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ESG Reporting for Global Competitiveness: Minimum Questionnaire to Help

Inside View

Judit Budai, Senior Partner, Szecskay Attorneys at Law

The Hungarian legislator adopted Act CVIII of 2023 on corporate social responsibility, considering environmental, social and societal aspects (known as the “ESG Act”) to promote sustainable finance and unified corporate responsibility.

The ESG Act gradually enters into force for different players within three years but, in general, was applicable as of Jan. 1. It is a frame regulation and also amended other relevant rules. Further decrees are expected to clarify implementation.

The ESG Act created two sets of compliance obligations: sustainability due diligence obligations and ESG reporting applicable gradually to public and private large enterprises and public SMEs, and the regulation of accreditation and recording of ESG advisors and trainers, auditors, software developers, distributors, and certifiers to create a transparent domestic service provider framework.

While the ESG Act also amended the Hungarian Accounting Act to harmonize sustainability non-financial reporting obligations, ESG reporting on the supply chain due diligence system is a new compliance and reporting obligation.

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 the entire supply chain performance. Enterprises carry 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.

An effective sustainability risk management system must enable the identification and management of significant social and environmental risks with adverse impacts and the prevention, elimination or minimization of breaches of social or environmental obligations within the supply chain. 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.

Developing and operating an effective risk management system requires involving risk management tasks in all relevant business processes, appointing an employee as an independent risk management officer to conduct annual full-scale risk assessment, and establishing a whistleblowing system for ESG breaches. Enterprises can prepare and submit their ESG reports free of charge to the Supervisory Authority for Regulated Activities (Sara) for publication through the publicly accessible ESG platform.

Company management is responsible for preparing and publishing an ESG report in compliance with EU and Hungarian rules within six months from the end of the financial year. It must be approved by a certified ESG auditor, prepared in a regulated format and deliver the company’s findings, measurements and conclusions regarding sustainability issues.

The complete list of possible sanctions in case of non-compliance is yet to be set out in government decrees, but a revenue-based fine or exclusion from state subsidy or procurement processes may be expected.

At this early stage, the sustainability due diligence obligation and ESG reporting aim to help local enterprises remain competitive in international markets where ESG reporting may require access to finance and a condition to stay in business by showing environmental and social responsibility to business partners.

Even if this will impose further costs on businesses and their supply chains, we may see a positive outcome if, for the purpose of compliance, Sara and the National Bank of Hungary provide a harmonized minimum questionnaire to ease the ESG reporting exercise for enterprises. In the already amended ESG Act, Sara was given the authority to establish the required content of ESG reporting, including minimum standards of a questionnaire annexed to the report and to assess claims to extend the minimum questionnaire. Based on this, we await further developments.

This article was first published in the Budapest Business Journal print issue of May 31, 2024.

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