Green lending trends in the banking sector – a breakthrough in Hungary
When it comes to sustainable development goals, Hungary ranks 19th in Europe. While it faces major challenges in areas, such as affordable and clean energy, climate protection and protection of terrestrial ecosystems, the country's financial system has recently begun to consider issues of environmental sustainability.
It is important to note that most of the credit institutions sector in Hungary sees the greatest commercial potential in the financing of renewable energy production. Therefore, the MNB is currently encouraging the banking sector to increase the level of green loans. In April 2021, the MNB issued a green proposal to encourage Hungarian credit institutions to adapt their operations to sustainable development, including strategy formulation, corporate governance and risk management.
Preferential capital requirements
The MNB has published new regulatory guidelines (Green Preferential Capital Requirement Programme for Corporates and Municipalities) for credit institutions on climate and environmental risk management, which came into force in June 2021. The new guidelines encourage banks to evaluate environmental risks when assessing their impact on operations and their financing portfolios using measurable and reliable indicators and methods in accordance with the recommendations of the task force on climate-related financial disclosures. However, the guidance goes well beyond climate information, requiring banks to create a dedicated unit to manage environmental risks and develop climate-neutral plans in line with the goals of the Paris Agreement.
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.
It is safe to say that the green corporate loan portfolio in Hungary is growing dynamically in relation to the overall business credit portfolio. In addition, the MNB launched a programme for environmentally friendly housing in summer 2021. As part of the scheme, the MNB provides refinancing to banks that finance the construction and purchase of green housing.
The MNB has published guidelines that define the main standards for green bonds, provide issuers with a list of tasks to be performed, and define required documentation and reporting obligations. In addition, the Budapest Stock Exchange is supporting the development of the green bond market by:
- publishing guidelines for environmental, social and governance (ESG) reports, introducing internationally accepted content and format standards; and
- providing practical assistance in the preparation of ESG reports.
The MNB has also launched a green mortgage bond purchase programme for the purchase of green-rated mortgage bonds to facilitate the issuance of green housing loans.
Green company bonds were first issued in summer 2020 as part of the MNB's bond funding for growth scheme. The start of the Hungarian corporate green bond market was marked by the issuance of bonds worth HUF 30bln (approx. EUR 78.8m), followed by more green bond issuances by several other companies. All bonds issued comply with the corporate green bond regulation and have been verified by an external testing body to meet international standards, namely green bond principles (GBPs). Therefore, the Hungarian GBPs comply with the 2014 International Capital Markets Association Principles.
Additionally, the Hungarian Green Bond Framework was introduced in May 2020. The Ministry of Finance in cooperation with the government debt management agency of Hungary has set up a steering committee. The GBPs include:
- the use of proceeds;
- overall investment eligibility;
- reporting of total inflows;
- management of inflows; and
- impact reporting.
State aid in green finance
According to the National Clean Development Strategy 2020-2050, the government is ready to intervene to achieve climate neutrality and is choosing the path of early action, even if it costs approximately HUF 24.7bln (approx. EUR 64.9m) more than a more relaxed timeline.
The Hungarian State has already enacted – and the European Commission has already approved – the EUR 2bln scheme aimed at providing investment support towards a sustainable recovery. The scheme was approved under the State aid Temporary Framework.
Green finance is taking significant hold in Hungary and gives hope for a smooth transition to ESG, which often gets pushed aside by pressing social objectives that lending businesses must satisfy in order to stay relevant. Even though it is becoming increasingly clear that environmental and social factors genuinely count, while greenwashing will not be tolerated, it is investors that will ultimately determine the future of ESG in Hungary.