On 5 August 2022, the Central Bank of Hungary (MNB) announced an update to its supervisory recommendation for credit institutions and Hungarian branches of credit institutions on climate-related and environmental risks. The recipients have to identify, manage, monitor and disclose climate and environmental risks.
Recommendation No. 10/2022. (VIII.2.) was updated to reflect changes in the European Union rules as well as the United Nations Principles for Responsible Banking Guidance Document and market feedback, and to outline more specific expectations and clearer goals related to making operations more sustainable. The Recommendation establishes a timeline with deadlines of 15 September 2022, 1 July 2023, and 1 January 2025. Market players need to consider climate and environmental risks and opportunities in their strategies, business plans and models from 15 September 2022 and integrate them in detail in the following years. Institutions need to create appropriate methodologies, documentation, key performance and risk indicators which covers short, medium, and long-term (at least 10 years) horizons.
On the other hand, corporate governance requirements include the integration of climate change and environmental risks. For this, it is important that the management board is aware of and understands climate change and environmental risks in order for the level of risk to be consistent with the strategy, policies and operations of the institution. MNB expects the institutions to designate a department or manager responsible (ESG centre or chief sustainability officer) for the management and control of climate change and environmental risks, who will report regularly to the management on his/her activities.
Furthermore, expectations regarding risk strategy and risk management policies should be consistent with the climate change and environmental risks and the institutions need to analyse how the environmental risks impact credit, operational, market and liquidity risks, and take environmental risks into account in client and partner rating process. For that, it is important to quantify the risks and create procedures, tools and methodologies.
Finally, credit institutions will also need to take measures against climate change in their operations. MNB expects that the institutions start preparing for the new disclosure requirements if they are subject to them.
By Krisztian Brody, Attorney at Law, KCG Partners Law Firm
