Environmental sustainability is essential to mitigate the risks of climate change. In order to promote this and develop a green economy, it is essential to secure adequate financing from the private sector. To this end, banks have started making available financial products for environmentally sustainable purposes.
The world’s central banks are becoming increasingly active in promoting environmental sustainability and the National Bank of Hungary (MNB) has made climate change and environmental sustainability a strategic priority. In February 2019 the MNB launched its Green Program, with the purpose of supporting the domestic financial intermediary system to achieve environmental sustainability through financial products and services.
This approach was reinforced when the Hungarian Central Bank Act was changed in August 2021, one of the first ones worldwide to set the support of environmental sustainability as a priority objective of the MNB.
The MNB has been using a number of instruments to reduce the risks associated with climate change and other environmental problems, and to expand the financing of the domestic green economy. The range of programs and products to promote sustainable finance, both in the banking sector and in capital markets, is constantly expanding.
Environmental considerations have globally been most visible on the bond markets, and the Hungarian green market is also dominated by green bonds. The first green government bond was issued in 2020. Since then, the corporate green bond market has also started to “go green” and the number of green bonds has been steadily increasing. Most green bond issues take place through the MNB’s Growth Bond Program, launched in 2019 to increase liquidity in the corporate bond market, with a total volume of EUR 4.3 billion. So far, the issuance of corporate green bonds in Hungary has been linked to the property development sector – a key area for reducing carbon emissions and mitigating climate risks.
The development of the green asset market is also supported by the Budapest Stock Exchange (BET). In March 2021, the BET issued the ESG Reporting Guidelines for BET issuers. These guidelines provide guidance and recommendations for sustainability reporting by listed companies.
MNB introduced the Green Preferential Capital Requirement Program at the end of 2020 as part of its green initiative in the capital markets. Under this scheme, investors purchasing green corporate bonds receive a discount on the capital requirements for that asset.
In addition, the MNB has a Green Mortgage Bond Purchase Program for the purchase of green-rated mortgage bonds with the aim to promote green housing lending and also the National Sustainable Capital Market Strategy project in partnership with the EBRD to help the domestic capital market become a more supportive financier of environmental sustainability.
As part of its measures for the banking sector, the MNB issued its Green Recommendation in April 2021. It sets out expectations in terms of strategy formulation, corporate governance, risk management, and disclosure. The Green Recommendation aims to facilitate the transition of credit institutions towards sustainable operations and to prepare for mandatory regulatory changes relevant to climate change and environmental risks.
In order to encourage green lending on the retail side, the Green Preferential Capital Requirement Program for Housing came into force in early 2020. Under the regulation, banks can apply significantly reduced capital requirements for loans to finance the purchase or construction of energy-efficient properties and energy efficiency retrofits, in return for which they must offer customers an interest or fee rebate and fix energy efficiency features for new loans.
As part of the green toolkit strategy, the Green Home Program was also launched to facilitate the emergence of a green home loan market, under which the MNB provides refinancing funds to banks for the construction or purchase of green homes, which they can on-lend to retail customers.
In the corporate sector, the MNB also introduced the Green Preferential Capital Requirement Program for loans financing renewable energy production (mostly solar power plants) at the end of 2020. Since then, the range of products covered by the capital requirement discount has been extended and will continue to be extended to other categories (e.g., exposures related to electromobility, sustainable agri-food, energy efficiency investment, acquisitions related to green activities, and the financing of sustainable real estate investment).
By Erika Papp, Budapest Managing Partner and Head of Finance CEE/CIS, and Kitti Tulner, Associate, CMS
This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
