Making Sustainability a Legal Obligation: the Hungarian ESG Act

Inside View

François d’Ornano, Managing Partner, D’Ornano Partners

Hungarian companies face accelerated environmental, social, and governance reporting obligations under the new ESG Act, reshaping corporate accountability and sustainability measures ahead of EU directives.

As an international law firm advising foreign investors in all business law disciplines, D’Ornano Partners is committed to assisting companies, investors, and other stakeholders in navigating ESG and sustainability challenges under the Hungarian ESG Act. In recent months, the firm developed a specific offering for South Korean clients by creating a Korean Desk, headed by a Korean lawyer, equipped to offer legal support to Korean clients in CEE and SEE, including advice related to the Hungarian ESG issues presented below.

In fact, according to the new act, companies will be required to report on their sustainable operations earlier than is anticipated by the EU and as early as next year for some.

By adopting the ESG Act on Dec. 12, 2023, the Hungarian Government aimed to address two critical issues with one solution, immediately imposing two new reporting obligations on large Hungarian-based companies.

At its core, the act seeks to provide an objective assessment of companies’ sustainability efforts. Amendments to the Accounting Act compel businesses to present the non-financial facets of their operations in a standardized format, aligning with EU standards. The sustainability disclosure obligation is of particular significance, mirroring the EU’s Corporate Sustainability Reporting Directive.

Supply Chain Integrity

Additionally, companies must disclose the environmental integrity of their supply chain operations, effectively integrating the EU’s Corporate Sustainability Due Diligence Directive into Hungarian law. Companies will have to prepare an ESG strategy, set up an ESG risk management framework, regularly analyze risks, implement proactive and remedial ESG measures internally, implement ESG measures for direct suppliers, evaluate risks among indirect suppliers, and prepare reports on the fulfillment of their ESG obligations.

The ESG Act initially targets large companies of public interest, who will first have to publish their ESG report related to 2024 in 2025 if two of the following three indicators exceed the following thresholds in the previous year: a balance sheet total exceeding HUF 10 billion; a net turnover exceeding HUF 20 bln; or an average number of employees of 500 or more. A year later, in 2026, all large companies will be required to do so, with the threshold for the number of employees reduced to 250. Finally, in 2027, all public-interest small- and medium-sized companies, irrespective of balance sheet, annual net turnover, or number of employees, will be obliged to publish their ESG accounts. For international groups, including data on their Hungarian operations in the consolidated EU-wide report will suffice. Companies should have their ESG reporting audited by a registered ESG certifier.

Despite the law’s initial applicability to only a handful of Hungarian-headquartered companies, the ripple effects are felt across the business landscape. Large companies are tasked to collect data on emissions, energy use, sources, and waste management from all their subcontractors to obtain an accurate picture of their operations. This poses a significant challenge for many companies as they may not have recorded such data before, lacking complex corporate governance processes.

The legislation provides a framework for reporting obligations, whereas the specifics will be detailed by the newly established ESG Council, overseen by the Minister of National Economy and submitted to the Supervisory Authority for Regulatory Affairs (in Hungarian: “Szabályozott Tevékenységek Felügyeleti Hatósága” or “SZTFH”), appointed as the monitoring and management body. These rules must be published in a decree by July 1. Additional provisions, such as rules for auditors and the authority of the SZTFH to impose fines, will come into effect later, respectively, in 2025 and 2026.

This article was first published in the Budapest Business Journal print issue of April 19, 2024.

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