Adaptation capacity and short maturity protect Hungary’s foreign exchange reserves

Key points

• Hungary’s central bank (MNB) says its sovereign-bond holdings—the largest part of its foreign exchange reserves—face no immediate climate-related financial threat, owing to short asset maturities and issuers’ strong adaptation capacity.

• MNB stresses that climate risks and green investment still affect inflation and directly impact banks through lending and collateral channels.

• The bank’s disclosures show moderate transition risk in its corporate portfolio, over €2.8bn in green sustainability bonds and a 66% cut in its own operational carbon footprint.

The sovereign portfolio of Hungary’s central bank – which accounts for the largest share of its foreign exchange reserves – does not face an immediate threat from the financial repercussions of climate change events, even as 70% of the energy mix of sovereign issuers is in oil, gas and coal, the central bank revealed in its  latest climate-related financial disclosures. 

Magyar Nemzeti Bank (MNB) said this is due to the relatively short maturity of the assets and the significant adaptation capacity of the countries within the portfolio.

Nonetheless, the central bank emphasized that climate risks and green investments have an impact on inflation, visible for instance in food prices and the reshaping of the energy system.

“Climate change also directly affects the banking system, for example in terms of lending and collateral,” it added. In 2023, MNB stated that a record amount of Hungarian bank loan portfolios were exposed to climate transition risk, with energy and agriculture loans being the most vulnerable.

The central bank’s sustainability disclosures aim to shed light on how the central bank’s balance sheet and operations are exposed to transition risks, physical risks and nature-related risks.

Despite the occurrence and intensity of climate change risks being hard to predict and quantify, MNB held “it can be stated with absolute certainty that the materialisation of transition and physical risks – in some combination – is inevitable”.

It further added that the timing, severity and subsequent manageability of climate-related risks depend on how we respond to them.

“If the targets of the Paris Agreement are met globally, we will face higher transition risks, otherwise the future will be determined by the occurrence of physical risks,” it said.

The disclosures show that MNB’s corporate portfolio (within its foreign exchange reserves) carries relatively moderate transition risk, with negative screening indicators suggesting that there is no material risk.

Within its foreign exchange reserves, MNB also holds more than €2.8bn in green or other sustainability-labelled bonds.

The report also argues that gold as a safe-haven asset could in some cases increase in value as climate risks rise. MNB warns that gold’s “physical risk exposure is negligible, but its transition risk profile cannot be clearly identified”.

Combined, gold and foreign exchange reserves represent 73% of the bank’s assets, with the remainder largely held for monetary policy purposes.

Back in 2020, the bank was the first in the world to introduce a preferential capital requirement for banks offering energy-efficient housing loans as part of its monetary policy strategy. 

In terms of nature, the bank does not use the framework provided by the Taskforce on Nature-related Financial Disclosures (TNFD) but a combination of tools, including the WWF risk filter suite.

For its domestic monetary policy assets, Hungary’s nature profile, as assessed by the WWF tool, shows elevated risks for water quality and floods, as well as ecosystem services.

The central bank also disclosed that, at the end of last year, the carbon footprint of its own operations decreased by 3,977 tonnes in nominal terms relative to the 2019 baseline, a 66% decline. 

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