ESG Reporting and the SME Sector: CSRD Impact, Supply Chain Expectations and Sustainability Compliance

Sustainability reporting has become one of the most dynamically developing areas of European corporate law in recent years. The Corporate Sustainability Reporting Directive (CSRD – Directive 2022/2464/EU) and related regulations have significantly reshaped corporate transparency obligations. Below we examine the legal framework, the actual impact on the SME sector and the practical steps involved.

Legal Framework

Pillars of ESG Regulation

1. CSRD – Corporate Sustainability Reporting Directive (2022/2464/EU)

The Directive of the European Parliament and of the Council of 14 December 2022 on corporate sustainability reporting obligations. The CSRD replaced the former NFRD (2014/95/EU) and prescribes a significantly broader scope, more detailed content requirements and mandatory external assurance.

2. ESRS – European Sustainability Reporting Standards

Commission Delegated Regulation (EU) 2023/2772 contains the first set of ESRS (ESRS 1–2, E1–5, S1–4, G1), which prescribe the content and methodological requirements for companies subject to the CSRD.

3. EU Taxonomy Regulation (2020/852/EU)

Defines which economic activities qualify as environmentally sustainable. Financial institutions and large companies are required to disclose the extent to which their activities align with taxonomy criteria.

4. CSDDD – Corporate Sustainability Due Diligence Directive (2024/1760/EU)

The supply chain due diligence directive, adopted in 2024. This – not the CSRD – requires companies to identify, prevent and mitigate human rights and environmental risks in their supply chains.

5. Hungarian Transposition

The CSRD was transposed through amendments to Act C of 2000 (Accounting Act) and related legislation. The sustainability report has become a mandatory component of the annual report for affected undertakings.

Scope of the CSRD: Who Must Report?

Phased Introduction

The CSRD does not apply to all undertakings simultaneously – entry into force is phased:

Period	Affected Undertakings	First Report
FY 2024	Listed large undertakings (previously NFRD-obliged, >500 employees)	In 2025
FY 2025	Other large undertakings (at least 2/3 met: >250 employees, >€50M turnover, >€25M total assets)	In 2026
FY 2026	Listed SMEs (excluding micro-undertakings)	In 2027 (opt-out possible until 2028)

Non-Listed SMEs

Essential clarification: the CSRD does not directly apply to non-listed SMEs. Most Hungarian small and medium-sized enterprises are therefore not obliged to prepare sustainability reports under the CSRD.

This does not mean, however, that sustainability expectations do not affect them – the impact is indirect but very real.

The “Trickle-Down Effect”: Indirect Pressure on the SME Sector

Supply Chain Expectations

Large undertakings – which are subject to the CSRD and particularly the CSDDD – are also obliged to identify sustainability risks in their supply chains. As a result:

• Multinational companies (e.g. automotive manufacturers, banks, retail chains) request ESG data from their suppliers
• This manifests as a contractual obligation, not as a regulatory requirement vis-à-vis the SME
• The supplier SME is obliged to provide data to its large corporate partner within the framework of the relevant contract

Important distinction: the CSDDD (2024/1760/EU) – which prescribes supply chain due diligence – requires due diligence from large undertakings, not from SMEs. SMEs are the subjects of this obligation, not its addressees.

Financing Impact

Following the EU Taxonomy Regulation and EBA (European Banking Authority) guidelines, credit institutions increasingly take ESG risks into account in their lending decisions:

• Banks disclose what proportion of their loan portfolio aligns with sustainability criteria under the Taxonomy Regulation (Green Asset Ratio)
• This incentivises ESG-oriented lending but does not constitute a legal prohibition on lending to non-ESG-compliant undertakings
• Preferential “green loan” products are appearing on the market – these are based on the bank’s commercial decision, not on a regulatory requirement

Public Procurement Aspects

In the area of green public procurement (GPP):

• Act CXLIII of 2015 (Public Procurement Act) allows the enforcement of environmental criteria among evaluation criteria
• The EU plans to introduce mandatory GPP criteria for certain product categories
• Contracting authorities may decide at their own discretion whether to apply ESG criteria

What Does ESG Reporting Cover in Substance?

ESRS Requirements (for Large Undertakings)

ESRS-based reporting for large undertakings covers:

Environmental (E):

• Climate change – greenhouse gas emissions (Scope 1: direct, Scope 2: indirect energy, Scope 3: value chain) – ESRS E1
• Pollution – ESRS E2
• Water and marine resources – ESRS E3
• Biodiversity – ESRS E4
• Circular economy – ESRS E5

Social (S):

• Own workforce – ESRS S1 (occupational health and safety, pay equality, training etc.)
• Value chain workers – ESRS S2
• Affected communities – ESRS S3
• Consumers and end-users – ESRS S4

Governance (G):

• Business conduct – ESRS G1 (anti-corruption measures, lobbying etc.)

Voluntary SME Standard (VSME ESRS)

The Commission, with EFRAG’s involvement, developed the Voluntary SME ESRS (VSME) standard, which:

• Is voluntary – designed for non-listed SMEs
• Is simplified – contains significantly fewer data points than the large-company ESRS
• Is modular – adaptable to the undertaking’s size and activity
• Aims to provide a standardised response to supply chain data requirements

The “Unreliable Partner” Category Question

Hungarian law does not contain a general legal category under which an undertaking would be deemed a “legally unreliable partner” due to the absence of an ESG audit, leading to immediate termination of its contracts.

What may actually apply:

• A contractual partner may stipulate ESG compliance conditions in the supply agreement – breach thereof constitutes breach of contract (Civil Code Section 6:137), not an automatic ground for termination
• A public procurement contracting authority may exclude a tenderer that fails to meet the environmental or social conditions specified in the tender (Public Procurement Act Sections 65, 67)
• A financial institution may decide not to extend credit on the basis of ESG risks – this is a commercial assessment, not a regulatory automatism

Practical Advice for SMEs

Short Term

1. Assess your exposure: if you are a large company’s supplier, map out what ESG data your contractual partners require from you
2. Start with the VSME standard: the voluntary SME standard is suitable for providing a structured response to supply chain expectations
3. Carbon footprint measurement: measuring Scope 1 and 2 emissions is a relatively simple and cost-effective step for most SMEs

Medium Term

1. Policy development: internal ESG policy, environmental and social targets
2. Energy efficiency: reduced emissions are beneficial not only from an ESG perspective but also as a cost saving
3. Training: briefing employees and management on ESG expectations

Legal Considerations

1. Contract review: understanding the precise legal content of ESG clauses appearing in supply agreements
2. Data protection: GDPR requirements also apply to ESG data collection
3. Advisory support: in complex cases, consulting an ESG legal adviser is recommended

Sanctions and Legal Consequences

For CSRD-Obliged Undertakings

• The sustainability report is subject to auditor assurance
• Inadequate or incomplete reporting may trigger sanctions under the Accounting Act
• The auditor provides limited assurance, which will gradually evolve into reasonable assurance

For SMEs

• Direct legal sanction under the CSRD: none (if the undertaking is not CSRD-obliged)
• Contractual consequences: breach of ESG obligations assumed in supply agreements constitutes breach of contract – with consequences under Civil Code Sections 6:137–6:152
• Market disadvantage: the absence of ESG data may result in competitive disadvantage in procurement markets and lending

ESG reporting is not merely a large-company obligation – through supply chain pressure, changing financing conditions and green public procurement criteria, it reaches the SME sector as well. The correct interpretation of the regulation – the precise distinction between actual legal obligations and market expectations – is essential for cost-effective and lawful compliance.