ESG due diligence obligation for financial institutions in Hungary

November 14, 2024

Are you prepared for the new requirements?

The money side of the green transition continues to be of great importance, especially when considering the perpetual financial anxiety that EU member states face. Capital needs to be available for future-proof and competitiveness-supporting investments all over in Europe. For this to thrive, the need remains to identify new ways to mobilize capital for investing in future green technologies, but so far, the messages have been mixed about the prospects of new public funding for the commercialization and scaling of tech-clean, deep as well as bio.

Money is available in the private sector; thus, commercial lending institutions are the likely candidates to perform the duty of scaling-up those companies that are needed for the green change. With ever-stronger regulation of credits, creditors and lenders, rigorous scrutiny of the borrowers, also from a sustainability point of view, is becoming the norm.

While the EU has taken the lead globally in respect of regulating sustainable finance¹, it is doing so with calculated patience-giving companies a couple of years to complete their due diligence and reporting on environment, social and governance (ESG). Voluntary commitments or agency-approved sectoral approaches (the Netherlands, for example) are now emerging. In Germany and in Hungary, however, market players face additional obligations. In particular, the Hungarian "ESG law" (Law CVIII of 2023 and its 2024 implementing regulations) has imposed (from 2025) strict due diligence and ESG-reporting obligations on large companies deemed to be of "general economic interest." These obligations will gradually extend to other companies from 2026 and 2027 onwards.

In Hungary, the overseeing authority for commercial banking and lending operations, the Central Bank (MNB), published guidelines for entities providing financial services, based on the European Union's Non-Financial Reporting Directive², for their credits, loans and financial leasing operations. In effect from January 1, 2024, these guidelines³ establish a minimum list of questions a potential borrower must answer regarding environmental, social and governance when applying for financing support above a certain threshold. The aim of the authority is to better assess the risks and opportunities attached to the functioning of the borrower entity-and particularly, from an ESG point of view.

The text is aimed at all market participants-Hungarian entities and non-Hungarian entities running operations through filial establishments in Hungary.⁴ Part of the questionnaire concerning environmental claims builds upon the MNB's Green Guidance from 2022⁵ and the bank's guidelines on credit risk assessment and control from 2024⁶.

The new guidelines, on the other hand, set out a long list of questions, but they do not provide recommendations for data-handling policies.

Compliance can be fulfilled either by collecting data from credible databases or by a thorough due diligence process, as part of the risk assessment and individual decision-making process connected with the borrower's request.

Requests in excess of €1 million by foreign entities-economic entities not having a Hungarian-registered operation-have additional reporting obligations. Beyond the minimum data, these applicants must answer questions concerning their activities in respect of climate change mitigation and adaptation, the circular economy, water circulation, biodiversity, employee relations, consumer handling, reporting, third-party liabilities, governance and social responsibility, among others.

For local borrowers, ESG due diligence is introduced gradually: first to be assessed are credit requests above HUF 500 million (ca. €1.25 million). These deals must have such assessments completed by July 1, 2025.

Compliance starts with data collection and analysis of existing internal operations; gaps can only be filled afterwards. Though the guidance is not mandatory, it reflects the authority's approach to financial institutions' handling of clients' ESG-related risks. The same financial institutions now have two years to advance from qualitative evaluations to a well-established, internally verified qualitative and quantitative scoring system in respect of its customers.

At Dentons Budapest, we have already begun assisting clients and banks to comply with the new requirements. For questions, please contact Pál Belényesi, Of Counsel, at our office.

1. Examine the following legislation: Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Taxonomy); Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation (Disclosures Delegated Act); Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (CSRD); Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards (European Sustainability Reporting Standards); EBA/REP/2021/18 report.
2. Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.
3. A Magyar Nemzeti Bank 9/2024. (IX.24.) számú ajánlása a hitelkockázat vállalása, mérése, kezelése és kontrollja során a környezeti, társadalmi és vállalatirányítási információk felmérését szolgáló minimum kérdéssor alkalmazásáról.
4. Check: a hitelintézetekről és a pénzügyi vállalkozásokról szóló 2013. évi CCXXXVII. törvény (Law CCXXXVII of 2013).
5. A környezeti fenntarthatósági szempontok érvényesítéséről a hitelintézetek tevékenységeiben című 10/2022. (VIII. 2.) MNB ajánlás.
6. A hitelkockázat vállalásáról, méréséről, kezeléséről és kontrolljáról szóló7/2024. (VI.21.) MNB ajánlás.