Sponsored briefing: ESG laws in Hungary

BSLAW’s managing partner Robert Szuchy gives insight into navigating the ESG system in place in Hungary

How are ESG laws impacting international commercial arbitration proceedings?

ESG (environmental, social, and governance) laws and regulations are increasingly influencing various aspects of business and law, including international commercial arbitration proceedings. Here are some ways in which ESG laws can impact such proceedings:

1. ESG-related disputes: With the growing focus on sustainability and corporate responsibility, arbitration proceedings may involve disputes related to ESG matters. These disputes could arise from allegations of environmental damage, human rights violations, labour practices, or corporate governance issues. The resolution of such disputes may require consideration of ESG laws and standards.
2. Expert witnesses and evidence: ESG laws can impact the selection and role of expert witnesses in arbitration proceedings. Experts may be required to provide opinions on ESG-related matters, such as environmental impact assessments, social responsibility practices, or governance frameworks. Parties may also present evidence related to compliance with ESG regulations or the impact of ESG factors on contractual performance.
3. Arbitrator expertise: Given the complexity of ESG matters, parties may seek arbitrators with expertise in relevant ESG-related fields. Arbitral institutions may establish panels or specialised lists of arbitrators with experience in handling ESG disputes. The appointment of arbitrators knowledgeable in ESG can ensure effective adjudication and understanding of the legal and factual issues involved.
4. Public policy considerations: ESG laws and policies may influence the public policy considerations that arbitrators must consider during the arbitral process. Tribunals may need to assess the compatibility of the dispute resolution outcome with the objectives of relevant ESG laws and regulations. This can impact the interpretation of public policy exceptions or the enforcement of arbitral awards.

It is worth noting that the precise impact of ESG laws on international commercial arbitration will depend on the specific legal framework, jurisdiction, and the evolving nature of ESG regulations. As ESG continues to gain prominence, it is expected that its influence on arbitration proceedings will continue to evolve and be subject to further developments.

What are the key provisions of your country’s ESG laws that companies should be aware of in their operations?

ESG rules are not found in a single legal source, so there is no ESG law or ESG regulation. Several national sources of legislation issue a set of ESG rules, which come into force at different times. Here are some key provisions and regulations in Hungary that companies should be aware of in relation to their operations:

1. Environmental protection:
   Act on Environmental Impact Assessment: This law regulates the assessment of the potential environmental impacts of certain projects and activities, requiring companies to obtain permits and conduct assessments where applicable.
   Waste Management Act: Companies are required to comply with waste management regulations, including waste prevention, recycling, and disposal measures.
2. Labour and social rights:
   Labour Code: This code sets out the rights and obligations of employers and employees, including regulations on working hours, wages, occupational safety, and equal treatment.
   Act on Equal Treatment and the Promotion of Equal Opportunities: This law prohibits discrimination in employment based on various grounds, including gender, race, ethnicity, religion, disability, and age.
3. Corporate governance and reporting:
   Hungarian Corporate Governance Code: The Corporate Governance Recommendations published by the Budapest Stock Exchange Ltd are designed to formulate guidelines facilitating compliance by public limited companies. This code provides guidelines for corporate governance practices, emphasising transparency, accountability, and shareholder rights.
   Accounting Act: Companies are required to comply with financial reporting and disclosure obligations, including reporting on environmental and social matters in their annual reports.
4. Anti-corruption:
   Act on Criminal Liability of Legal Entities: This law holds companies criminally liable for corruption offences committed by their representatives.
   Code of Conduct for Companies in Public Procurement: Companies participating in public procurement processes must adhere to ethical standards and anti-corruption principles.

How do your ESG laws differ from those of other countries, and what challenges may arise for multinational companies operating there?

Hungary does not have specific comprehensive ESG laws that are distinct from other countries. However, there may be differences in the specific laws, regulations, and enforcement mechanisms related to ESG topics compared to other jurisdictions. Here are some potential challenges multinational companies may face when operating in Hungary:

1. Regulatory variations: Multinational companies operating in Hungary may encounter variations in ESG-related regulations compared to their home countries or other jurisdictions where they operate. These differences can include variations in environmental standards, labour regulations, corporate governance requirements, and anti-corruption laws.
2. Reporting and disclosure requirements: ESG reporting and disclosure requirements can differ from country to country. Multinational companies may need to adapt their reporting frameworks to meet the specific requirements of Hungary, ensuring that they capture the necessary data and information for compliance.
3. Cultural and language considerations: Operating in a foreign country like Hungary also involves understanding the local culture, language, and business practices. This understanding can be crucial for effective implementation of ESG initiatives stakeholder engagement, and compliance with local norms.
4. Enforcement and legal remedies: The enforcement mechanisms and legal remedies available for ESG-related violations can differ across jurisdictions. Multinational companies need to be aware of the local enforcement landscape and potential legal consequences for non-compliance.

