CMS Expert Guide to ESG Compensation in Hungary

Section 16(1)-(2) of Act LXVII of 2019:  Directive 2017/828/EU of the European Parliament and of the Council (SRD II Directive) has been implemented into Hungarian national law by this act. The public joint-stock company (hereinafter referred to as: "company") establishes a remuneration policy for the directors. The remuneration policy must contribute to the business strategy, long-term interests and sustainability of the company and must explain how it does so.

Section 3:268(2) of Act V of 2013 (Civil Code): The general meeting has the sole power to vote on the company's remuneration policy. The company may therefore pay remuneration to its directors only on the basis of the remuneration policy put to a vote at the general meeting.

Article 450(1)(j) of the Regulation 575/2013/EU of the European Parliament and of the Council: In relation to their remuneration policy and practice, institutions must disclose the total remuneration for each member of the management body or top management. Section 22(2) of Act LXVII of 2019 sets out that the remuneration report provisions of this act regarding to credit institutions and investment companies must be applied if the Hungarian National Bank, acting in the scope of its duties related to the supervision of the financial intermediary system, requests it in its decision on the prudential requirements for credit institutions and investment companies and in accordance with this EU Regulation.

Article 5(1) of Regulation 2019/2088/EU of the European Parliament and of the Council (SFDR): Financial market participants and financial advisors must include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks and must publish that information on their websites.

These regulations apply to all public joint-stock companies, regardless of sector.

According to Section 95/C of Act C of 2000 on Accounting, those large companies that qualify as public-interest entities under Hungarian law, where:

a) on the balance sheet date in the previous two consecutive financial years either two of the following three indices exceed the limit indicated below:

1. the balance sheet total exceeds 6,000 million forints,
2. the annual net turnover exceeds 12,000 million forints,
3. the average number of employees in the financial year exceeds 250 persons; and

b) the average number of employees in the given financial year exceeds 500 persons;

are required to publish non-financial statements in their annual reports.

These non-financial statements contain ESG-relevant information. This rule was incorporated into this Act by the 2014/95/EU Non-Financial Reporting Directive (NFRD). The disclosure requirements imposed by the NFRD will be repealed by the transposition of the EU Corporate Sustainability Reporting Directive (CSRD) into Hungarian law. Additional obligations will be implemented with the adoption of CSRD.

The rules related to executive remuneration cover a larger part of the social ("S") pillar.

Act LXVII of 2019 sets out the requirements for the annual report: the company must prepare an annual remuneration report. The report must be clear and comprehensible and capable of providing a comprehensive overview of all remuneration awarded or based on the results of the recent financial year and determined in any form for each director in accordance with the remuneration policy, including newly appointed directors during the financial year.

The remuneration report should include the following information on the remuneration of each director:

a) the total amount of remuneration broken down into components, the relative proportion of fixed and variable components of remuneration, as well as a description of how the total remuneration is consistent with the accepted remuneration policy and how it contributes to the company's long-term performance, as well as information on how the performance criteria have been applied,

b) the annual change in remuneration over at least the last five financial years, the development of the company's performance and the average remuneration of the company's non-executive employees over that period, expressed in full-time equivalent terms and presented in a way that allows for comparison,

(c) all remuneration received from companies belonging to the group comprising the parent company and all its subsidiaries,

(d) the number of allocated or offered shares and share options, the main conditions for exercising the right, including the exercise price and date, and any changes thereto,

(e) information on the application of the possibility to reclaim variable remuneration,

(f) information on any deviation from the procedure for implementing the remuneration policy.

The remuneration report should not contain any specific information on directors as defined by national and EU regulations, nor information on the family situation of individual directors.

The remuneration report must include the names and titles of the directors.

The remuneration report must be made publicly available free of charge on the company's website for a period of ten years following the vote of the general meeting of shareholders.

However, it is important to note that the 2020/852/EU Regulation (Taxonomy Regulation), the 2014/95/EU Non-Financial Reporting Directive (NFRD) and the 2019/2088/EU Regulation (SFDR) also require companies to issue an annual report.

There is no specific distinction between directors and top management employees; the rules explained above apply to the directors.

We are not aware of any regulations in Hungary governing ESG obligations for employees' remuneration who are not directors and top management.

There are currently no legal requirements specifically aimed at addressing the pay gap between executive and workforce remuneration. According to Act CXXV of 2003 on equal treatment and the promotion of equal opportunities, no one can be discriminated against on the basis of gender (equal treatment requirement).

In Hungary, there are no prescribed remuneration schemes in relation to ESG.

No, each company sets up its own KPIs.

It is difficult to identify a complete market practice in Hungary in this respect, as market practice is still evolving in Hungary. Nevertheless, we would like to give a few examples in relation to ESG criteria for executive remuneration:

1. Some companies have established a direct link between executive remuneration and ESG targets by taking into account the level of achievement of ESG targets in the KPI calculation of performance-related share remuneration.
2. Some banks do not intend to promote sustainable investment recommendations for their employees through specific indicators and therefore do not set specific ESG-related performance indicators. As a consequence, this disclosure has no impact on the remuneration policy.
3. Other companies ensure the consistency of their remuneration policy by integrating ESG considerations as follows: their remuneration policy is consistent with the policies of integrating sustainability risks into investment decisions, as there is no direct link between potential sustainability risks and performance-related remuneration.

Yes, the market practices derive from self-regulation if companies adopt ESG criteria.

Market practices have emerged in all sectors and industries, but are currently strongest in the banking and insurance sectors.

Environment

• Use of renewable energy
• Reducing carbon emissions
• Waste management, waste reduction, separate waste collection
• Circular economy, recycling
• Reducing water use

Social

• Hiring employees with reduced working capacity
• Hiring employees who are underprivileged or come from minorities
• Occupational health and safety
• Improving gender balance in the workplace
• Education and training
• Data protection

Governance

• Involvement of external stakeholders in the decision-making process
• Involvement of independent experts in the decision-making process
• Risk management
• Transparent operation, sharing of operational data

They are generally included in both.

We cannot specify the share of ESG-related variable remuneration with numbers.

Please see the answer to Question 4. The disclosure requirements imposed by the NFRD will be repealed by the EU Corporate Sustainability Reporting Directive (CSRD).

The provisions do not overrule or change the existing agreements.

There is no direct supervision by authorities, but a claim may be brought to the Directorate General for Equal Treatment if the Social aspect of ESG is violated. The Hungarian National Bank monitors compliance with the EU Regulation 2019/2088 (SFDR).

The EU Corporate Sustainability Reporting Directive (CSRD) has already been adopted, but it is worth mentioning the Social Taxonomy that the European Commission would like to develop, but has not yet done so.