements and employment contracts concerning other employees. Refusal to enter into an employment contract due to disability, promotion, termination of employment, and reassignment to other work without their consent is prohibited. It is necessary to ensure that workplaces are accessible to people with disabilities and adapted for their use. The "Employment" law establishes quotas for enterprises and organizations. This quota applies to employers to ensure the employment of job seekers and unemployed individuals with special needs for social protection. This includes individuals with health limitations, families of martyrs, youth under 20 years old, single and large families raising minor children, parents raising children with established disabilities up to 18 years old, individuals reaching retirement age within less than two years, those released from correctional facilities, and former internally displaced persons. The employment legislation also provides benefits and exemptions for many categories of individuals. For example, the Labor Code may provide for reduced working hours for certain categories of employees, taking into account age, health condition, working conditions, job specifics, and other circumstances. The reduced working hours per week should not exceed 24 hours for employees under the age of 16, employees aged 16 to 18, and employees with disabilities due to bodily function impairments of 61-100%, as well as for pregnant women, women with children under one and a half years old, and parents raising a child under three years old on their own. In addition, the law also stipulates that at workplaces with physical, chemical, biological, and other severe production factors harmful to health, as well as the workplaces that are highly sensitive, stimulating, mentally, physically, or neurotically stressful, or adversely impacting the health of others, the weekly reduced working hours should not exceed 36 hours. If an employee's health and physiological condition, as well as the health of his (her) child with a chronic illness or other family members, according to the relevant medical opinion, require performing labor functions on a part-time basis, and for women with children under fourteen years old or children with established disabilities, the employer shall set part-time working hours based on their application.
Pregnant women, those with children under 14 years old, and those with children with established life limitations may be required to work at night, overtime, on weekends and public holidays, and other non-working days, as well as travel on business trips only with their written consent. Women caring for a child under one and a half years old may, upon their request, be assigned other light work until the child reaches the age of one and a half or be provided with conditions to care for the child. When entering into an employment contract, a probationary period is not established for individuals under 18 years old, the pregnant women, women with children under three years old, men bringing up a child under three years old on their own, and other specified categories. Employees who have been injured or disabled in military actions defending the homeland, freedom, and territorial integrity, employees who have been awarded state honors and titles for bravery in protecting the independence and territorial integrity of Azerbaijan, pregnant women, women on social leave with their child for up to three years, and those who have worked in the relevant position for less than a year after returning from such leave, as well as employees under 18 and individuals from certain other categories, are not subject to performance evaluations. Additionally, during leave, specific benefits are available to employees in various categories. For example, the Labor Code states that employees engaged in underground work, where working conditions are harmful and strenuous, and whose labor functions involve increased sensitivity, stimulation, mental and physical stress, are granted additional leave based on working conditions and the specifics of their labor functions.
The duration of additional leave, based on working conditions and the specifics of labor functions, should not be less than 6 calendar days. Component S also includes occupational safety measures. The country's Constitution, adopted in 1995, establishes the right of every individual to work in safe and healthy conditions. Our country's policy in this area is aligned with progressive international standards. Azerbaijan has ratified approximately 60 International Labour Organization (ILO) conventions on fundamental workers' rights, including over 20 conventions related to occupational safety and health. One of the main requirements of national legislation is that employment contracts shall meet occupational safety standards and clearly stipulate the employer's obligation to ensure healthy and safe working conditions for employees. The owner and employer of an enterprise are directly responsible for adhering to occupational safety norms and regulations at employees' workplaces and shall ensure compliance with all standards, norms, and rules of occupational safety. In 2023, a public legal entity called the "Labor Protection Center" was established under the State Labor Inspectorate. The Center is designed to provide services to employers in the area of occupational safety and workplace certification, organize training in these areas, offer consultation services on labor rights, occupational safety, and labor security, and provide methodological assistance.
Benefits and Exemptions under Component G (Governance Area)
By the decision of the Central Bank Board dated August 28, 2023, principles of ESG (Environmental, Social, and Governance) have been integrated into the "Corporate Governance Standards in Banks." Therefore, banks shall consider financial and non-financial risks that include ESG factors both in their business strategies, which significantly impact their operations, and in their risk assessment processes to ensure long-term sustainability. In 2023, new electronic trading and post-trading systems will be launched. The new electronic trading system will integrate appropriate software, allowing investors to conduct remote trading through the Fund.
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