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01 February 2024

The potential of open banking and ESG in Hungary

In an era where convenience is king, consumers worldwide are embracing the ease of online services. A transformative trend known as open banking is making waves in the realm of finance.

The foundation of open banking in Europe was laid with the Payment Services Directive 2 (PSD2), aiming to modernise payment services and foster competition by securely sharing customer account information with third-party providers. This innovation empowers customers and SMEs to share their data and initiate payments through third parties. Given customers' willingness to switch to the most convenient service provider, the banks of the future will be those that adapt to this evolving landscape.

Wondering about the interplay between open banking and ESG? Think the European Union's Taxonomy. The Taxonomy's primary mission is to classify activities as environmentally friendly, prevent greenwashing and facilitate ESG-aligned investments. For an activity to be considered "sustainable" under the Taxonomy, it must meet two criteria. It must contribute to at least one of six environmental goals, like climate change mitigation, and must do no significant harm to other environmental goals, while respecting human rights and labour standards.

The Taxonomy employs Technical Screening Criteria, developed in secondary legislation known as Delegated Acts, to define specific requirements and sustainability thresholds. It also categorises activities into own performance. Thus activities and transitional activities are enabled, recognising the significance of "seemingly green" activities in the journey toward sustainability. Beyond categorisation, the Taxonomy requires entities to disclose information about how their operations align with its guidelines. By receiving the relevant information, banks can identify patterns and provide businesses with insights to help ameliorate behaviour and to build services that really make a difference.

The integration of open banking and ESG reporting signals a significant shift in the Hungarian financial sector. Mandatory ESG reports for SMEs could give open banking firms an advantage over traditional banks. This presents both opportunities and challenges for Hungary's financial industry.

author: Gergely Szalóki