The Central Bank of Hungary (MNB) is among the global sustainability champions

In an era of uncertainty, which the world has entered in the 21st century, humanity's vision of the future must and should be based on the idea of sustainability. The Central Bank of Hungary (MNB), as one of the pioneering central banks in the fight against climate change, has transformed its operation with this in mind. György Matolcsy, governor of MNB passed on important messages about this and also about the intellectual revolution around the birth of new economics, as well as about reducing our country's ecological footprint.

In our Sustainability Interviews series, we ask leaders of organisations and companies really focusing on sustainability to share their thoughts, inspiring results, and forward-looking ideas to help us to respond to the most important challenges of our time.

– Mr. Matolcsy, this decade was started by several crises. The outbreak of Covid19 was followed by the galloping inflation and then a military conflict of geopolitical significance. Could this series of events, or polycrisis as called by many, be the prelude to an imminent new era?

– We have clearly entered an era of uncertainty, which is a period of changes with greater impact than ever before. We need to have a different attitude to each other and to the world around us. The challenges and megatrends of our century can no longer be addressed with the mentality and tools of the 20th century. New foundations and approaches are definitely needed to tackle global warming, the depletion of environmental resources, geopolitical tensions or the slowdown in economic growth.

– How can we outline the new mentality that can adapt to continuous and epochal change?

– The most important central element of the challenges that humanity faces sustainability. New visions for the future should be based only on this concept. We are living in a period of such intellectual renewal that can be compared to the intellectual revolutions of the Renaissance and Reformation half a millennium ago. This change is the driving force behind the sustainability transition, which is best seen in the fundamental change in the foundations of economic theory. Previous classical economic theories based on liberal and social market economy and other approaches are not valid anymore. They have lost their validity with the new era, and are being replaced by a new, emerging theory. This is what we defined as new and sustainable economics in the professional workshops and publications of MNB. This new scientific approach is based on the principle of balanced growth and the principle of life and combines different fields of knowledge and the interconnectedness of human communities.

– You also emphasize in your articles and related publications: the revolution of our mentality is needed for the current intellectual change. What must be changed fundamentally?

– All economic and social communities tend to go their own way, but they should do so following the laws of sustainable economics. This primarily means that the focus is no longer on the capital and profit but on the primacy of public interest, that is on sustainability and the appreciation of life. Exponentially expanding changes no longer allow for the previous neutral technical approaches because uncertainty and unpredictability keep increasing in all areas of human activity. Therefore, the mental revolution of our time is based on mission, brings emotions and feelings into transformations, thus strengthening and accelerating the changes of thinking.

– How does the requirement for sustainability change the role of money and capital? What resources can the new economics primarily build on?

– The main source of the current transition is based on intellectual foundation: knowledge. If we pass on knowledge, it becomes information, and when consolidated, it becomes data. If we compare this to the resources previously identified by economics, we can say that in our era, data is the new oil, talent is the new capital and creativity is the new earth. Moreover, while material goods are diminishing as they are used, knowledge is the first economic resource that does not diminish by being shared and consumed, but on the contrary, it expands exponentially. This is an extremely important change since while material goods are characterised by scarcity, the growth of knowledge usually creates general abundance. The most important resources will be talent and creativity that radically accelerate the accumulation and transfer of knowledge.

– How is this related to the new foundation of economic thinking?

– The different fields of knowledge are united in the theory of sustainable economics. The technological revolution of knowledge, information and data unites traditional economics with the world of other social sciences and then the natural sciences, especially quantum physics and biology. The most important fundamental law of the current changes is interoperability. The areas of consumption and investment are also united as the “consumption” of knowledge becomes an investment. The boundaries between industry and services also disappear and the circular economy becomes dominant. Since the new economic thinking is characterised by new contexts and flows, it is necessary to be ready for a change and self-correction at any moment. In other words: There is no longer an orthodox economics carved in stone but a continuously changing and therefore always unorthodox economics.

– How unconventional is it for a central bank to deal with this?

– We are proud that MNB is among the world’s leading green central banks. MNB has been one of the first banks, at international level, to address the issue of environmental sustainability, and this has been followed by decisive actions in the form of targeted measures over the last three years. The Hungarian Parliament's decision made on 28 May 2021 to add a green mandate to the MNB's obligations provides a unique legal backdrop to this. According to this, MNB must support the environmental sustainability work of the government in power. Therefore, the environmental and sustainability aspects are getting more and more emphasis in the activities of MNB – without jeopardizing the reduction of inflation, which is the primary aim. It has not yet been universally recognised that by the second decade of the 21st century, the role and responsibilities of central banks had radically changed, and these institutions can no longer afford not to address the monetary policy aspects of the transition to a carbon neutral economic model.

– With what specific programmes does the Hungarian central bank aim to avoid catastrophes expected to happen due to climate change?

– The intellectual revolution related to sustainability has already reached perhaps all central banks. MNB has also been one of the first banks taking significant steps. To this end, MNB launched its Green Programme in 2019 which focuses on establishing a financial system that is able to strengthen the stability of the financial system and to promote green goals. One part of the programme is the Green Preferential Capital Requirement Programme, launched on 1 January 2020, under which banks can claim discounts from the central bank in exchange for lending energy-efficient housing loans when assessing whether they meet the capital requirements. The range of loan purposes accepted under the programme has been significantly extended in recent years, for example, the programme now includes financing for renewable energy infrastructure or electromobility. Another goal of the Green Programme is to promote the possible short and long-term identification of climate risks. Domestic financial markets must contribute to the realisation and assessment of ecological risks to a much greater extent than at present for the green revolution to succeed. The so-called green recommendations first launched by MNB in 2021 promote this effort. These are recommendations and requirements that help financial institutions strengthen their resilience to environmental risks. In 2021, we published our first Green Finance Report, which has come out once a year ever since to help everyone understand the importance of environmental sustainability in financial markets. It is also worth emphasizing that green aspects appeared at MNB in the field of handling foreign reserves too. In accordance with the Monetary Council's decision, the development of a bond portfolio of securities with green classification already started in 2019. We measured the environmental impact of the portfolio for the first time the year before last. I am pleased to report that our innovative practice has contributed to avoiding 55,000 tonnes of carbon dioxide emission in 2021 and 94,000 tonnes the following year, which is roughly equivalent to the carbon footprint of a Hungarian town with a population of 19,000.

– The impacts of the steps presented so far can primarily be seen in the money markets. How can the green actions of MNB help retail lending?

– In addition to the Green Preferential Capital Requirement Programme that I have already mentioned, mainly by two initiatives: the Green Home Programme within the framework of the Funding for Growth Scheme, which has been terminated for the time being, and the Green Mortgage Bond Purchase Programme. Both are part of our green instruments strategy, and both are designed to support the construction and purchase of residential properties with particularly high energy efficiency scores.

– Why is it the housing market where MNB is going green?

– In our changing geopolitical landscape, energy management has become a key area. In our country, nearly 30 percent of energy consumption is due to household consumption, and around 60 percent of this is due to the heating and cooling of residential properties. If we can reduce this, we can achieve greater savings, and thus greening, by taking smaller steps. The Green Home Programme was launched in October 2021. MNB provided refinance to commercial banks at zero interest rates, and also set out favourable conditions for financial institutions to on-lend these loans to their customers as mortgages. It is no wonder that this programme became popular very quickly after its launch. The Green Mortgage Bond Purchase Programme is also based on residential properties with high energy efficiency scores. Since banks can only issue green mortgage bonds for loans disbursed on the basis of such real estate collateral. We can state that by this programme, we have managed to establish the market of green mortgage bonds in Hungary.

– Experts warn us that although increasing energy efficiency reduces the risks of climate change, it cannot solve the problems of ecological sustainability on its own. Moreover, the sustainability crisis will remain with us even when handling climate issues. This statement raises the question: to what extent does MNB address sustainability issues other than climate change when pursuing its green mandate?

– Indeed, the central bank's green programmes primarily focus on climate issues, and one of the main reasons for this is that one of the key objectives of domestic and EU sustainability policy is to achieve climate neutrality by 2050. However, we do not deal with climate change only. MNB has already recognised the economic significance of biodiversity loss. To this end, we launched a research methodology project with the OECD last autumn to assess the financial risks of loss in biodiversity and to develop financial surveillance methodologies to address these risks. We would also like to set an example to others by aiming to reduce our “carbon footprint”. Greening is priority in the operation of our central bank. By 2025, we will reduce MNB’s carbon emission by 80 percent versus 2019, and we will offset any remaining emissions, for example by afforestation.

– How big is Hungary’s ecological footprint that must be reduced?

– The most important index related to this is the ecological balance. Our country – compared to most of the EU countries and to the global average – has deficit in this area, that is, our “footprint” is bigger than our biological capacity. However, the good news is that the situation in Hungary is better than in the EU on average, but we still have a lot of work to do, especially in improving the efficiency of energy use and waste management. Another significant indicator for sustainable development is the energy mix of a country’s economy, especially now, in times of war when energy security is more important. Part of that security is the reduction of energy imports which stood around 60 percent on average in Hungary over the last decade. This figure is close to the EU average, however, it is higher than the regional average, which is less favourable. And the share of renewable energy increased to 14 percent in 2020, which is still lower than the EU average and that of the Visegrad Group. Therefore, there is room to further improve the energy mix too.
Ensuring sustainability is essential for Hungary's long-term development and successful catch-up. MNB helps to achieve this goal through a number of programmes and instruments. One of the most important of them is the central bank’s ‘green shift’. We have already laid the foundations of it. Part of our mission is to continue to play an active role in supporting the transition to a low-carbon economy. MNB will continue to give this a priority, leading other central banks and setting an example for them.
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