What are the potential consequences for companies found to be in violation of your ESG laws, and how can these risks be mitigated?

Hungary does not have specific comprehensive ESG laws that are distinct from other countries. However, violations of existing laws and regulations related to environmental, social, and governance aspects can result in various consequences for companies operating in Hungary. Here are some potential consequences:

1. Fines and penalties: Companies found to be in violation of ESG-related laws and regulations in Hungary may face financial penalties. The amount of fines or penalties can vary depending on the nature and severity of the violation.
2. Legal proceedings: Violations of specific laws or regulations may lead to legal proceedings against the company. This could involve litigation, administrative proceedings, or investigations by regulatory authorities.
3. Reputational damage: ESG-related violations can harm a company’s reputation, leading to negative publicity and loss of trust from stakeholders, including customers, investors, and the public. This can have long-term impacts on the company’s brand value and market standing.
4. Remediation and corrective actions: Companies may be required to take remedial measures to address the ESG violation,
   such as implementing environmental remediation measures, improving labour practices, or adopting proper corporate governance practices.
5. Operational restrictions: In some cases, regulatory authorities may impose operational restrictions on companies found to be in violation of ESG-related
   laws. This could include limitations on permits, licences, or activities until compliance is achieved.
6. Loss of business opportunities: Companies that do not comply with ESG standards and regulations may face difficulties in securing contracts, partnerships, or investments from entities that prioritise ESG considerations.

How can companies ensure compliance with ESG laws during cross-border transactions and business deals?

Ensuring compliance with ESG laws during cross-border transactions and business deals requires careful consideration and due diligence. Here are some key steps companies can take to promote compliance:

1. Conduct ESG due diligence: Prior to engaging in cross-border transactions or business deals, companies should conduct comprehensive ESG due diligence. This involves assessing potential risks and compliance requirements related to environmental, social, and governance aspects. It includes examining the legal, regulatory, and reputational aspects of the target company or project.
2. Include ESG clauses in contracts: Companies should consider incorporating ESG clauses in their contracts and agreements. These clauses can outline specific ESG-related obligations and requirements that all parties must comply with. This ensures that ESG considerations are explicitly addressed and can help manage potential risks.

In your opinion, what role do whistleblowers play in enforcing ESG laws, and are the protections in place currently adequate?

Whistleblowers can play a significant role in enforcing ESG laws in Hungary by reporting violations and providing valuable information to authorities. While specific whistleblower protection laws in Hungary may not be solely focused on ESG, whistleblowers can still contribute to the enforcement of ESG-related regulations through existing legal frameworks. Here are some key points regarding the role of whistleblowers in Hungary:

1. Legal protection: Whistleblowers in Hungary are protected by various laws and regulations that safeguard their rights and provide protection against retaliation. The Hungarian Act on the Protection of Whistleblowers (Act CLXV of 2013) establishes provisions to ensure the confidentiality of whistleblowers’ identities and offers safeguards against adverse actions.
2. Reporting mechanisms: Whistleblowers can report ESG-related violations through established reporting mechanisms such as internal reporting channels within their organisations or external reporting platforms provided by regulatory authorities, ombudsman offices, or specialised whistleblower hotlines.

How can companies navigate the complex and evolving landscape of ESG disclosure and reporting requirements in your country and beyond?

Navigating the complex and evolving landscape of ESG disclosure and reporting requirements can be challenging for companies. Here are some strategies to help companies effectively manage ESG disclosure and reporting obligations in Hungary and beyond:

1. Stay informed: Companies should stay abreast of the latest developments in ESG regulations and reporting frameworks. This involves monitoring updates from regulatory bodies, industry associations, and international standards-setting organisations. Engaging with ESG-focused networks and subscribing to relevant publications can also provide valuable insights.
2. Conduct materiality assessments: Companies should conduct materiality assessments to identify the ESG issues that are most significant for their operations and stakeholders. This assessment helps determine the key ESG topics that require disclosure and reporting focus.
3. Adopt international reporting standards: Utilise internationally recognised ESG reporting standards and frameworks, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-related Financial Disclosures (TCFD). These frameworks provide guidance on ESG reporting and can enhance consistency and comparability across jurisdictions.
4. Understand local regulations: Companies should familiarise themselves with the specific ESG disclosure and reporting requirements in each jurisdiction where they operate, including Hungary. Analyse the relevant laws, regulations, and guidelines to ensure compliance with local expectations and standards.

What steps should companies take to ensure that their supply chains are free from ESG violations, and what liabilities may arise if they are not?

