The December 2022, the GREEN Issue of the Financial and Economic Review is Now Published

The December issue of our quarterly focuses on environmental sustainability and the green transformation of the economy and finance. The section ‘Our Future Vision’ explores one of the most topical issues from a central bank perspective, namely, the relationship between monetary policy and the green transition. The published studies cover the implications of energy ratings on supply-side house prices and lending rates, the impact of carbon shocks on bankruptcy probabilities in the Hungarian banking system, sustainable investments in the insurance sector, the influence of media coverage of environmental issues on yields, essays on the regulatory environment for ESG bonds and funds, particularly from the perspective of sovereign risk, and trends, characteristics and regulation of green bond impact reports. The feature article examines trends and dilemmas in green financial capacity building.

Pál Péter Kolozsi, Balázs István Horváth, Judit Csutiné-Baranyai and Veronika Tengely present the relationship between monetary policy and environmental sustainability. In recent years, central banks have become increasingly active in the field of environmental sustainability; however, it is not yet clear how and to what extent they can play a role in the green transition. Climate change and the green transformation of the economy have an impact on price stability, which is the primary mandate of monetary policy, and central banks may face challenges if they want to keep the sustainability objective in mind.

The real estate market is a key element of the green transition; therefore, the pricing and financing costs of modern housing in Hungary are important issues. Gábor Hajnal, Alexandr Maxim Palicz and Sándor Winkler investigate whether a price premium can be identified for green properties based on new housing construction in Budapest, and whether banks finance residential properties with more modern energy systems at lower interest rates. They estimate that a green price premium can be identified in the new housing market in Budapest, but banks currently do not take into account energy aspects in case of their pricing of loans.

Assessing the financial implications of climate change has emerged as a new challenge for central banks in recent years, and forward-looking climate risk stress tests can provide a solution. The study by Bálint Várgedő presents the methodology and results of a climate change stress test on credit institutions, which is novel in its ability to assess and quantify the short-term transition risks of the Hungarian banking sector. The methodology presented has the advantage of being able to estimate the magnitude of macroeconomic shocks, the differences in the transition across sectors and can be easily integrated into stress testing processes.

In his study, Gábor Szigel shows that the comparability of the specific carbon footprint of bank loan portfolios across institutions can be significantly impaired by different price levels in different countries, to the detriment of credit institutions operating in poorer, lower-income countries. The problem is caused by lower price and cost levels in lower income countries. This is because they will make the carbon footprint of the same activity per loan amount appear more polluting in a poorer country than in a richer one. The solution could be to adjust the specific bank carbon footprint by purchasing power parity.

To achieve global environmental goals, the financial sector is also needed alongside governments. Viktória Deák, Nikolett Tőrös-Barczel, Norbert Holczinger and Ferenc Szebelédi look at sustainable investment in the Hungarian insurance sector. They examine the recent pace of development and the characteristics of EU regulation at this stage, and the extent to which EU regulation is capable of keeping environmentally and socially responsible investments on track, avoiding greenwashing. The study also analyses the opportunities and challenges inherent in sustainability regulation for unit-linked asset funds.

Balázs Csillag, Marcell Granát and Gábor Neszveda assess the role of the media in pricing ESG investments. They use machine learning based structural topic modelling (STM) to quantify the role of environmental topics in the media and use this to divide the 10 years under study. The results show that ESG aspects are priced into expected future returns by the market in high-intensity periods of environmental themes, while ESG is not significantly important in low-intensity periods. This suggests that investors in the US do not consider ESG aspects in the absence of strong media coverage.

In his essay, László Bokor scrutinises regulatory and market trends and some of the novel, non-green-science-based constraints to financing the transition to a sustainable economy. An increasing number of investment funds are obtaining ESG ratings that set out rules excluding sovereign bonds (e.g. freedoms, corruption) based on NGO indicators. The emergence of these criteria as international standards could threaten to exclude non-compliant sovereigns from the green/ESG market and, if further escalated, even from the normal market.

In their paper, Gergely Manasses, Éva Paulik and Attila Tapaszti discuss the characteristics and current regulation of green bond impact reporting, with a special focus on the challenges facing the sector. The measurement of the environmental impact of green bonds, its reliability and the disclosure of results are key to the transparent functioning of the market and to support investors’ decisions. As this market segment is still at an early stage of development, the lack of appropriate data and methodologies is a common problem. In the long run, only the homogenisation of reporting, the creation of a common reporting structure and the development of regulations can provide a solution to this problem.

Green financial capacity building is key to the effectiveness of green efforts. In the feature article in our thematic publication, Balázs Sárvári approaches the current challenges of green finance from the perspective of scarce expert capacity and summarises related good practices, highlighting the activities of the Magyar Nemzeti Bank (the Central Bank of Hungary).

In addition to the above, the December issue of the Financial and Economic Review includes three book reviews and two conference reports.

We wish you a very pleasant reading.

Editorial staff of the Financial and Economic Review