Positive Money’s Green Central Banking analysis of the Central Bank of Hungary

Positive Money tracks the progress of central banks in G20 countries towards supporting the green transition by greening their policies and practices with the Green Central Banking Scorecard. While Hungary is not in the G20, the countries’ central bank has conducted a self-assessment according to the Scorecard’s methodology, revealing that it would rank higher than all G20 countries’ central banks and financial supervisors if it featured on the Scorecard. Positive Money welcomes this proactive stance on green central banking, providing a leading example that G20 central banks must follow.

As the top ranking central bank on the Green Central Banking scorecard, the Central Bank of Hungary—the Magyar Nemzeti Bank (MNB)—has firmly asserted itself as a leading advocate for sustainability and responsible financial practices. While the MNB is not an institution of a G20 country, its proactive adoption of the Scorecard methodology and subsequent score demonstrates its commitment to advancing green finance, which is warmly applauded by Positive Money.

Under the governorship of Gyorgy Matolcsy, the MNB has published a comprehensive climate strategy, which covers the actions it is taking to integrate climate considerations into its monetary policy, financial stability and research functions. 

The MNB has worked towards offering more climate objectives in its monetary policy since 2021. According to its latest climate-related financial disclosure report, the central bank has also worked on neutralising carbon emissions from its own operations. The MNB has reduced the carbon footprint of its operations by 60% by 2022 and intends to reduce it by a further 15pp by 2025. Emissions that can not be reduced are offset by financing restoration projects.

Key Recommendations 

While we welcome the advances made by the MNB, we also recommend the following for further action: 

• Require all financial institutions to disclose credible transition plans based on scientific evidence. [1]

• Action “high-impact” monetary policies such as exclusion of fossil fuel assets from collateral frameworks or higher reserve requirements for fossil fuel assets. 

• Action “high-impact” financial policies such as implementing higher risk-weights for new and existing fossil fuel exposures.

• Proceed with issuing guidance to clarify the domestic sustainable financial framework and bolster institutions’ green transition efforts.

• Review and consider extending green corporate capital requirements programmes to further incentivize sustainability.

How the MNB stacks up against G20 countries from the 2022 Scorecard

RankCountryResearch and Advocacy

(out of 10)

Monetary Policy

(out of 50)

Financial Policy

(out of 50)

Leading by Example

(out of 20)

Aggregate Score

(out of 130)

Grade

(A+ to F)

1Hungary1019401079B-

RankCountryResearch and Advocacy

(out of 10)

Monetary Policy

(out of 50)

Financial Policy

(out of 50)

Leading by Example

(out of 20)

Aggregate Score

(out of 130)

Grade

(A+ to F)

1 (1)–France1012311770 (52)B-2 (6)↑Italy101231861 (45)C+3 (7)↑Germany101230860 (44)C+4 (4)–European Union101228858 (47)C5 (5)–United Kingdom101027956 (46)C6= (2)↓Brazil101818753 (51)C6= (3)↓China101231053 (50)C8 (9)↑Japan10614535 (25)D+9 (8)↓Indonesia10114530 (26)D+10 (14=)↑Canada10214228 (15)D11 (11=)–Mexico1044523 (17)D12 (10)↓India10010121 (18)D13 (11=)↓South Korea1016219 (17)D-14 (16)↑Russia808218 (12)D-15 (13)↓Australia1004317 (16)D-16 (14=)↓United States1006016 (15)D-17 (18)↑Turkey1002214 (5)D-18 (17)↓South Africa1002113 (10)D-19 (19=)–Argentina60006 (0)F20 (19=)↓Saudi Arabia00000 (0)F

Research and Advocacy 

As the first Central European participant, MNB joined the NGFS in January 2019. Since then, MNB has organised the Green Finance Conference every year with internationally renowned speakers.

The MNB intends to actively contribute to the academic research of sustainability issues. There are cooperation agreements in place with Budapest University of Technology and Economics and Research Centre of the Faculty of Economics of the University of Szeged.

Monetary Policy 

In a significant step toward green finance, the MNB has implemented a series of impactful monetary policies, setting an inspiring precedent for other central banks. Although the MNB is yet to commit to, or conduct any ‘high-impact’ monetary policies, they represent a leap forward in fostering green initiatives within the financial sector.

MNB introduced preferential haircuts in its collateral management framework offering  a generous  20% discount (with a maximum of 5 percentage points) for green securities pledged. Moreover, the central bank has made environmental sustainability disclosures a prerequisite for maintaining these preferential haircuts in the collateral management framework.

In 2021, MNB launched the Green Mortgage Bond Purchase Programme, a pivotal step aimed at nurturing a domestic green mortgage bond market and encouraging green mortgage lending. Through this programme, MNB acquired fixed-rate mortgage bonds into its own portfolios, with an initial allocation of HUF 200 billion, supporting the construction and acquisition of modern, energy-efficient residential real estate.

