MNB Focuses on Climate and Nature-Related Risks

The statutory objectives of the National Bank of Hungary (MNB) include, directly and indirectly, the support of environmental sustainability, the central bank said in a statement on the occasion of World Environment Day.

The effects of climate change can spread through various transmission channels into the economic and financial system, affect inflation, foreign exchange reserve investments, and influence the operation of the banking system, therefore environmental sustainability issues shall also be addressed when considering the central bank's primary mandates, the statement says. In addition, the green mandate also gives MNB explicit legal authority to enforce environmental sustainability considerations with the means at its disposal, without jeopardizing its primary objective.

The National Bank of Hungary – similarly to several other central banks – views climate change as a systemic risk factor and is committed to responding to these challenges with the system of instruments provided for by law – without jeopardizing its primary objectives. The MNB has published its climate change-related financial report for the fifth time this year, reflecting its efforts to enhance green transparency, develop risk assessment methods and support green finance initiatives.

The report was prepared based on the recommendations of the Task Force on Climate Change-related Financial Disclosures (TCFD) established by the G20 Financial Stability Board, and follows the methodology of the eurozone central banks, while covering a wider range of instruments and indicators. The report presents the MNB’s strategies and methods for managing climate risks, as well as the exposure of the central bank’s financial instruments to climate and nature-related risks.

In accordance with the principle of double materiality, the analysis also focuses on examining the environmental impact of the bank’s own operations and its financial instruments, as well as on the analysis of other, broader natural risks, because the stability of the ecosystem and the services it provides and climate change are interrelated; the impacts may affect economic actors in the form of physical and transition risks.

In the case of sovereign exposures, which account for the largest share of the foreign exchange reserves, the countries’ combined emission trajectories remain still not in line with the targets set in the Paris Climate Agreement. Nevertheless, primarily due to the relatively short maturity of the securities and the significant adaptation capacity of the issuer countries, the portfolio is largely protected against the potential negative financial impacts of climate change.

Within the foreign exchange reserves, there was more than EUR 2.8 billion of exposure to green or other sustainability-labeled bonds at the end of the year. This includes a dedicated EUR 500 million green bond portfolio, the positive environmental impact of which is – among other things – approximately 123,000 tons of avoided GHG emissions per year. This is approximately equivalent to the carbon footprint of a Hungarian settlement with a population of 20,000 people.

As a member of the Network for Greening the Financial System (NGFS), which now has 149 members – mainly central banks and financial supervisors – the National Bank of Hungary emphasizes that it remains committed to working closely with financial system actors, economic decision-makers and international partners in order to understand and map the financial and economic impacts of environmental sustainability risks as accurately as possible.