The Hungarian National Bank ("MNB") issued a guideline this January to assist market participants in the issuances of green bonds. This guideline is one of the measures that the MNB introduced under its Green Programme, which it launched in early 2019 to mitigate the risks associated with climate change and other environmental problems, to expand green financial services in Hungary, to widen the related knowledge base in Hungary and abroad, and to reduce financial market participants' and its own ecological footprint. The Green Programme relating to green financial services consists of several initiatives, whose range continues to expand both in the banking sector and in capital markets with the sole aim of promoting green finance.
Encouraging green bonds
Launched in July 2019, the MNB's Growth Bond Programme, under which market participants may also choose to issue green bonds, boosted the corporate bond market. After some cautious first steps, by 2021 it had become a popular financing tool and today the proportion of green bonds stands at 13 % of all bonds issued under the Growth Bond Programme. In addition, the MNB launched a Green Mortgage Bond Purchase Programme for the purchase of green-rated mortgage bonds to promote green housing lending.
The Budapest Stock Exchange ("BÉT") also supports the development of the green bond market. In March 2021, the BÉT issued the ESG Reporting Guidelines for BÉT issuers. In addition to presenting the standards used in international practice in terms of content and format, the ESG Reporting Guide also provides practical help in preparing ESG reports.
Under the guideline, the funds raised by issuing green bonds must be spent on sustainability projects, which may range from environmental protection to social goals. The guideline links its categorisation to various international standards and taxonomies (ICMA GBP, CBI standard and EU GBS).
The guideline
The guideline set forth the main green bond standards, provides the issuers with a to-dos list and stipulates the necessary documentation and reporting obligations. The point of the extra documentation is to verify that the envisaged bonds issue qualifies as green. The issuer undertakes certain obligations that ensure that the funds will be allocated in a certain way to achieve certain green goals. External service providers verify these goals beforehand and check the allocation after the successful issuance.
When preparing to issue a green bond, the issuer is advised to contact a green verifier and a green investment service provider. The latter assist the issuer in analysing its operation and to assess if the envisaged project fits into a green standard and to prepare the green framework. The green verifier provides a second-party opinion on the green framework, the verification report or the external review, but may also be mandated to cross-check the allocation report and the environmental impact assessment. The guideline sets forth the expectations the documentation must meet content-wise and what data is advised to be included.
Conclusion
Green bonds would have the strongest effect if they facilitate the implementation of investments that are useful for the environment and society but could not be realised under normal financing. In the issuer's cost-benefit analysis, the net present value could be made positive primarily by reducing the costs of funds; therefore, green bonds would offer the most benefits if they allowed cheaper funds to be raised compared to normal bonds.
As the Hungarian financial market is still dominated by lending, encouraging bond issuances is vital for developing a heathy balance. MNB's Growth Bond Programme give the Hungarian corporate bond market a kick-start; nevertheless, the programme was shut down in December last year. The MNB is now keen to support the Hungarian bond market by other means. The guideline of the MNB is an important assistance for the prospective issuers in Hungary; whereas it also helps establish a greener financial market in Hungary.
By Gergely Szaloki, Partner, Schoenherr
