MNB published the first report on the environmental sustainability of the financial system in Hungary. The report highlights that Hungary is lagging behind in a number of areas in achieving the Sustainable Development Goals, or SDGs, and the country ranks 19th in Europe overall in terms of these goals. Additionally, an MNB survey suggests that the green aspects have clearly strengthened in case of banks last year, though the Hungarian banking sector is still at a serious disadvantage compared to euro area institutions.
The report reveals that the financial system in the country has only marginally integrated environmental sustainability aspects into its operation and, consequently, only little “green financial” data is available for now. Only a few percent of the Hungarian financial capital can be estimated as green, while achieving the international and national objectives requires much more environmentally sustainable private investments. Additionally, Hungarian banks are generally unaware of the extent of their climate risk exposures and are, therefore, unable to properly manage or mitigate them. For the first time, the “Bank Carbon-Risk Index” (developed by MNB) provides an insight into the Hungarian banking sector's exposure to transition risks and shows a negative trend and a strong risk concentration. The share of environmentally sustainable economic activities financed by the banking sector cannot be quantified at present, but based on MNB estimates, excluding the energy sector, it is presumably very modest.
Nonetheless, in the capital markets, the report notes that the 2020 launch of the green bond market in Hungary is an important milestone, which may be accompanied by the market penetration of ESG-based investment products. Despite the coronavirus epidemic, two green government securities and three green corporate bond issues were successfully carried out in 2020. The expansion of domestically issued green assets may also help the development of investment products using the ESG approach, the share of which is, however, negligible for the time being. In addition to the measures of MNB to promote green finance, EU and global initiatives can also quickly transform the Hungarian and European financial markets. The introduction of new EU rules applicable to large companies, banks, and institutional investors only started in 2018, but its provision on sustainable investments will be applicable in the Hungarian market already from March 2021, followed by a new set of banking regulations from 2022. The report concludes that meeting the existing data gaps is necessary, as such gaps can result in, among other things, incorrect pricing of climate risks, which undermine prudent risk management. Overcoming this problem is a clear priority of EU legislation, with the MNB also attempting to improve it through several existing and planned measures.
Keywords: Europe, Hungary, Banking, Insurance, Securities, ESG, Climate Change Risk, Sustainable Finance, Sustainable Development Goals, Green Bonds, MNB
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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