THE ESG ACT ON SUSTAINABLE FINANCING AND CORPORATE SOCIAL RESPONSIBILITY ENTERED INTO FORCE ON JANUARY 1, 2024

On December 12, 2023, the Hungarian Parliament adopted Act CVIII of 2023 on Sustainable Finance and Unified Corporate Responsibility (hereinafter: “ESG Act"), which entered into force on January 1, 2024. With the ESG Act, Hungary implemented the expectations set forth in No. 2022/2464 EU Directive on Corporate Sustainability Reporting (hereinafter “CSRD”). Set forth below is the summary of the most important obligations introduced by the ESG Act.

What is the scope of the ESG Act?

ESG Act covers:

a) large enterprises domiciled in Hungary that qualify as companies of public interest¹ , where in the preceding business year, on the balance sheet date of the business year, any two of the following three indicators exceeded the following threshold values:
• total balance sheet value exceeds 10,000 million forints;
• annual net revenue exceeds 20,000 million forints;
• average number of employees exceeds 500;

b) large enterprises where in the preceding business year, on the balance sheet date of the business year, any two of the following three indicators exceeded the following threshold values:
• total balance sheet exceeds 10,000 million forints
• annual net revenue exceeds 20,000 million forints;
• average number of employees exceeds 250;

c) small and medium-size enterprises which are subject to public interest.

According to the ESG Act, the Regulatory Authority for Supervised Activities (in Hungarian: Szabályozott Tevékenységek Felügyeleti Hatósága) will oversee the compliance of businesses with sustainability-related due diligence obligations, as well as the transparency of the ESG data reporting processes.

What obligations do affected companies have?

Under the ESG Act, the sustainability-related due diligence obligations for companies covered by the legislation encompass the following:

• Establishing a risk management system;
• Developing an internal responsibility strategy and system;
• Conducting regular risk analyses;
• Identifying preventive and corrective measures within the business's own sphere of activity and with direct suppliers,
• Fulfilling ESG data reporting obligations, and
• Notifying direct suppliers regarding emerging human rights and environmental risks.

As per the above, companies falling under the scope of the ESG Act are required to conduct regular comprehensive risk analyses to identify significant corporate social responsibility and environmental risks within their own business sphere and with their third-party supply partners.

What is the reporting obligation outlined in the ESG Act?

The ESG Act also addresses the mandatory sustainability reporting required by the CSRD, which stipulates that every large enterprise and public interest small and medium enterprise must prepare a compulsory sustainability report. Section 95/E. § (4) of the ESG Act details the mandatory elements of the report. There is a specific standard established by the European Union known as the “European Sustainability Reporting Standard”.

According to the legislation, the sustainability report must be prepared, published, and deposited concurrently with the companies’ financial statements and is subject to the opinion of the companies’ auditors.

The obligation for preparing the sustainability report takes effect at different times for companies of public interest and large enterprises. The first sustainability report for companies of public interest for business year 2024 should be published in 2025, and in case of large enterprises the report shall be first published in 2026 for business year 2025.

¹The ESG Act follows the concept of public interest entities as defined in Section 2 (19) of Act LXXV of 2007, according to which a public interest entity is an entity whose transferable securities are admitted to trading on a regulated market of a state of the European Economic Area or any entity that is classified as a public interest entity by law (e.g. credit institutions, insurance companies, investment firms).

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