Navigating the complex and evolving landscape of ESG disclosure and reporting requirements can be challenging for companies. Here are some strategies to help companies effectively manage ESG disclosure and reporting obligations in Hungary and beyond:

1. Stay informed: Companies should stay abreast of the latest developments in ESG regulations and reporting frameworks. This involves monitoring updates from regulatory bodies, industry associations, and international standards-setting organisations. Engaging with ESG-focused networks and subscribing to relevant publications can also provide valuable insights.
2. Conduct materiality assessments: Companies should conduct materiality assessments to identify the ESG issues that are most significant for their operations and stakeholders. This assessment helps determine the key ESG topics that require disclosure and reporting focus.
3. Adopt international reporting standards: Utilise internationally recognised ESG reporting standards and frameworks, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-related Financial Disclosures (TCFD). These frameworks provide guidance on ESG reporting and can enhance consistency and comparability across jurisdictions.
4. Understand local regulations: Companies should familiarise themselves with the specific ESG disclosure and reporting requirements in each jurisdiction where they operate, including Hungary. Analyse the relevant laws, regulations, and guidelines to ensure compliance with local expectations and standards.
5. Engage stakeholders: Engage with internal and external stakeholders to understand their expectations and reporting needs. This includes investors, customers, employees, communities, and NGOs. Stakeholder engagement can help identify the relevant ESG topics and provide insights on reporting formats and metrics that stakeholders value.
6. Enhance data collection and management: Develop robust systems for collecting, managing, and verifying ESG data. Establish processes to ensure the accuracy, completeness, and reliability of data used in ESG reporting. Consider leveraging technology solutions that facilitate data collection, analysis, and reporting.
7. Integrate ESG into corporate governance: Embed ESG considerations into the company’s corporate governance structures. This involves assigning responsibility for ESG reporting, establishing board oversight, and integrating ESG metrics into performance evaluations and executive compensation frameworks.
8. External assurance and verification: Consider obtaining external assurance or verification of ESG disclosures to enhance credibility and transparency. Independent audits or verifications can provide assurance to stakeholders and investors.
9. Continuous improvement: Continuously review and improve ESG disclosure and reporting processes. Seek feedback from stakeholders, monitor emerging best practices, and adapt reporting strategies accordingly. Regularly evaluate the effectiveness of reporting efforts and refine disclosures over time.

How can companies balance their ESG obligations with their fiduciary duties to shareholders and other stakeholders?

Balancing ESG obligations with fiduciary duties to shareholders and other stakeholders requires a comprehensive and integrated approach. Here are some strategies that companies can adopt to strike a balance:

1. Stakeholder engagement: Actively engage with a broad range of stakeholders, including shareholders, employees, customers, local communities, and NGOs. Understand their perspectives, concerns, and expectations regarding ESG issues. This engagement helps inform decision-making processes and ensures that the company’s actions consider the interests of various stakeholders.
2. Long-term value creation: Recognise that ESG considerations are not solely about compliance or meeting regulatory requirements but also about long-term value creation. By integrating ESG factors into business strategies, companies can enhance resilience, identify growth opportunities, manage risks, and build trust with stakeholders.

How might the growing focus on ESG considerations in corporate decision-making impact the future of international commercial arbitration and white-collar crime enforcement?

The growing focus on ESG considerations in corporate decision-making is likely to have several impacts on the future of international commercial arbitration and white-collar crime enforcement:

1. Disputes and arbitration: The increasing attention to ESG considerations may lead to a rise in disputes related to ESG issues, such as breach of ESG commitments, environmental harm, labour violations, or corruption. These disputes may find their way into international commercial arbitration proceedings, requiring arbitrators to assess and address ESG-related claims and defences.
2. ESG clauses and arbitration agreements: Parties involved in international commercial transactions may include ESG clauses in their contracts and arbitration agreements. These clauses could require parties to comply with specific ESG standards, or provide mechanisms for resolving disputes arising from ESG-related breaches. Arbitration proceedings would then play a role in resolving these ESG-related disputes.
3. ESG considerations in arbitral decision-making: Arbitrators may increasingly take into account ESG considerations when rendering decisions. This could involve considering the environmental, social, and governance impacts of the dispute, assessing the parties’ adherence to ESG standards, and weighing potential reputational risks associated with certain outcomes.

Firm profile: BSLAW Brussels

Avenue Michel-Ange 10., 1000 Bruxelles | T: +32 240 18712 |
www.bslawbrussels.com

Head of practice/Head of ESG
Robert Szuchy – Managing partner (pictured)

Areas of expertise and speciality within ESG

• EU Project Finance and Financial Law
• EU Public Procurement Law and Public Tenders
• Regulatory advice
• Representation of Interests
• Energy law
• Corporate and commercial law
• Data protection (GDPR)

Firm profile: BSLAW Budapest

Szuchy Ügyvédi Iroda, 1054 Budapest, Aulich utca 8 | T: +36 1 700 1035 |
www.bslaw.hu

Managing Partner:
Róbert Szuchy PhD (pictured, above)

Areas of Expertise/Practice Groups

• Corporate, commercial
• Energy law
• Public procurement
• Litigation/arbitration
• Data protection, data privacy
• Employment and labour