Historically, factoring in ESG in investment decisions was initially a risk management method and, as such, was very much value-neutral. However, since then, it has been embraced by national and EU legislators, and its spread to the entirety of financial markets and the real economy became inevitable. Once banks (credit markets) came into the picture, all of a sudden, entire supplier chains were subject to the stringent test of environmental, social and governance aspects..
As BÉT deputy CEO István Máté-Tóth explains to the Budapest Business Journal, companies in Hungary realized early on that ESG compliance would not be just a nice-to-have thing given the country’s open, export-driven economy deeply integrated into global supply chains.
“Stakeholders knew right away that they couldn’t afford not to take this seriously; otherwise, they would lag behind in the race,” he tells the BBJ. Add intensifying consumer and investor demand for sustainable practices, and the equation shows that expectation levels are way above average in this department.
“Hungarian blue chips fulfill relevant criteria on the European level,” Máté-Tóth notes. The issue is already embedded in the corporate culture of the highest-ranked local companies: Magyar Telekom (a subsidiary of the German telco Deutsche Telekom) launched these processes as early as in the middle of the 2000s, followed by the other blue-chips OTP Bank, oil and gas giant Mol, and pharma firm Richter and yet more, the deputy CEO recalls. The BÉT was ready to play its part in giving an extra boost to help green approaches take root.
Although the relevant ESG act entered force only last year, the Budapest Stock Exchange published an extensive ESG Reporting Guide in 2021 after a large-scale consultation. Indeed, it was the first such endeavor in the entire region. The document deals with regulatory aspects, reporting standards and ratings, BÉT recommendations and how to prepare organizations for reporting.
The bourse didn’t stop at putting together that guide, though. Under its mentorship program, the organization gathered non-listed companies to gear them up with the knowledge needed to comply.
A one-day ESG training scheme drew more than 200 firms, while nearly 50 businesses participated in an ESG certification program based on a set of evaluation criteria put together by EY. Part of the latter package was a comprehensive ESG strategy.
But what if a BSE-listed company decides not to play by these rules? Would they face the threat of being delisted? That won’t happen, experts confirm, but that doesn’t mean legal and investor expectations go away. It turns out, though, that many firms listed in Budapest take a somewhat more proactive stance.
“Companies often regard this not just as an obligation but an opportunity to stand out in the CEE region or appeal to their customer base,” Máté-Tóth says. “Not to mention that younger generations see tremendous value in green practices, so compliance can also help retain talent.”
The BÉT executive further highlights that you need to look at how the dynamics are evolving. Companies benefit if they grasp risks better, but legal and customer expectations determine what firms will invest in and at what price.
“This is the trade-off that needs to be managed,” Máté-Tóth notes. “You get a better overview of risks; the environment [also] benefits, and companies will be run more efficiently. In turn, you don’t invest as much as you would without these new regulations, or you do so by spending more. We don’t always manage this balance well, and ESG compliance alone won’t make everything great. But these [ESG] expectations are here to stay.”
“The BÉT is dedicated to facilitating a process where issuers implementing sustainable investments and investors interested in green securities find one another,” BÉT deputy CEO István Máté-Tóth stresses.
Hence, the bourse website [bse.hu] has been altered to distinguish those securities by indicating compliance criteria. In 2022, the National Bank of Hungary (MNB) published its Green Bond Issuance Guide, and BÉT follows the standards detailed in those guidelines concerning green debt securities. Incidentally, although the Budapest Stock Exchange is itself a listed entity, the MNB is the»controlling owner of the bourse and nominates the chairman of the board, a position currently held by MNB deputy governor Barnabás Virág.
MNB’s role in shaping the ESG field can’t be over-emphasized. It not only received a sustainability mandate from lawmakers, but its experts have also published a plethora of sectoral studies and analyses that help stakeholders navigate ESG waters. Its regulatory activity also contributes to ensuring that financing for sustainable investments becomes cheaper.
You may wonder to what extent the size of Hungarian capital markets may limit whether related ESG measures can be enforced in the wider economy.
“Indeed, it’s smaller than it should be, even compared to our current level of economic development, but it’s growing,” BÉT deputy CEO István Máté-Tóth explains. “Listed Hungarian companies have a vast network of suppliers to whom this expectation also applies. Accordingly, it all spread to the real economy a long time ago, and so, in this respect, the capital market size is not a limitation.”
ESG compliance undoubtedly boosts your company’s reputation and access to capital, but it comes at a cost. Many firms complain about having to hire entire teams to deal with reporting, an extra administrative burden that hampers global competitiveness. European sustainability rules also have a major impact on the allocation and cost of capital, increases capital costs in certain sectors.
BÉT deputy CEO István Máté-Tóth agrees that in the United States and Asia, regulators handle the issue entirely differently; ESG reporting obligations and the resulting capital allocation rules are a European thing.
“There are so many related regulations on the EU level that it’s more like an acronym tsunami,” he notes and points to the alternative Anglo-Saxon approach that instead tends to reduce red tape if an issue arises.
“Yes, it does trigger huge administrative costs, and it is at the political level that what is sustainable is decided. But the ESG framework aims to manage risks on the company management front, in particular, and so, if you comply, you will be able to handle those risks better,” he says.
This article was first published in the Budapest Business Journal print issue of January 24, 2025.
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