MNB Issues Recommendation on Climate and Environmental Risks

The following are the key highlights of the expectations set out in the Recommendation:

• Supervisory expectations for integrating environmental sustainability considerations into business model and strategy. MNB expects credit institutions to identify the risks arising from climate change and environmental degradation at the level of key sectors, geographical areas, and in relation to the products and services in which they operate or plan to operate. MNB also expects credit institutions to identify and assess which climate and environmental risks are material to their business strategy in the short, medium, and long term, along with the resilience of their business strategy to these risks.
• Supervisory expectations for internal governance. MNB expects the management body of the credit institutions to have adequate collective knowledge, skills, and experience with regard to the climate and environmental risks. MNB also expects that a separate organizational unit or function ("Environmental, Social, and Governance or ESG center” or dedicated “chief sustainability officer”) responsible for the management and control of climate change and environmental risks is established within the credit institution or a senior manager is designated under the management body in its supervisory function, responsible for the management and control of climate and environmental risks.
• Supervisory expectations for risk management. MNB expects credit institutions to have a comprehensive and well-documented picture of the impact of climate and environmental risks on existing risk categories. Credit institutions are expected to develop appropriate risk indicators and set appropriate limits for climate and environmental risks. Credit institutions are also expected to monitor and disclose, where available, their policies for economic (sub)sectors, geographical exposures, and the current data on climate and environmental risk exposures, preferably in the form of quantitative measures. MNB has also set out its expectations with respect to management of credit, market, operational, and liquidity risks as well as expectations regarding the assessment of climate and environmental risks through the use of sensitivity, scenario analysis, or stress testing.
• Supervisory expectations for disclosures. MNB expects credit institutions to start preparing for the new disclosure requirements under Article 8 of the Taxonomy Regulation and Article 449a of the Capital Requirements Regulation or CRR. Under Article 8 of the Taxonomy Regulation, companies and financial institutions subject to the non-financial reporting directive will be required, from January 01, 2022, to provide additional transparency on the extent to which their activities are considered environmentally sustainable. In addition, Article 449a of CRR requires large institutions with securities traded on a regulated market to disclose information on certain ESG risks after June 28, 2022.

MNB expects credit institutions to conduct self-assessment, including a detailed gap analysis, in relation to the requirements detailed in this Recommendation. Based on the findings, the institutions are expected to develop an action plan to address the gaps and to submit this plan to MNB by September 30, 2021. Following an analysis of the submitted gap analysis, action plans, and prudential discussions, MNB will, after considering the EU legislative developments, set more detailed deadlines for the latest dates of compliance for the different expectations, which will be published in the context of the next revision of this Recommendation. MNB has also made available a “Knowledge Base” to help banks to comply with the supervisory Recommendation as soon as possible and to the greatest extent possible by presenting a collection of practical examples, good practices, available data sources, and methodologies.

Effective Date: June 01, 2021/June 30, 2021

Keywords: Europe, Hungary, Banking, Climate Change Risk, ESG, Sustainable Finance, Credit Risk, Market Risk, Operational Risk, Stress Testing, Disclosures, NFRD, Taxonomy Regulation, CRR, Recommendation, Recommendation 42/2021, Reporting, MNB