Executive Summary The MNB’s statutory objectives include, both directly and indirectly, promoting environmental sustainability and addressing the risks caused by climate change. While the primary mandates of the central bank provide opportunities to address climate change, since mid-2021 the ‘green mandate’ has further strengthened this by making the promotion of environmental sustainability an explicit objective. The MNB’s decision-making bodies and executives are regularly informed about the impact exerted by climate change and other environmental risks on the financial system and the MNB’s operations, and they support environmental sustainability through their decisions. In order to integrate sustainability aspects into their activities, the MNB’s various organisational units take wide-ranging steps, which are coordinated at the level of the decision-making bodies and senior management. The MNB’s strategy for environmental sustainability has been elaborated in line with its mandates laid down in the MNB Act and its organisational structure. In the Green Monetary Policy Toolkit Strategy, the MNB identifies a number of climate-related risks that may have an impact on price stability. Without compromising its primary objective, the MNB develops its monetary policy toolbox in harmony with long-term environmental sustainability considerations. The MNB’s Green Programme sets out the relationship of the supervisory strategy to sustainability objectives, supporting the stability of the financial system through the identification, measurement and management of climate-related and environmental risks. Greening its own operations is also a priority for the central bank, which has set a target of an 80-per cent reduction in direct carbon emissions by 2025 compared to the 2019 level and offsetting emissions that cannot be reduced further. The central bank’s risk management frameworks consist of different elements, as the MNB has several mandates. Given the specific characteristics of climate-related risks, traditional risk management frameworks cannot be applied with adequate accuracy, and it is therefore essential to adjust them and introduce new methodologies. The first steps have been taken in terms of resource allocation and task definition, both in monetary policy and in the field of financial supervision. Environmental sustainability is increasingly reflected in the central bank’s operational areas and programmes, such as the asset purchase programme, central bank lending, collateral management and foreign exchange reserve management. Climate change has an indirect impact on financial supervision via the financial system and the real economy. The financial risks posed by climate change are also taken into account in the supervisory work through the use of increasingly sophisticated tools for risk identification, measurement and management. In addition to examining its own operations, one of the MNB’s primary objectives with this report is to provide information on the widest possible range of its financial instruments and related climate risk aspects. The MNB’s longterm objective is to produce a climate risk report that covers its entire asset portfolio. In the short term, mainly due to data availability constraints, the MNB will produce a report that is representative in terms of its total assets, but is not exhaustive. With regard to foreign exchange reserves, the analysis focuses on sovereign exposures, which represent the core component of the reserves. In respect of monetary policy instruments, the analysis also covers mortgage bonds and corporate exposures in addition to sovereigns. Furthermore, the MNB considers it particularly important to provide a brief summary of the climate risk exposure of securities and large corporate loans accepted as collateral. The MNB analysed the climate risk exposure of financial asset portfolios according to the two main climate-related risk categories, namely transition risks and physical risks, broken down by portfolios. The MNB assessed these risks using metrics commonly applied in international practice, supplemented by its own estimates and special analysis for some of the asset categories. In preparing its analysis, the MNB seeks to gain as broad an understanding as possible of the risks and opportunities posed by climate change, and has therefore quantified a number of metrics for different asset portfolios. The analysis of the climate impacts of financial portfolios was based on the preliminary balance sheet data at the end of 2021 and the latest available annual greenhouse gas (GHG) emissions and corresponding GDP data. For the foreign exchange reserves, weighted average carbon intensity (WACI), energy mix and physical risk metrics were calculated. The WACI metric for the sovereign reserve assets is 287 tonnes CO2e per million euro of GDP, which is 6
THE MAGYAR NEMZETI BANK’S CLIMATE-RELATED FINANCIAL DISCLOSURE • MARCH 2022
