The Hungarian ESG Act has arrived

Due to the holiday season and the legislative dumping at the end of the year, the important new milestone in the ESG field did not receive much publicity, even though Act CVIII of 2023, the ESG Act, which is the first comprehensive Hungarian regulation in the field, entered into force as of January 1, 2024. The field, which until now has mostly been covered by EU sources of law and in one Hungarian law, has finally ceased to be a stepchild and has been given the first comprehensive and unified law, which the legislator himself named the ESG Act.

What is ESG?

ESG has been a hot topic for years, but in the beginning, it is worth noting that ESG is an acronym that contains the initials of three areas: environmental, social and governance.

These are the aspects that have so far been fragmented and mostly imposed on the largest companies in EU legislation (e.g. the Taxonomy Regulation, the CSRD Directive) and in domestic legislation (e.g. the Accounting Act, Act LXVII of 2019), so that they take into account these aspects and sustainability issues in their operations and investments.

Until now, there has been no single Hungarian ESG regulation, but the duties and obligations of the companies concerned had to be selected from the EU and national legal sources that entered into force at different times – emphasises Dr. Péter Weidinger, LL.M., partner of act Bán & Partners.

Scope of the ESG Act

The new single regulation, which is called Act No CVIII of 2023 on the rules of corporate social responsibility, taking into account environmental, social and societal aspects, and amending other related acts, in order to promote sustainable financing and unified corporate responsibility, is therefore a step forward from a regulatory and enforcement perspective. This is particularly true if we consider that the ESG Act contains rules applicable not only to the companies concerned but also to the public regulators/authorities and to the ESG market players.

The ESG Act applies mainly to large companies with a balance sheet total of more than HUF 10 000 million, an annual net turnover of more than HUF 20 000 million and more than 250 or 500 employees. According to the ESG Act, at least two of the previous annual figures of a large enterprise must exceed the above thresholds set out in the Act in order to be covered by the Act.

Small and medium-sized enterprises that qualify as a public interest entity are also subject to the law, regardless of the above thresholds, i.e. not only giant companies should get acquainted with the new ESG Act, calls the attention Dr. Péter Weidinger, LL.M., expert at act Bán & Partners. Such a public interest SME is a company whose transferable securities are admitted to trading on a regulated market in a state of the European Economic Area. In other words, Hungarian-based companies listed on an EEA stock exchange already fall into this category and are subject to the new rules.

However, due to its comprehensive nature, the scope of the Act extends not only to these companies, but also to service providers in the ESG market, i.e. ESG certifiers, ESG qualifiers, but also companies producing and distributing ESG softwares.

Obligations of the companies

The law has created a number of obligations for companies subject to the ESG Act, the breach of which can result in fines of up to millions of forints. However, the good news for the companies concerned is that not all of these obligations will be required from 2024 and fines for non-compliance with ESG reporting obligations will only be imposed from January 1, 2026.

The most important obligation for companies, which is reflected in principle in the ESG Act, is to assess and manage the social and environmental impacts of their operations and to prevent, minimise or eliminate social or environmental risks.

The most tangible obligation is that the companies concerned will be required to prepare and publish ESG reports on an annual basis (in ascending system). The first stakeholder group will have to prepare ESG reports for the first time in 2025 for the financial year 2024 and the last stakeholder group will have to prepare it in 2027 for the financial year 2026. The ESG report should be made publicly available free of charge on the company’s website and should include, among other things, a description of the company’s sustainability due diligence process, the social responsibility and environmental risks identified by the company, or the measures taken by the company and the company’s objectives.

Other obligations include setting up a risk management system, carrying out regular risk analyses, or reporting ESG data. It is important to underline that it is not enough for companies to look in-house, but that they also need to look at the whole supply chain, as well as the activities of direct suppliers and subsidiaries. This can ultimately lead to a company being obliged to suspend or, in the worst case, terminate its business relationship with a direct supplier that persistently breaches its environmental obligations, emphasises Dr. Péter Weidinger, LL.M., partner at act Bán & Partners.

It is worth pointing out that companies should also ensure that they have an internal or external complaints system in place to enable anyone to report the company’s social responsibility (“CSR”) and environmental risks and breaches of CSR or environmental obligations arising from the economic activities of the company, its subsidiaries or its direct suppliers. It is important to note that a company may also use its internal whistleblowing system, established under the Hungarian Whistleblowing Act transposing the EU Whistleblowing Directive, as such a complaint handling forum.

State actors

The ESG Act also regulates the role of the state in ESG. The Minister responsible for this area will be the Minister responsible for economic development, who will establish and operate the National ESG Council. The members of the Council will be delegates from several ministries and economic actors (e.g. the Hungarian Chamber of Commerce and Industry), while the Council will be chaired by the Minister.

The tasks of the authority will be carried out by the Authority for the Supervision of Regulated Activities (“SZTFH”). This is the authority that, among other things, supervises gambling, tobacco and bailiffs and liquidators. It will also maintain the records required by law, e.g. on ESG reporting companies, ESG certifiers and ESG qualifiers.

The SZTFH has also been given strong powers of control and sanction, as it has the right to enter the premises, buildings and other facilities of the company during its inspections, and can also inspect and make copies of documents. And anyone who obstructs the inspections of the SZTFH can face fines of up to millions of forints.

SZTFH will also be the operator of the electronic platform for the preparation and submission of the ESG report, the ESG management platform.

Additional rules

The attention of practitioners should also be drawn to the changes of the Accounting Act and the Auditing Act, which also entered into force as of January 1, 2024. Of particular importance is the new chapter of the Accounting Act on Sustainability Reporting, which will also become an indispensable point of Hungarian ESG regulation.

Since the ESG Act is a framework regulation, the specific details will be laid down in government decrees, ministerial orders and decrees of the President of the SZTFH. These will therefore complete the Hungarian ESG regulation, but in the meantime it is worthwhile for affected companies to prepare for ESG-compliant operation and implementation of the ESG Act rules, concludes Dr. Péter Weidinger, LL.M., partner of act Bán & Partners.