Final draft of ESG Law transposing the EU’s CSR Directive submitted to Hungarian parliament

On 14 November 2023, the Minister for Economic Development submitted to parliament the final draft "Law on the Rules of Environmentally Conscious and Societally and Socially Responsive Corporate Social Responsibility Reporting Promoting Sustainable Finance and Unified Corporate Responsibility" (ESG Law).

The ESG Law transposes the Corporate Sustainability Reporting Directive 2022/2464 (CSRD) into national law, establishes a national Environmental, Social and Governance (ESG) framework to comply with EU obligations, and includes provisions of the proposed Corporate Sustainability Due Diligence Directive (CSDD). Regarding the proposed CSDD, however, the EU legislative process on CSDD is ongoing, which means there is no adopted legislation in the EU and no final version of the text.

Background

The final draft of the ESG Law contains a number of notable modifications compared to the initial draft submitted for public consultation before. Firstly, the thresholds needed for the applicability of the ESG Law have been revised and set in HUF instead of EUR while the reference to the maximum fine amounting to 10% of the turnover of the preceding year has been omitted. Secondly, detailed rules regarding ESG reporting have been added as an amendment of the Accounting Act, including provisions on the content requirements of the sustainability report and the requirements related to ESG auditors. Thirdly, requirements for an exemption from ESG reporting based on the consolidated ESG report of the parent company have also been clarified.

Organisations covered by the legislation

The scope of the ESG Law extends to the following enterprises with a seat in Hungary:

• large enterprises qualifying as entities of public interest and for which any two of the following three indicators exceeded the following thresholds at the balance sheet date in the preceding financial year:
  • a balance sheet total of HUF 10 billion,
  • an annual net turnover of HUF 20 billion,
  • an average number of employees of 500;
• a large enterprise for which any two of the following three indicators exceeded the following thresholds at the balance sheet date in the preceding financial year:
  • a balance sheet total of HUF 10 billion,
  • an annual net turnover of HUF 20 billion,
  • an average number of employees of 250; and
• small and medium-sized enterprises qualifying as entities of public interest.

Any undertaking whose transferable securities are admitted to trading on a regulated market in a State of the European Economic Area or is qualified by law as an entity of public interest is considered as an entity of public interest (e.g. certain insurance companies, banks). An entity that does not meet the specified thresholds must also comply with the provisions if it voluntarily or contractually undertakes to report ESG information under the ESG Law or is required by law to report ESG information. The scope of the ESG Law also covers ESG auditors, ESG consultants, companies that distribute and produce sustainability software, and institutions that train ESG consultants.

Sustainability due diligence obligations

Organisations covered by the ESG Law are required to establish a risk management system, develop an internal responsibility strategy and system, conduct regular risk analyses, establish preventive and corrective measures for their own business and for their direct suppliers, comply with ESG reporting obligations and collect declaration of risks from indirect suppliers.

Supply chain control

The ESG Law sets out specific due diligence requirements for company supply chains, with the aim of preventing or minimising company social responsibility (CSR) or environmental risks to the company or eliminating breaches of CSR or environmental obligations. In this context, risk assessment and risk analysis should also consider the risks posed by both direct and indirect suppliers and, as a preventive measure, direct suppliers should declare that they are complying with the human rights and environmental standards required by the company's management and that they are managed appropriately along the supply chain.

Provisions on ESG reporting

Organisations subject to the ESG Law are required to produce an annual ESG report in Hungarian in electronic format on the fulfilment of their sustainability due diligence obligations for the previous financial year and to make it publicly available on their website free of charge within four months of the end of the financial year. The preparation of the ESG report will be the responsibility of the undertaking's supreme body and will be certified by the undertaking or the person authorised to represent the parent undertaking.

The ESG report must include a description of the sustainability due diligence process carried out in relation to sustainability issues, the company's findings as to whether and which CSR and environmental risks or breaches of human rights or environmental obligations have been identified, the measures taken by the enterprise to prevent, mitigate or remedy actual or potential adverse sustainability impacts and their results, a description of how the enterprise assesses the impact and effectiveness of these measures, and a description of the conclusions the enterprise draws for future measures.

Regulatory control, sanctions

Regarding sustainability issues, the Supervisory Authority of Regulatory Affairs (SARA) supervises the adequacy of company compliance with ESG due diligence obligations, the transparency of ESG reporting processes and also lays down in a regulation the detailed content requirements for ESG reporting. In the course of the inspection, the SARA has the right to verify the submission of the ESG report, to enter the premises, buildings and other facilities of the enterprise, to inspect any document related to the case, including documents containing business secrets, to make copies or extracts of the document and to examine any object or work process related to the case. In the event of failure to comply with the obligation to provide ESG information, the SARA will impose a fine on the undertaking. However, the provision on levying the fine will only become effective as of 1 January 2026.

Next steps

The applicability date of the ESG Law varies between the following organisations with a seat in Hungary:

• large enterprises qualifying as public interest entities meeting the thresholds set out above must apply the ESG Law for their activities for the financial year 2024 and must prepare their first ESG report under the ESG Law in 2025;
• large enterprises meeting the thresholds set out above must apply it to activities in the financial year 2025 and must prepare their first statutory ESG report in the year 2026;
• small or medium-sized enterprises qualifying as public interest entities must apply it to their activities in the financial year 2026 and prepare and publish their first statutory ESG report in the year 2027.

The text of the draft ESG Law is available here in Hungarian only.

The article was co-authored by János Bálint.

For more information on this draft law and how the CSR Directive could impact your company, contact your CMS client partner or these CMS experts.