What is ESG? What Do We Need to Know About It?
ESG is an acronym formed from the words Environmental, Social & Governance. This framework is a structure comprised of a multitude of regulations designed to present sustainability-related, typically non-financial data. This provides a standardized format for information, making it possible to compare companies across different industries and offer valuable information to various decision-makers (e.g., investors, banks, etc.).
The regulation initially affects only large companies of public interest, who must report from 2024 onward for the year 2025. If any two of the three thresholds have been exceeded in the past two years, reporting will become mandatory for them.
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Thresholds:
- HUF 10 billion total assets
- HUF 20 billion revenue
- 500 employees (from 2025, 250 employees)
From 2025, however, this will affect relatively many more entities, not just large companies of public interest; any company that exceeds the aforementioned criteria, with the modification that the employee threshold will be adjusted to 250, will also be required to report.
International Regulations regarding sustainability
In recent years, international standard-setting bodies have developed somewhat similar, yet to some extent different, standards. These include, but are not limited to:
- ISSB – IFRS S1 and S2 Sustainability Disclosure Standards
- GSSB – GRI Standards
- EU CSRD – ESRS Standards
For Hungary, as a member of the European Union, the EU CSRD standards have the most significant impact, as we had to integrate these into our domestic legal framework. The relevant regulations were enacted by the EU in the summer of 2023, and our domestic legislation incorporated them into the accounting law, effective from January 1, 2024.
Currently, there are twelve ESRS standards: two general, five related to environmental protection, four to social issues, and one to governance. The creation of sector-specific rules is still ongoing. The so-called sustainability report ("non-financial statement") must be prepared as part of the business report, and a special auditor with sustainability certification must issue a separate report on it in addition to the annual audit.
It is possible that if the appointed auditor of the company does not have the necessary certification, the company may designate another auditor for these tasks.
Exemptions can be claimed at a consolidated level from preparing this report, but this does not mean that these issues should not be addressed at the local level, as comprehensive data reporting to the parent company is expected.
Domestic ESG Regulations
In Hungary, the obligations related to the preparation of ESG reports are governed by a separate law ("Act CVIII of 2023 on the rules of corporate social responsibility that promote sustainable finance and encourage environmentally conscious, social, and social aspects in corporate responsibility and the amendment of related laws"),which provides the framework, while the detailed rules will be defined in implementing regulations. The first set of regulations, including those related to certifications and qualifications, was issued in August 2024. Further details are expected from the Supervisory Authority for Regulated Activities in the coming months.
In its ESG report, the company must disclose the information necessary to understand the impact of its activities on sustainability issues, as well as the information needed to understand how sustainability and social issues affect the company's development, performance, and position, and its relationship with society. This ESG report must also be independently certified, but this will be done by an ESG certifier. The specific rules for them will also be established by the Authority for Regulated Activities Supervision.
Content of the ESG Report:
- The impact of the activity on sustainability issues
- The impact of sustainability and social issues on the company's development, performance, and position
- Comparison of CSRD and domestic regulations
| CSRD | Hungarian ESG Act |
|---|---|
| 2022/2464/EU Regulation | Legal Regulation |
| Part of the Business Report | Report Format |
| Auditor with special certification | Certifying Person |
As we can see from the above, there is significant overlap between the two regulations, but they prescribe fundamentally different requirements. The content of the Hungarian ESG report is much more aligned with the newly adopted CSDDD ("Corporate Sustainability Due Diligence Directive"). The scale of data will be similar, so data only needs to be collected once and then presented in the appropriate format according to the requirements of the two systems.
Evolution of the Scope of Entities Required to Report Over Time and by Corporate Background
You should act now regarding the Hungarian ESG!
Our experts are here to help navigate between the two reporting requirements so that your company meets all the regulations and takes advantage of the opportunities offered by ESG. Contact us and prepare in time for the changes!
