On December 12, 2023, the Hungarian National Assembly adopted the ESG (Environmental, Social, and Governance) law in line with Hungary’s EU obligations. The aim of this new regulation is to ensure that companies disclose relevant information about the sustainability risks they face, aligning Hungary with the EU’s sustainability frameworks, standards, and regulations. As a result, companies will now have reporting obligations regarding sustainability risks and related corporate performance starting in 2024.
The Oeconomus Economic Research Foundation and Beceptum Central Europe Ltd. organized an international event on June 26, 2024, titled “ESG – Danger or Opportunity? Hungary’s Sustainable Economy Conference,” where Hungarian policymakers, foreign experts (including German, Polish, and American professionals), as well as representatives from relevant sectors, large companies, and the business community examined how these regulations are reshaping the competitiveness landscape and how we can support the integration of sustainable business practices.
Hungary’s Sustainable Economy Conference
The event was opened with a speech by Anikó Túri, State Secretary for Public Administration at the Ministry of Economic Development.
“If you ask me whether ESG is a danger or an opportunity, I argue in favor of it being an opportunity!” – stated Anikó Túri at the beginning of her opening speech. The State Secretary emphasized that this regulation is necessary because it makes a company’s non-financial performance measurable, which is important for both investors and consumers. She reminded the audience that Hungary adopted the ESG law in December 2023, in compliance with its EU obligations. Why so early?
“Because it is important for Hungarian companies to be prepared. If they know in advance what they need to do. If the regulation is simple and transparent, it will improve their competitiveness,” she explained.
The COVID-19 pandemic, the war in Ukraine, and the energy crisis: a lot has happened since the idea of ESG regulation first emerged in the European Union, pointed out Péter Törcsi during his welcoming speech at the “ESG – Danger or Opportunity? Hungary’s Sustainable Economy Conference.” The Chairman of the Board of the Oeconomus Economic Research Foundation highlighted that it was important for foreign experts – including those from Germany, the United States, and Poland – to share their experiences and perspectives with Hungarian stakeholders.
A new market is emerging based on ESG principles. It is crucial whether Hungary will actively participate as a shaping player in this market or merely follow others or suffer from their decisions, evaluated Miklós Panyi. The Deputy Head of the Prime Minister’s Office pointed out that Hungary is currently at the forefront of this area, which could lead to a competitive advantage and create significant new economic opportunities. “Let’s not be pessimistic! Hungarian solutions might even be applicable internationally, on a global scale,” he said. The politician acknowledged that while there are opportunities, there are undoubtedly also risks.
“Every state has the right to define its national economic strategy based on its sovereignty. The Hungarian government’s goal is to develop the most independent ESG framework possible while fulfilling EU obligations,” he emphasized. In this context, he also pointed out that, as a committed supporter of families, the Hungarian government would take corporate family-friendly measures into account when conducting ESG evaluations.
Ádám Csepeti, Deputy State Secretary for Strategic Affairs, emphasized the government’s commitment to ESG:
“The Hungarian government is keen to ensure that ESG is viewed as an opportunity rather than an additional burden by economic actors. We are still in the early stages, so it is the government’s responsibility to prepare those affected for the actual implementation and help them adapt.”
While ESG presents opportunities, it also brings disadvantages and risks. It is crucial not to allow ideologically motivated harmful regulations to be imposed on economic players. Thoughtfulness and thorough planning are essential, he explained.
Zoltán Martonyi, Senior Partner at Martonyi & Partners Law Firm and Beceptum Central Europe Ltd., highlighted that the adaptation costs of ESG regulations are higher in Eastern Europe, making it difficult to determine whether ESG should be viewed as a necessary evil or as an investment opportunity. He added that corporate leadership is crucial in the ESG performance matrix, and alongside the environmental, social, and governance criteria, financial sustainability must also be taken into account.
