Gábor Gyura is Head of Sustainable Finance at the Central Bank of Hungary. He is a member of several international committees and working groups in the field of green finance. He has a master’s degree in Economics and also holds a PhD in Earth Sciences


Let’s start with a very general question. What is the role of central banks in sustainability?

There is an extremely intensive policy debate nowadays about this. While there are some slight differences in details, the primary objective of most central banks is to achieve and maintain price stability. Without prejudice to this primary objective, many central banks are required by law to support the stability of the financial system as well as the economic policy of governments. It is now widely agreed that climate change and other sustainability anomalies have an impact on the financial system, and thus have implications for the mandates of central banks.

That said, the big debate comes after. Some say that central banks are to play just a night-watchman-like role by assessing climate and environmental related risk of the financial system and providing transparency to markets by publishing reports on such risks. Others argue that central banks should take a more active stance and strive to reduce such risks, such as by requiring banks to develop ESG (Environmental, Social and Governance), and in particular, climate-related financial risk management processes. Some are of the view that central banks should go even further and in an activist manner push capital allocation in a green direction.

The legal mandates of central banks are not carved into stone, either. The remit of the Bank of England’s monetary policy committee has recently been changed to include the supporting of the UK’s net zero plans. A draft law has also been submitted to the Hungarian Parliament explicitly stating that the Central Bank of Hungary (Magyar Nemzeti Bank) should support Hungary’s environmental sustainability policy. Climate issues also constitute an important element of the ECB’s ongoing strategic review.

ESG is very often associated with equity markets. Do you think this is still true and what trends do you see in the future?

Indeed, ESG used to be a term mostly used in association with equity markets. I believe this is changing though and ESG is integrated to debt markets to an increasing extent. In some cases, of course, it is simply giving a name to already existing practices, but in others, especially with less sophisticated market players, this is indeed a new approach in lending.

ESG is gaining in importance in both risk management and in the product landscape. As for risk management, many banks have been using some form of negative screening policy in lending for quite some time. These approaches are becoming more refined, and at the same time, the ones who did not have such policies will be introducing such approaches. New regulations will require integrating ESG into banking in an explicit way. The EU Capital Requirement Directive (CRD) calls for uniform definitions of ESG risks, and appropriate qualitative and quantitative criteria (including stress test and scenario analysis) for the assessment of the impact of ESG risks on banks.

This is something that the European Banking Authority (EBA) – in cooperation with the national authorities, such as the Central Bank of Hungary – is working on very intensively. The EBA is also to develop proposals for standards about the management of ESG risks by banks, and how supervisors can also assist banks with a view explicitly comprising of an ESG aspect.

But ESG is not just about risk management in banking. There is a big room for product development as well.

ESG or sustainability linked loans (besides similar bonds) appear one very interesting example for that.

The Central Bank of Hungary has recently published its climate related recommendation for banks. What is it about?

The main goal of our recommendation is to improve the preparedness of banks for climate-related and environmental risks. In this spirit, the recommendation comprises expectations about integrating environmental sustainability considerations into business model and strategy, internal governance and the risk management of banks.

But there is more: the recommendation also encourages banks to develop green financial products, to draw up carbon neutrality plans, and as a part of this, take care of their Scope 1-2 and 3 emissions. Needless to say, for banks, Scope 3 emissions are the most important from a carbon footprint perspective.

The recommendation also explicitly suggests that Hungarian banks sign the UN’s Principles for Responsible Banking.

We believe this UN initiative is a great global initiative and Central-Eastern-European (CEE) banks that have so far been largely missing as signatories.

Do you see particular challenges in the CEE region? We hear a lot of news about green and sustainability linked bonds and loans but not that many from our region yet.

Clearly, the CEE market is lagging behind more developed markets in this respect, but there are also very promising developments. To mention one example: in Hungary the green bond market didn’t exist at all before 2020. However, last year saw several green corporate bond issuances, and Hungary’s sovereign green bonds issued in 2020 have even been recognized by Climate Bonds Initiative in its 2021 Climate Bonds Awards in the Sovereign Green Market Pioneer category.

Banks have also started to design green finance programs, so dedicated green lending is also being developed. In the mutual fund segment, we see a growing number of ESG funds being launched. However, the volumes are very modest and no so called „Article 9”, i.e. sustainable investment products, have been offered yet.

This is clearly a learning process for all stakeholders, and not just for financial institutions. Firms need to enhance their non-financial reporting processes. Reporting according to the new EU Taxonomy regulation will be a major challenge for them. And let’s not forget retail customers. There is still a lot to be done in improving financial literacy, so that more and more customers are aware of the existence of green financial products, be it a loan to finance energy efficiency improvements or a mutual fund investing into green bonds.

How compliant is the investment sector in terms of the new SFDR regulation in the region?

Implementation of the new Sustainable Finance Disclosure Regulation (SFDR) by local market players is clearly quite a challenge, but this in turn will create the fundamentals for further growth and market integrity.

We have not launched the first examinations about SFDR yet, so at this moment we don’t have a comprehensive overview of the market’s compliance. What we do perceive is that SFDR is a huge challenge also for those players who have a track record with ESG products. The new regulation introduces many disclosure obligations that so far were largely missing from the practice of even the most advanced market players. What is more, SFDR has a very broad scope and thus also covers financial market participants and financial advisors who do not have any ESG or green products as well.

Importantly, at least the treatment of sustainability risks needs to be disclosed even by those market players who are not involved in the ESG business.

As a regulator, we intend to act in a supporting role in the initial period. We recently issued a circular to all market players clarifying the most complex provisions of the regulation, and stand ready with consultations on a permanent basis. At the same time, we also stress that SFDR is a very important piece of regulation and that everybody should aspire for the highest level of compliance. As a regulator, we will use our examination tools to ensure this, and we also hope that investors themselves will also push market participants in the same direction.

Is the corporate sector prepared to supply financial information with relevant information? What are the most important tasks here?

Today, Hungarian ESG mutual funds primarily invest in foreign assets. We hope this will also change by time and that mutual funds, investment-linked insurance products and also pension fund portfolios, will play an increasing role in financing the green transition and sustainable investments of Hungarian companies. Data is of course the very precondition of that, and there is a lot of room for improvement for corporate reporting in that respect. The Budapest Stock Exchange’s recently published ESG Guidelines will hopefully help, and going forward, the new legally binding reporting obligations will be key as well.

The EU Taxonomy regulation requires large companies, from 2022 onwards, to disclose their annual turnover’s and CAPEX figures’ Sustainability Taxonomy-compliant share, which I personally expect to be a game changer. These new metrics promise to become the “most telling” indicator of a company’s greenness and its direction.

Looking forward, the EU’s new Corporate Sustainability Reporting Directive initiative will be the next big challenge and will further deepen and broaden the reporting obligations, which will all help the development of the sustainable finance landscape.

If a bank CEO asked you what are the 3 most important tasks to accomplish to do ESG the right way, what would be your answer?

  1. Instead of just looking at the new ESG regulations as a compliance task, see with what kind of business potential they present.
  2. Don’t forget that “E” does not only stand for climate-related issues.
  3. Invest in capacity building, hire experts who truly have ESG expertise. “Competence greenwashing” is increasingly seen by many as a risk to the integrity of this rapidly growing market, and we should all strive to minimize such risks.