A new amendment to the ESG Act has entered into force, which, in addition to changes to the personal and material scope of the Act, contains provisions primarily aimed at easing the burden on businesses and the application of the Act. According to the proposal of the Act, the amendments are necessary in light of the experience gained in the practical application of the ESG Act since its entry into force. The changes entered into force on 19 January, except for the amendment on fines. The main amendments are summarised below, without being exhaustive.
Changes in the scope of the ESG Act
The personal scope of the ESG Act has been amended in two areas. Firstly, public-interest entities will only be covered by the ESG Act in the first instance if they meet the specified thresholds (or at least two of them) for two consecutive financial years. The amendment does not affect other categories of certain enterprises covered by the ESG Act, so of course large enterprises that are of public-interest as large enterprises are also covered by the ESG Act, which may be excluded from the first round of the ESG Act by the amendment. Thus, the amendment is primarily relevant regarding the date of entry into force of the obligations under the ESG Act: large public-interest entities that fall outside the scope of the amended section of the ESG Act as a result of the amendment will not be subject to the ESG Act starting from 1 January 2024, but rather starting from 1 January 2025. (Given the date of entry into force of the amendment, this may effectively exempt certain groups of large public-interest entities from filing ESG reports in 2025).
Another change to the personal scope is that, although regulated financial service providers will continue to be exempt from the sustainability screening obligations under the ESG Act, they will also have to comply with the ESG contributor rules. Thus, from now on, financial service providers will also have to be vigilant to ensure that their activities, which may also be included in an ESG contributor activity, do not constitute unauthorised ESG contributor activities, as the latter will be subject to supervision and fines by the Supervisory Authority of Regulated Activities (SARA).
The material scope of the ESG Act is also amended, as the amendment repeals the already unfortunate Article 1(2) of the ESG Act, which extended the scope of the ESG Act to cover, under certain conditions, the investments and exposures of enterprises. The interpretation of this provision has been a challenge for legislators since the introduction of the ESG Act, who expected the government to use the mandate of the ESG Act to regulate the criteria for classifying an enterprise's exposure and investment (and thus provide some guidance on the interpretation of the provision). However, the government's mandate was removed from the ESG Act with the April amendment, and the current amendment simply repeals the entire provision.
Changes in the area of materiality
The ESG Act provided for dual materiality as a matter of general principle, meaning that companies should assess their risks and their materiality both 'from the outside inwards', i.e. how external sustainability risks affect the company's operations, and 'from the inside outwards', i.e. how the impacts of the company's operations can be assessed from an environmental and social perspective. In line with this, the ESG Act also stipulates, amongst other things, that a company must include in its ESG report the information necessary to understand the impact of its activities on sustainability issues, as well as the information necessary to understand how sustainability and social issues affect the development, performance and position of the company and its relationship with society.
The amendment addresses the issues of dual materiality through a so-called simplification or 'codification clarification' by deleting the word 'dual' from the relevant provisions, so that the ESG Act now refers only to the 'materiality principle'. However, the amendment does not affect the disclosure and reporting obligations of companies as quoted above, so the materiality of the obligations is not changed, irrespective of the amendment to the principle.
It is therefore difficult to say at this stage whether the simplification and clarification will make it easier for companies to fulfil their due diligence obligations for sustainability purposes, without changing other relevant legal obligations.
Amendments affecting the supply chain and its members
Entities that do not qualify as enterprises (are not required to submit ESG reports) but voluntarily (or are obliged by law) provide ESG data can now fulfil their obligation by completing questionnaires for each supplier group set out in the SARA Regulation as well as by preparing ESG reports and completing the ESG questionnaire. The amendment underlines in several places that ESG reporting is voluntary for these entities.
Another new rule is that companies subject to the Act are obliged to provide their direct suppliers with a free training programme on how to complete the supplier questionnaire (the exact details of which will be set out in a ministerial decree). This will create an additional burden for companies, but on the other hand, a well-designed and implemented training programme will presumably help to collect ESG data and therefore to properly screen the supply chain, thereby supporting the fulfilment of sustainability due diligence obligations in the long term.
Registers and fines
The amendment introduces clear and welcome changes to the content of the various registers kept by the SARA.
Firstly, it removes the obligation to keep registers of companies required to publish an ESG report, given that the information contained therein may also be disclosed in the context of other reporting obligations.
Secondly, it partly modifies and partly completes the scope of the information to be registered in relation to ESG contributors, particularly ESG consultants. For example, the provision requiring the registration of accommodation and title of residence in Hungary for foreign natural person consultants is removed from the ESG Act, which is of concern both from a practical and EU law perspective. However, the rule that ESG consultants' clients must be included in the register of ESG consultants would not be changed. The necessity of this provision is particularly questionable in view of the new rule requiring companies to register their ESG contributors (including ESG consultants).
Finally, the new rules will allow for the possibility to amend ESG reports already filed, which is likely to address the real needs and problems of companies.
At the same time, the amendment clarifies the provision of the ESG Act that empowers the SARA to impose fines for failure to comply with due diligence obligations for sustainability purposes, which will enter into force on 1 January 2026, so that in addition to failure to comply with the obligations, it also provides for fines for the submission of ESG reports that do not comply with the ESG Act or other relevant legislation.
In summary, the amendment contains several provisions that are responsive to real life challenges and genuinely facilitate the application of the ESG Act, and it is likely to assist companies in meeting their sustainability due diligence obligations. However, the system of the ESG Act and other relevant legislation is understandably still very much in its early stages, and this is probably not the last amendment to clarify, add or repeal the relevant provisions to facilitate the fulfilment of sustainability due diligence obligations.
By Peter Gyorfi-Toth, Partner, ESG Practice Leader, and Dora Dranovits, ESG Practice Coordinator, Senior Associate, DLA Piper Hungary
