According to the ESG Act1 promulgated on December 22, 2023, certain large companies must also examine the operations of their suppliers—alongside their own and their subsidiaries—from an ESG perspective (i.e., environmental, social, and governance aspects), and they must prepare an annual report on the results.
Under the law, the companies concerned must carry out a risk assessment—covering their suppliers as well—at least once a year, and must establish systems suitable for managing these risks, including addressing problems identified at direct suppliers.
In addition, declarations must be completed with all suppliers regarding compliance with human rights and environmental protection requirements.
If social responsibility or environmental obligations are violated at any point in the supply chain, the obligated company must develop corrective measures together with the affected supplier.
¹Act CVIII of 2023 on laying down the rules of corporate social responsibility taking into account environmental, societal and social considerations to promote sustainable finance and unified corporate responsibility, and amending certain related Acts.
Companies concerned must also expand their whistleblowing systems in accordance with the Whistleblower Protection Act to handle violations related to social responsibility or environmental obligations, and this must also be enforced with their suppliers.
In addition, companies must establish their own ESG strategy and internal responsibility framework, and prepare ESG reports on an annual basis regarding the fulfillment of sustainability due diligence obligations for the previous financial year, which may also involve their suppliers.
The law also prescribes sanctions affecting suppliers in relation to these obligations. Insufficient ESG preparedness or violations of ESG requirements by the affected companies may result in the suspension of supplier contracts for up to 30 days.
At the same time, sustainability due diligence of suppliers offers several advantages for companies, as it promotes the establishment of stable and reliable supplier networks that ensure continuous business operations, where risks arising from non-compliance with environmental, social, and governance (e.g. corruption) aspects can be minimized.
The scope of the ESG Act extends to the following companies with a registered seat in Hungary:
1. Large companies of public interest, where in the two financial years preceding the business year, at the balance sheet date, at least two of the following three indicators exceeded the thresholds:
- HUF 10,000 million total assets
- HUF 20,000 million annual net revenue
- An average of 500 employees
2. All other large companies whose main activity falls under the sectors defined in Annex 1 of the ESG Act (according to the Classification of Economic Activities), and where, in the two financial years preceding the business year, the following thresholds are exceeded:
- HUF 90,000 million annual net revenue, and
- An average of 500 employees
For the first time, activities from the 2025 financial year must be reported in 2026.
Our services in relation to the ESG act
1. Preparation for compliance with the ESG Act
As an accredited ESG advisory firm, KPMG supports companies in identifying the regulatory requirements applicable to them under the ESG Act and in assessing their compliance with these obligations based on their current level of preparedness. The ESG compliance “quick scan” is an assessment that helps define the tasks, timeline and required resources necessary for compliance.
Conducting such an assessment also creates significant value for companies that do not yet fall under the scope of the ESG Act, as it lays the foundation for long-term planning and strategic decision-making, and helps identify ESG-related risks and business opportunities. Timely preparation can provide a competitive advantage in the eyes of investors, partners, and clients, while reducing future compliance costs.
2. ESG strategy and systems
The Hungarian ESG Act requires the establishment of an internal ESG system and the development of an ESG strategy that defines the organizational framework for ESG-related development within the company, as well as multi-year forward-looking objectives and the associated tasks. In addition, the requirements include the creation of a risk management system and an ESG complaints handling system.
| ESG services | Business benefits enhancing competitiveness |
|---|---|
| Development of an internal ESG / corporate responsibility strategy | A company-level ESG strategy forms the basis for meeting ESG-related requirements and for continuous improvement. During the development of the strategy, the company’s current ESG performance is assessed, areas for improvement are identified, and multi-year objectives are set along with specific targets, deadlines, and responsible parties. In this way, the company’s ESG development becomes continuously trackable and measurable. |
| Support for establishing an internal ESG / corporate responsibility system | An internal ESG system provides the organizational framework for implementing the corporate ESG strategy, defining responsibilities for individual ESG areas as well as internal cooperation channels. |
| Development of a supplier selection, evaluation, and risk management system | In addition to supporting compliance with legal requirements, the evaluation system offers further benefits by promoting the creation of a stable and reliable supplier network that ensures continuous business operations, where risks arising from non-compliance with environmental, social, and governance aspects (e.g., corruption) can be minimized. Furthermore, the risk management system enables the classification of the company’s own activities and compliant suppliers into risk categories, supporting cost-efficient and effective risk management. |
| Expansion of the whistleblowing system under the Whistleblower Protection Act² to cover violations related to social responsibility or environmental obligations across the entire supply chain | A well-functioning reporting system covering complaints related to corporate social responsibility and environmental matters across the entire supply chain can minimize the risks of fines and reputational damage due to non-compliance, while significantly increasing the likelihood of early detection and preventing potential regulatory proceedings or negative media coverage. |
²Act XXV of 2023 on complaints, public interest disclosures, and rules related to the reporting of abuses (whistleblowing).
3. Risk assessment, measures & declarations
The Hungarian ESG Act requires annual risk assessments and, where justified, extraordinary risk assessments to be carried out within the established risk management system. In the case of significant risks, preventive measures must be taken, while in the event of breaches of environmental and social obligations, corrective measures must also be implemented. In addition, direct suppliers must provide declarations on compliance with legal and environmental requirements.
| ESG services | Business benefits enhancing competitiveness |
|---|---|
| Conducting annual and ad hoc risk assessments | With the help of risk assessment, activities and areas within the company’s own operations and among suppliers that pose the highest ESG (environmental, social, and governance) non-compliance risks can be identified in a timely manner. |
| Development of preventive measures to manage identified ESG risks | Timely management of identified risks enables the prevention of breaches related to social responsibility and environmental obligations, thereby reducing additional costs arising from non-compliance (fines, corrective measures) as well as reputational risks (negative press, exclusion from public procurement procedures). |
| Advisory support in developing corrective measures in case of breaches of social responsibility or environmental obligations | By promptly eliminating breaches with appropriate corrective measures, companies can avoid significant fines and customer boycotts. Boycotts resulting from environmental and human rights abuses have already proven capable of significantly reducing the revenues of several multinational companies over multiple years. |
| Preparation of supplier declarations on compliance with human rights and environmental requirements, and on their proper management within the supply chain | Supplier declarations carefully prepared jointly by legal and ESG experts reduce the company’s civil liability risk across the entire supply chain. |
4. Preparation of the ESG report
The Hungarian ESG Act also requires the preparation of annual reports on the fulfillment of sustainability due diligence obligations, subject to mandatory certification.
| ESG services | Business benefits enhancing competitiveness |
|---|---|
| Preparation of an annual ESG report on the fulfillment of the company’s sustainability due diligence obligations | Presenting the company’s ESG performance on an annual basis improves transparency and increases the trust of stakeholders in the company and its ESG activities. The information collected for the report also significantly facilitates the completion of ESG questionnaires sent by the company’s customers and financiers. |
