Analysis of the Small and Medium-Sized Enterprises ESG Rating in Hungary

In the past decade, numerous studies have established a positive relationship between ESG and financial performance; however, significantly less attention has been directed toward SMEs, the causal relationship, and the industries driving ESG changes. This study aims to identify which industries are associated with ESG changes among Hungarian SMEs and to examine whether there is a relationship between financial performance and ESG changes. The assumption of a causal relationship has so strongly dominated the research that the possibility of a reverse effect has rarely been considered, namely that companies with a strong financial background could become leaders in ESG. This study, addressing the above research gap, analyzes a sample of 1,200 SMEs and provides evidence that, in terms of ESG and its individual components, companies with a strong financial position are more likely to perform well than those with weaker financial performance. Analysis of companies' financial data shows a link between financial results and changes in ESG ratings. It is found that improving revenue, profit, and ROE from 2022 to 2024 statistically significantly reduces the likelihood of a decrease in the company's ESG rating and increases the probability of an increase in the ESG rating. Our findings suggest the importance of integrating ESG goals into strategic financial planning for practitioners. SMEs with higher financial performance are better positioned to adopt ESG initiatives, emphasizing the need for robust financial health as a foundation for sustainability.