Hungary recently adopted the so-called “ESG Act” (Act CVIII of 2023) relating to corporate social responsibility, taking into account environmental, social, and governance aspects, in order to promote sustainable financing and unified corporate responsibility. The act will gradually enter into force for different players within three years but, in general, is applicable as of January 1, 2024. The act is a framework regulation and further detailed rules are to be set out in government decrees yet to be issued to give greater clarity to market participants.
The ESG Act created two sets of compliance obligations: one is sustainability due diligence obligations applicable gradually to public and private large enterprises and public SMEs, and the other is the regulatory framework to register ESG certifiers, ESG reports, ESG consultants, and ESG software developers and distributors.
While the ESG Act also amended the Hungarian Accounting Act by implementing (EU) 2022/2464 Directive on Corporate Sustainability Reporting, which requires all large enterprises and listed SMEs to include a separate sustainability report in the business report of the annual financial statement, the sustainability due diligence obligation is a new compliance and reporting obligation. The new obligation requires the targeted enterprises to screen their supply chain to assess the sustainability of the entire corporate value chain and to produce an annual ESG report on the fulfillment of their obligations in this respect.
Through this legislation, Hungary – following Germany but before the adoption by the EU of the pending proposal for a directive on corporate sustainability due diligence – created a framework to monitor an entire supply chain performance with the obligation to (a) establish an effective sustainability risk management system, (b) develop an internal responsibility strategy and monitoring system, (c) carry out regular risk analyses, (d) establish preventive and corrective measures, (e) comply with ESG reporting obligations, and (f) obtain the declaration of direct suppliers in view of the risks involved.
According to the ESG Act, a sustainability risk management system is deemed effective if it enables the identification and management of significant social and environmental risks with adverse impacts in the activity of the enterprise and in the activities of its direct suppliers, and the prevention, elimination, or minimization of breaches of social or environmental obligations within the supply chain. The operation of an effective sustainability risk management system sets a number of personnel and material criteria, such as appointing an independent risk management officer, including risk management tasks into all relevant business processes (e.g., tendering and procurement, etc.), reviewing the results annually, applying corrective measures in case of actual or impending breaches of environmental or social obligations by the enterprises or its suppliers, and finally extending the whistleblowing system for ESG breaches.
It should be noted that only the ICT system of an accredited supplier that distributes and produces ESG software in Hungary (as defined in the ESG Act) may be used for supply chain due diligence and risk analysis and rating.
The ESG Act created a publicly accessible ESG platform through which enterprises can prepare and submit their ESG reports free of charge to the supervising authority – the Supervisory Authority of Regulated Activities – for publication in a digital form and publish their ESG certificate accompanying the ESG report.
The management of the enterprise is responsible for the preparation and publication of an ESG report in compliance with EU and Hungarian rules within six months from the end of the financial year. The ESG report must be audited by a certified ESG auditor (not necessarily a financial auditor).
The full list of possible breach sanctions is yet to come in the form of government decrees, but a revenue-based fine or exclusion from state subsidy or procurement processes may be expected for non-compliance.
While sustainability reporting is not a novelty in Hungary, through the ESG Act, the regulator meant to train and prepare local enterprises to remain competitive in international markets in the future. While exploring their sustainability self-consciousness, the sustainability due diligence obligation and ESG reporting can be challenging for enterprises in the initial stages. However, ESG reporting may be a requirement to access finance and a condition to remain in business as a responsible supplier by showing environmental and social responsibility to business partners.
By Judit Budai, Senior Partner, Szecskay
This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