He pointed out that the expansion of data disclosure obligations represents a significant additional burden for small and medium-sized enterprises. ESG creates a comparative disadvantage for EU countries because it does not apply to companies outside the EU, thus giving them a competitive edge.
American Perspective
“There is nothing new in ESG; we’ve already seen this ‘movie’,” warned Anthony Kim during his critical speech. The guest researcher at the American Heritage Foundation reminded the audience that as early as the 1970s, there were discussions about how companies should focus not only on continuous economic growth but also on collective social responsibility. Imposing activist ESG regulations on companies does not enhance competitiveness; rather, it burdens them, he argued.
During our panel discussions, leaders from key companies such as the Budapest Stock Exchange, Richter Gedeon, MOL, MVM, and MBH Bank shared their perspectives.
Szabina Altsach, CEO of Beceptum Central Europe Ltd., emphasized in her closing speech:
“Small and medium-sized enterprises must also be encouraged to comply with ESG principles. This will improve transparency and increase accountability, while also urging SMEs to plan ahead and adopt sustainable practices. ESG is not a burden; it is the key to survival and success.”
Economic Background
The theme and timing of our conference were intentional: just a few days before the start of the EU’s rotating presidency, it is essential to emphasize that one of the key focuses during this six-month term will be competitiveness. However, ESG regulations within the European Union are becoming increasingly stringent, and excessive regulation could lead to competitiveness challenges. These challenges can be grouped into regulatory, financial, operational, and market-related aspects.
EU companies must adapt to strict ESG regulations, such as the EU Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD). Compliance with these regulations often requires significant investments in new reporting systems, data collection, and verification processes. For small and medium-sized enterprises, these costs can be particularly burdensome, which can affect their competitiveness compared to larger companies with greater resources.
Implementing ESG regulations often involves technological, infrastructural, and training investments: transitioning to renewable energy sources, improving supply chain sustainability, or enhancing working conditions can be costly. Companies must assess and mitigate risks related to the environmental impact, labor practices, and ethical governance of their suppliers. This may require extensive audits, engaging suppliers, and potentially restructuring supply chains, which can be time-consuming and expensive.
These investments do not always yield immediate returns, which makes it challenging for companies to balance short-term financial results with long-term sustainability goals.
Financial institutions are increasingly incorporating ESG criteria into their lending and investment decisions, which could result in higher financing costs or limited access to funding for companies that fail to meet the required standards. Compliance with ESG regulations demands continuous innovation in areas such as product and service offerings, as well as business models. Companies must adapt to incorporate sustainable practices, which could disrupt established operations and require new skills and capabilities. This can be a significant challenge for companies competing in traditional industries.
This is the regulatory system of the Western world, which often creates additional challenges rather than providing assistance.
Within the EU, companies must not only compete with each other but also with companies from regions that have less stringent ESG regulations. This inequality could disadvantage EU companies in terms of cost structure and pricing.
There is growing consumer demand for sustainable products, and companies must strike a balance between ESG compliance, affordability, and quality. If consumer expectations regarding sustainability are not met, it could harm the brand’s reputation and market position. On the other hand, excessive investment in ESG initiatives without adequate consumer support could undermine profitability.
To mitigate these challenges, businesses and policymakers can take several steps. Collaboration between the public and private sectors could be fostered to share best practices and develop supportive policies. Financial incentives and subsidies could offset the costs of ESG compliance, particularly for SMEs.
Harmonizing regulations (both within the EU and beyond) is crucial, as global harmonization levels the playing field and reduces inequalities. Additionally, developing standardized and transparent reporting systems is beneficial, as it makes ESG performance clearer and more comparable. Furthermore, allowing third-party verification of ESG statements increases trust and credibility.
While the adoption of ESG regulations in the EU presents significant competitiveness challenges, it also offers businesses opportunities for innovation, differentiation, and resilience. By proactively addressing these challenges and leveraging support mechanisms, companies can not only comply with regulatory requirements but also gain a competitive edge in the evolving global market.
