Times call for action

Central banks are by necessity and choice at the forefront of advancing the green and digital transition through cooperation and collaborations

Environmental sustainability is clearly one of the biggest challenges of the 21st century. The conclusion of extensive research and dialogue is that the necessary actions need to be taken both on national and global levels, in a coordinated and timely manner to fulfill climate policy goals. As part of these actions, central banks must address the issue of the green transition which has clear implications for their core mandates, i.e., meeting inflation targets and safeguarding financial stability. And when central banks embrace the concept of sustainability, the digital revolution must also be taken into account. Digital solutions are inevitable for a sustainability turnaround. They not only provide smart tools for the circular economy, but they can also change the very form of money itself. It is thus obvious that central banks must actively shape the green and digital agenda.

This mission requires a comprehensive policy framework going beyond the traditional interpretation of central banking (that is, a narrow focus on price levels). Inflation continues to be the number one priority; however, central bankers cannot avoid considering a wide variety of factors to tame inflation. These factors include the ongoing green and digital transition of the economy, as well as supply-side shocks, pressures in energy markets and similar structural issues, which are also strongly related to geopolitics.

Recent proof of the very complex environment that central banks operate in has come from the energy sector. Many monetary authorities are now seeing that an unsustainable energy mix can have a serious impact on prices and inflation. In the long run, a decrease in fossil energy intensity and a reliance on renewable energy sources can be the solution for our current problems. But such a transition must be carried out through strengthening domestic innovation capabilities and nurturing effective cooperation in the field of cutting-edge technologies. We must correct the mistakes of the past when excessive reliance on conventional external energy sources and the lack of well-embedded know-how left many countries over-exposed to exogenous shocks. International collaboration must deliver major developments in this respect. Sharing knowledge and best practices could be the primary channel to developing win-win investments and a robust global network of the 21st century. This is equally true for manufacturing and hard infrastructure, as well as less tangible elements of the economy: services and the digital infrastructure. The distinction between "tangible" and "intangible" is becoming less meaningful nowadays.

No wonder that financial cooperation is also heading toward higher levels of joint added value. Central banks are pioneers of this new collaborative approach. It has been the People's Bank of China (PBOC) which ventured to create a central bank digital currency (CBDC), with wide-scale real-payment pilots having already been underway for three years. The PBOC has also been supporting international cooperation in this respect, which is essential because this new form of central bank money might have the most revolutionary impact on cross-border transactions. Such payments still lag behind domestic transactions in terms of speed and cost efficiency. While many countries have already introduced instant payments at home, international bank transfers usually still need time to be settled. Of course, this lags behind the pace of the "turbo charged" world.

Central banks are acting quickly and forming international partnerships to revamp the foundations of cross-border finance. They are leveraging groundbreaking technologies such as distributed ledgers, non-fungible tokens, smart contracts and other innovations. Initiatives such as the m-CBDC Bridge (a joint pilot of the People's Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates and the BIS Innovation Hub Hong Kong Centre) and Project Dunbar (also under the auspices of the BIS Innovation Hub) are gaining ground. European central banks are now getting onboard and have begun engineering test transactions with their Asian counterparts. This is good news because there could be no sustainability turnaround without renewing the global financial system and putting it on a sustainable path, too.

The Magyar Nemzeti Bank (MNB, the Central Bank of Hungary) is an institution advocate of multilateral cooperation in the various fields of the digital and green transition. Our past decade has seen extended partnerships with Eurasian central banks, financial institutions, think tanks and the academia to promote knowledge sharing, best practices and other joint activities. The MNB has announced its Green Program, the Central Bank Renminbi Program and the Budapest Renminbi Initiative, as well as the Budapest Eurasia Forum and an own Technical Assistance Program, which all have direct links to the international community.

In a nutshell, the Green Program aims to reduce the central bank's own carbon footprint, but it goes well beyond that. It is a comprehensive scheme to incentivize green financing for the real economy, i.e., channeling more funds to carbon neutral, sustainable investments and the renewable energy industry. Furthermore, financial institutions are encouraged to detect climate-related risks in their balance sheets and operations with an eye to measuring their environmental (or more generally, ESG) performance.

Green finance and future-oriented macro policies are nowadays at the heart of the MNB's engagement with its international partners. Sustainability is the core concept of our flagship event, the annual Budapest Eurasia Forum, which — in addition to regular staff-level dialogue — is a primary platform for solidifying our professional contributions on an international level. We are especially proud to have the Boao Forum for Asia, as well as the Fudan Development Institute and the Shanghai Forum among the distinguished partners of our event series.

Another similar platform is the MNB's Budapest Renminbi Initiative which provides a more specific opportunity to discuss the international role of the renminbi, its cross-border use and contribution to financing future-proof investments.

All in all, a successful digital and green revolution can only be achieved in a collaborative way. Let us not forget the words of the famous Hungarian poet, Sándor Petofi: "Time is right, and it decides what is not."

The author is governor of Magyar Nemzeti Bank, the Central Bank of Hungary. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn.