“Greening” the financial
is necessary to achieve a carbon-neutral economy
Recommendations for a
Sustainable Capital Market Strategy and Action Plan for Hungary
Deloitte’s recommendations for the Beneficiaries
the National Bank of Hungary,
the Budapest Stock Exchange,
the Ministry of Finance,
and the Ministry of Innovation and Technology
To channel capital into sustainable
investments market participants need support and incentives, says Deloitte in its recommendations for a
sustainable capital market strategy and action plan for Hungary. Without targeted capital mobilisation,
the European Union's 2030 emission reduction targets could be jeopardised, as meeting them will require an
extra €480 billion per year in investment over this decade.
Sustainable competitiveness is at the core of Europe's economic development and financial system, as set out in the European Green Deal. The Green Deal outlines measures to achieve climate neutrality in Europe by 2050. It sets out the necessary investments and available financing instruments for a just and inclusive transition.
Transition comes at a high price: the European Commission estimates that the EU will need an additional €480 billion per year in green investment, in this decade alone, to meet its 2030 emissions reduction targets. Closing this investment gap is inconceivable without the contribution of capital markets, which is essential to support the greening of the financial sector.
Hungary is also committed to transitioning to a climate-neutral economy by 2050. The Green Programme of the National Bank of Hungary (MNB) in 2019 was one of the first steps aiming to green the financial market, including several incentives to support the spread of green finance. In 2020, with the first sovereign green bond, Hungary has effectively kickstarted the domestic sustainable capital market. The MNB's Bond Funding for Growth Scheme, launched as a monetary policy measure, contributed to the development of the green bond market. Hungary's first corporate green bond issuances took place under this Programme. Finally, following the announcement of the Green Monetary Policy Toolkit strategy, Hungarian green mortgage bonds have been issued since 2021, under the Green Mortgage Bond Purchase Programme.
A domestic strategy and action plan for sustainable capital market operations is in preparation to support the development of sustainable and green finance in Hungary. Deloitte prepared related recommendations at the request of the European Bank for Reconstruction and Development (EBRD) for the Hungarian National Bank, Budapest Stock Exchange and Ministry for Innovation and Technology, with funding from the EU's Directorate General for Structural Reform (DG REFORM).
We formulated recommendations for the introduction of green and sustainable financial instruments linked to fundamentally green outcomes, that can activate capital markets in the transition to sustainable finance in line with the European Climate Law
- said Ákos Lukács, Head of Sustainability and Climate Change service line at Deloitte, who agrees that “greening” the financial system is key to a carbon-neutral economy.
The recommendations, which were discussed by an international panel of experts in January 2022, can be broken down into five themes.
1. Non-financial reporting
The maturity of ESG reporting varies widely on the domestic market. Although, there are a few outstanding reporting practices - being aligned with standards, certified by third-parties, or even designed in an integrated reporting format - there is still room for improvement among most disclosures. The EU is publishing more and more rules with an increasing focus on the disclosure of non-financial (NFRD, CSRD) and sustainability-related (SFDR) information, which directly affects companies and financial institutions.
The implementation of these recommendations would make it easier and more transparent for market participants to report on sustainability and non-financial issues.
Therefore, Deloitte encourages the acceleration of reporting in Hungary. They believe that BSE’s existing ESG Reporting Guidelines could be updated with an early and voluntary adaptation of the CSRD regulation. They believe that the Accounting Act could ensure that non-financial sustainability information is embedded in financial reporting. Access to non-financial information could also be improved if listed companies increase transparency and disclose ESG information. This will allow market participants to comply with European and national regulations, for example on climate risk assessment or reporting. Deloitte also considers it important to raise awareness among market actors about reporting obligations, requirements, methodologies, and data needs.
2. Improving the legal and regulatory framework for sustainable capital markets
In this area, Deloitte Legal proposes a comprehensive approach: on the one hand, further development of general capital market regulation and, on the other hand, consideration of introducing specific, sustainability-related capital market regulation. Dr. Linda Al Sallami, attorney at Deloitte Legal Law Firm, pointed out that the existing legal framework provides an appropriate frame for a sustainable capital market and that the MNB's Bond Funding for Growth Scheme and its Green Mortgage Bond Purchase Programme has been a catalyst for the emergence of green bond issuance.
- a related recommendation mentioned by dr. Péter
Partner at Deloitte Legal Law Firm.
Based on international best practices, a certain degree of standardisation of green criteria should be considered in line with the relevant EU legislation. The MNB already requires the application of international standards as a condition of participation in the Green Preferential Capital Requirement Program.
3. Sustainable investments and ecosystems
Deloitte finds that there are barriers to estimating and monitoring the sustainable investment gap in Hungary. The key recommendation in this area is to assess sustainability and ESG risks: this will both enable Hungarian companies to adapt to the new regulations and set investment targets that will encourage investment in line with domestic strategies. Advice also includes further development of existing sustainable ecosystems, launching new pilot ecosystems, better use of ecosystems with high climate mitigation potential and mobilising market actors to reduce the sustainable investment gap.
4. Public funds to foster sustainable investments
Tax incentives, direct subsidies and public investments are among the recommendations made in this area, but the consultant firm also considers the targeted use of EU financial funds to further promote green finance.
Supporting sustainable investment is at the core of the European Recovery and Resilience Facility and the Cohesion Policy. Resources should be used to achieve climate goals, especially through instruments that can leverage significant private resources, such as loan schemes and guarantee instruments.
- pointed out Attila Béres, Manager at Deloitte tax and legal advisory.
5. Enablers and barriers of sustainable capital markets
In this section, Deloitte’s experts address concerns such as the divergence in the definition of green investment across Europe, the increased risk of greenwashing, the need to take into account the currently limited mapping of climate change risks, and the unregulated consequences of failing to meet green commitments.
We have made several recommendations to clarify the differences in timing and content of EU regulations.
– says Ákos Lukács.
Have you got some questions?
Ask our Experts
Krisztina S. Nagy
dr. Csaba Márkus
Tax & Legal Services
dr. Péter Göndöcz
Deloitte Legal Göndöcz and Partners Law Firm
Service Line Leader
Sustainability and Climate change
dr. Linda Al-Sallami
Senior Managing Associate
Deloitte Legal Göndöcz and Partners Law Firm
Tax & Legal Services
This project is funded by the Structural Reform Support Programme of the European Union and implemented in collaboration with Deloitte, EBRD, and the European Commission.