’For most of history, man has had to fight nature to survive; in this century he is beginning to realize that, in order to survive, he must protect it.’ Jacques-Yves Cousteau ESG Reporting Guide for Issuers of the Budapest Stock Exchange 2 ESG Reporting Guide for Issuers of the Budapest Stock Exchange 1 Foreword Leaders, governments and organizations around the world are recognising that the time to take action for a sustainable future is now. Setting sustainable development goals is at the core of strategic planning, taking actions to confront global challenges such as climate change, other natural disasters, poverty, biodiversity loss, overpopulation, infectious diseases, to mention only a few, has never been more critical than at this present time. The financial sector has a key role in the global The ways stock exchanges can influence these areas economic sustainability action plan and so do capital can be numerous. First and most, it is imperative to markets and their flagship institutions: the stock include ESG principles into their own strategies to act exchanges. Together with the financial industry, as role models for listed companies. Further, exchanges exchanges around the world promote sustainable should take part in creating a supporting regulatory finance, the incorporation of environmental, social environment to build an adequate European and and governance (ESG) factors into investment domestic regulatory framework and adopt and apply decision-making, and the allocation of capital towards their own stock exchange rules supplementing these sustainable assets. rules of law. The Budapest Stock Exchange is no different from its Exchanges also play an important role in education, peers in that regard. In 2018, BSE joined the United and they may become think tanks, information hubs of Nations Sustainable Stock Exchanges initiative ESG-related topics and concentrate as much attention declaring its commitment to meet the UN Sustainable to them as possible. BSE is organising expert events, Development Goals (SDGs) by 2030. In addition, we conferences, educational events to spread the notion of work closely with the Federation of European Securities sustainability to as broad a public as possible. Exchanges (FESE) in its Sustainable Finance Task Force ESG awareness can further be improved by product and pay intense attention to the parallel efforts of the developments (dedicated market segments, promoting World Federation of Exchanges (WFE). BSE defined its green investment products, etc.) and by guiding most important focus areas as follows: listed issuers in their efforts to develop their ESG • improve the sustainability reporting and ESG data reporting routines and provide the market with quality sharing of listed companies information. The latter is the purpose of this present Guide. • draw investor attention to sustainable and green instruments listed on the exchange Richárd Végh • develop marketplace for the new, ESG compliant and CEO green investment products Budapest Stock Exchange 2 ESG Reporting Guide for Issuers of the Budapest Stock Exchange 3 Table of Contents Foreword 1 3 Introduction 5 What is the purpose of this guide? 6 2 Content, 4 Stakeholders Quality, Format Regulatory What is ESG? 9 1 and Materiality and Frequency and Policy What are the benefits of ESG reporting for issuers? 10 Introduction of Reporting of Reporting Landscape ESG and corporate governance reporting 13 Page 5 Page 15 Page 23 Page 31 Stakeholders and Materiality of Reporting 15 Stakeholders 16 Materiality 19 Introduction to ESG Data from BSE Annex Content, Quality, Format and Frequency of Reporting 23 ESG Reporting Collection to Recommendations Standards Issuer Ratings Page 51 Content of reporting 24 Page 45 Quality of reporting 25 Page 37 Page 41 Reporting format and disclosure channels 27 Roadmap of reporting 28 Building reporting capacity 28 Advancing reporting capabilities 29 Reporting frequency 29 Regulatory and Policy Landscape 31 Background 32 8 Introduction to ESG Reporting Standards 37 7 Global reporting standards to start with 38 5 6 Issue specific global disclosure and target setting schemes 39 Integrated reporting to enhance transparency and address interconnectivity 39 ESG Data from Collection to Issuer Ratings 41 Main ESG rating agencies 42 BSE Recommendations 45 Annex 51 Disclaimer 54 4 ESG Reporting Guide for Issuers of the Budapest Stock Exchange 5 Introduction 6 ESG Reporting Guide for Issuers of the Budapest Stock Exchange 7 Introduction “Our transformation to a carbon-neutral economy means that people need more What is the purpose of this guide? information from the companies they are • the ESG approach in general investing in. As things stand today, there is • the importance of ESG reporting The global environmental and social challenges the world is facing are now clearly apparent currently a sustainability reporting gap that • the basic terms, actors and for governments, corporates, and households as well. Investors and analysts on capital markets is hampering progress towards a sustainable processes involved expand their corporate valuation models currently in use involving sustainability criteria, financial system. The needs of investors for • the roadmap that leads to recognising the fact that in successful long-term investments investor focus must go beyond mere corporate sustainability information are the implementation of a stable financial profit maximalization. Investors expect companies to adjust their long-term strategies to growing faster than any improvements in reporting regime include ESG principles and to follow up their adherence thereto in a transparent way. Therefore, company reporting. So we welcome all views It is also important to underline public companies increasingly feel the pressure to disclose more and more non-financial, on how best to improve this Directive.” that – especially with the regulatory sustainability-related information to satisfy investors’ expectations. environment so hectically evolving EC vice-president Valdis Dombrovskis – this Guide cannot give answers On the other hand, the regulatory framework that The Non-Financial Reporting Directive, which came to all the outstanding questions will drive Europe to a more resilient and sustainable into effect on January 1, 2017, already requires ESG regarding sustainability reporting, future economy is forming just now. As for the related matters (such as employment, board diversity, nor can it provide a complete list reporting requirements, some disclosure obligations human rights, anti-corruption and bribery issues) to be of the multifaceted ESG rules and are already in place (e.g. The Non-Financial Reporting disclosed by specified large corporates, including banks ESG reporting from investee companies is at the core of regulations at this moment. Moreover, our focus is on Directive1 (NFRD), The Sustainable Finance and insurance companies. The Directive is currently all ESG transparency efforts, ratings and ESG disclosures reporting duties and improved transparency, so certain Disclosure Regulation2 (SFDR) – to be discussed in under review as part of the European Green Deal3, so of financial market participants addressed in the SFDR ESG aspects – such as for instance sustainability risk the Regulatory and Policy Landscape Chapter), with further alignments, standardizations and improvements build substantially on this information, and investors management – will not be discussed herein. the bulk of the regulations, technical standards in the to the reporting process can be expected, which will be seeking out green investment targets also rely on these pipeline, expected to come into force in the upcoming most likely manifested in more stringent transparency reports. But unfortunately, as the Green Finance Report It is also not possible within the scope of this document years. obligations (see the Regulatory and Policy Landscape issued by the Central Bank of Hungary in 20214 points to outline a detailed overview of the various ESG Chapter for further information). out, only a few Hungarian companies, institutions standards and recommend the use of one over another, provide adequate ESG data even among the exchange- as these should be tailored to individual issuer needs listed companies, and the extent and quality of these and goals. reports deviate greatly. Reporting forms and chosen This Guide tries to set some minimum expectations, standards (if any) also vary. Some of our issuers prepare recommendations to help BSE-listed issuers get high-level, integrated or stand-alone sustainability started with their ESG reporting routine. It is our reports, but many are not aware of the importance of strong intention to regularly update it as needed, this matter and lag behind. incorporating future regulatory changes, experience Investors, financial market Investee companies Intensifying This Guide has been issued to help BSE-listed and feedback from market participants. We hope it participants issuers ESG regulations shall pave the road to a more transparent and more need for green products and EU and HU companies to have a basic understanding of sustainability-related information sustainable operation for our issuers and maybe also those who are contemplating going public and getting stock exchange listed in the near future. 1 EUR-Lex - 32014L0095 - EN - EUR-Lex (europa.eu) 4 Green Finance Report, March 2021 (mnb.hu) 2 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02019R2088-20200712 3 A European Green Deal | European