Under the Funding for Growth Scheme (FGS), MNB launched the Green Home Programme, designed to bolster the acquisition  of energy-efficient homes. Under the programme, the central bank has provided 0% refinancing to lenders for retail loans for new homes with a primary energy consumption threshold of 90 kWh/sqm per year. Additionally, the programme capped interest rates on these loans at 2.5%, with an initial allocation of HUF 200 billion.

In December 2023, the MNB made a formal commitment to double the size of the dedicated green bond portfolio in its foreign exchange reserves to EUR 500 million. The portfolio is consistent with the recommendations of the Network for Greening the Financial System.

The MNB has published a Charter of Sustainable and Responsible Investment, in which it commits to making reserves management more environmentally sustainable and sets medium and long-term objectives to green reserves management (without conflicting conventional reserves management goals), with the additional intention of leading private finance towards greener decision-making.

Financial Policy 

The MNB is spearheading the country’s drive towards green housing loans by implementing a modest ‘’green supporting factor’’ in the housing sector, which accounts for 40% of the country’s carbon emissions. This is expected to stimulate bank lending for the purchase and construction of energy efficient houses as well as retrofits on existing homes. 

EBA’s requirement on Pillar 3 disclosures of ESG risks is fully implemented in Hungary,  mandating financial institutions to transparently report their environmental risk exposure in a standardised way.

MNB Green Recommendation sets forth comprehensive expectations from  MNB regarding the identification, measurement, management, control and disclosure of climate-related and environmental risks. It also emphasises the integration of environmental sustainability considerations into the core operations of credit institutions. 

The central bank conducted extensive stress testing exercises, both long- and short-term,  covering the banking system and insurers,  publicly publishing the results. 

Furthermore, the MNB has implemented a preferential capital requirement programme for green corporate and municipal financing. This initiative permits the reduction or complete remission of Pillar II capital requirements for environmentally sustainable corporate and municipal exposures that meet the criteria. Therefore, Hungarian banks are entitled to request significantly reduced capital requirements for loans for the purchase and construction of energy-efficient properties. This also applies to solar power plants, sustainable agriculture, energy efficiency and electromobility. The capital discount is 5% or 7% of each eligible gross exposure, which reduces the participating institution’s Pillar II capital requirement. The new capital requirements cover more than 85% of the banking sector.

The discount rates vary depending on industry and adherence to sustainability standards, reflecting a substantial step forward in green finance policy implementation. 

The MNB’s Certified Consumer-Friendly Housing Loan framework supports the financing of green housing goals under favourable conditions (effective from April 2023).

Leading by Example 

The MNB is one of the first central banks outside the G20 to proactively use the Green Central Banking Scorecard methodology. This demonstrates its commitment to aligning their operations with environmental considerations and sustainable finance principles.

The MNB has made significant strides in environmental sustainability, pledging to reduce 75% of its direct GHG emissions by the end of 2025 (compared to a 2019 baseline), having already achieved its initial commitment in 2021. This reduction has been backed by measures such as installing photovoltaic systems and adopting 100% renewable energy for electricity supply in their buildings. To offset emissions that can’t be further reduced, the MNB actively finances habitat restoration projects, exemplified by a 27-hectare afforestation initiative in partnership with WWF Hungary.

Additionally, the Hungarian Parliament has incorporated environmental sustainability into the MNB’s statutory objectives as a secondary mandate, marking the central bank as the first in Europe to receive such a green mandate. 

Recognising the substantial carbon footprint in the cash supply chain, the MNB commenced preparations for environmental sustainability recommendations covering money processing, companies’ business models, strategies, operations, and risk management in 2023. 

These initiatives, though classified as medium and low impact under the “Leading by Example” section of the Green Central Banking Scorecard project, represent commendable progress in environmental responsibility.

MNB’s proactive stance marks a cultural transformation within the central banking community, where institutions are increasingly acknowledging the vital significance of integrating sustainability into their core operations and policies. The MNB has the potential to influence neighbouring central banks and financial institutions. By showcasing their success, the MNB can inspire others in the region to adopt similar green finance and sustainability practices, thus catalysing a broader shift towards a more environmentally responsible financial sector. 

Notes

[1] This can be achieved by making transition plans mandatory and outlining a pathway to a “climate safe and nature positive global economy”, starting with an immediate public declaration of expectations, along with “clear and detailed” transition plans covering all central banking, financial regulation, and supervision activities. The pathway should target a 50% reduction in greenhouse gas emissions and reversing nature loss by 2030, leading to net-zero emissions and full recovery of biodiversity by 2050.