‘We intend to be proactive, leading by example’: why Hungary is racing ahead on green finance

January 16, 2024|Written by |Magyar Nemzeti Bank

In the last couple of years, Hungary’s central bank, the Magyar Nemzeti Bank (MNB), has become a strong advocate of sustainable financial practices. Using the publicly available methodology of the Green Central Banking scorecard, the MNB took it upon itself to voluntarily assess its green policies and compare its performance to the G20 countries ranked in the scorecard in order to see where it could further improve.

The results are striking: the MNB scored higher than any G20 country, due to its monetary and financial policy results. Its assessment was checked and validated by Positive Money, which conducts the research and analysis for the scorecard.

Barnabás Virág, deputy governor of MNB, spoke to Green Central Banking to explain what they gained from the exercise.

What did you learn by conducting an analysis of your green policies?
We are constantly evaluating our practices by promoting dialogue on the climate change agenda. We regularly organise our Green Finance Conference to discuss the most important issues.

The scorecard gave us an additional opportunity for introspection, as it provided a clear framework to reflect on our previous initiatives. It was an insightful experience that deepened our understanding of where currently we stand.

The result reinforced our belief that our strategy to focus on green policies is right and it allowed us to identify areas in which we excelled. For example, it was inspiring to learn that some of our initiatives, such as the green preferential capital requirement programme, are unique.

The analysis also highlighted areas where we can improve, and also underscored the need for increased collaboration, prompting us to engage more closely with peers to foster knowledge sharing.

MNB scored well based on the Green Central Banking scorecard criteria. Why does MNB have such an emphasis on green policies?
We live in a period of defining changes that have greater impact than ever before. This is the main characteristic of this decade: fast transitions in many areas of life, such as digitalisation, technology and energy, as well as climate. It is important that all economic policy makers understand the details of such processes and react promptly. In terms of climate change, unfortunately, we are already in the 24th hour. Eight years after the Paris Agreement, it seems that global warming is on track to reach 1.5ºC in the early 2030s.

The primary objective of the MNB is to achieve and maintain price stability. Without prejudice to this, the MNB maintains financial stability; furthermore, the MNB shall support the government’s economic policy. However, we recognised that changes in climatic conditions may not only have ecological consequences, but also severe social, economic and financial impacts.

In May 2021, the Hungarian parliament mandated the MNB to promote environmentally sustainable economic development and mitigate environmental risks, making us one of the first central banks to receive an additional secondary statutory mandate.

Despite the current period of high inflation and tighter monetary policy, green issues are still important, though the tools available for central banks have changed somewhat. There are still a range of options available, and we are evaluating solutions to further improve in a way that is in line with our primary objectives.

What do you hope to achieve by going public with your results?
Scoring ourselves using the scorecard criteria was important not only because it helped us to evaluate our performance, but it also showcased our dedication. We do believe that the most important goal is to change the entire mindset around climate change.

We saw that even a few niche programmes are suitable for this; for example, our green home programme was rather small compared to our GDP, but it helped direct focus on to the issues of the housing market, energy bill and so on. By sharing our results publicly, we aim to encourage other central banks, regulators and market players to start integrating green aspects into their operations as much as they can.

A grid of solar panels seen from above, with strips of green plants running underneath
The MNB has introduced a number of policies and initiatives to address climate-related financial risks. © Anders J

Does the MNB consider climate a systemic risk?
Absolutely yes, we do. Hungary is one of the most vulnerable countries in Europe to the consequences of climate change. The impacts can have far-reaching consequences that could potentially interfere with our primary and secondary objectives.

For example, the intensification of extreme weather events may have a negative impact on economic growth. An increase in the number of supercells and wildfires can destroy the means of production, while droughts and floods can disrupt agricultural activity. Low river levels can block transport routes and endanger energy production. By raising price volatility, these shocks may pose a greater challenge for central banks in implementing their monetary policies.

These processes can also have a serious impact on financial stability via the potential increase in non-performing loans, depreciation of collateral and changes in risk appetite. Central bank balance sheets may also be exposed to climate risks.

What policies did you put in place to score so well on the scorecard?
Sustainability issues are split across several streams within the MNB, including both monetary policy as well as financial regulatory authority arms. Besides their core functions, all units seek opportunities to integrate green initiatives.

The MNB actively contributes to the academic research and publication of sustainability topics. We signed cooperation agreements with universities to promote research on the topic of green central banking as well as practice-oriented technological research and development. In addition, the MNB established the Green Finance Scientific Awards and the Green Finance Research Initiative with the aim of recognising the work of researchers who have outstanding impact.

We established frameworks to promote green mortgage bond markets and provided incentives for sustainable mortgage lending by commercial banks to improve the energy performance of the housing stock. The green mortgage purchase and green home programmes are part of the MNB’s green monetary policy toolkit. In addition, we introduced preferential haircuts for green bonds in our collateral management framework, and built a dedicated green bond portfolio within FX reserves assets.

Most recently, we have published our sustainable and responsible investment charter, and set medium and long-term objectives for integrating environmental sustainability considerations into FX reserves management.

The MNB is unique among financial regulators in implementing preferential capital requirements for green corporate loans and bonds, as well as green housing loans. In the green recommendations, we set out a range of expectations in relation to managing climate-related risks and integrating environmental sustainability considerations into the business activities of credit institutions and insurance companies.

In order to help the consumers too, a certified consumer-friendly housing loan label was established to achieve transparent conditions on the housing loan market which, among other things, includes discounts if green conditions are met.

The macroprudential policy framework was also amended: green mortgage-backed fundings can be considered with preferential weighting in calculating the mortgage funding adequacy ratio. In addition, to see the big picture and analyse the potential financial risks, we conduct system-wide, short and long-term climate stress tests too.

The MNB also aims to promote transparency by regularly publishing its climate-related financial disclosure, which analyses the climate risk of its balance sheet and financing programmes, as well as its own operations. Concerning the latter, the MNB set a target to reduce its operational carbon footprint by 30% by the end of 2022. We exceeded the goal with a 60% reduction and our new target is for 75% by 2025, against a baseline from 2019.

What are your next steps for implementing sustainable policies?
We intend to be proactive, leading by example. We will continue to promote transparency, work on improving disclosures, and support the development of green financial markets in Hungary. We are analysing how to further green the balance sheets of the banking sector as well as our own portfolios.

How big of an impact do you think central banks can have on mitigating climate risk?
Climate and sustainability policies are set by elected governments, so fiscal policies will always take the lead, for instance by subsidising energy efficiency enhancement projects and introducing a carbon tax and other regulations. However, central banks must support such efforts. In the short term, inflation is the primary concern, although we are well aware that in the medium and long term, climate change and transition may have an impact on inflation.

Central banks have unique toolkits in the form of their regulatory and supervisory capacities to influence the behaviour of financial institutions, encourage the integration of climate considerations into decision-making processes, and promote the allocation of funds towards sustainable investments. By taking a proactive approach, central banks can help redirect financial flows and channel investments toward environmentally friendly projects.

This page was last updated January 17, 2024

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