Hydrogeological risks increase Italian firms' default probability
A new Bank of Italy working paper assesses the impact of climate-related physical risks on the one-year probability of default (PD) for Italian non-financial firms. The study finds that 38 percent of firms are exposed to hydrogeological risks, leading to a small average increase in PD.
Mapping climate risk to creditworthiness
Researchers compiled a unique dataset combining firms' financial data with the precise geographic location of their operational units, matched to hydrogeological hazard levels.
This allowed for the derivation of a discrete risk indicator and a PD adjusted for expected losses from floods and landslides.
The analysis reveals significant regional and sectoral differences in exposure, with Emilia-Romagna and Tuscany showing high absolute numbers of exposed local units and employees.
Liguria and Calabria exhibit the highest share of local units in the most severe risk categories.
The study underscores the importance of accounting for all local units, as considering only headquarters misrepresents risk for nearly 10 percent of firms.
This granular approach provides a more accurate picture of physical risk exposure across the Italian corporate landscape, moving beyond aggregated data to pinpoint specific vulnerabilities.
Limited overall impact, critical for high-risk areas
While the overall economic impact on firms' creditworthiness is limited, with only 0.43 percent of firms transitioning to a worse rating class, firms located in high-risk areas experience a notable decline in creditworthiness.
Sectors most affected include Agriculture, Transportation and Storage, and Accommodation and Food Services.
Insurance coverage emerges as a crucial mitigating factor, reducing the average PD deterioration by approximately 50 percent for insured firms.
This finding is significant given that banks often do not differentiate between insured and uninsured firms in their assessments.
The study also concludes that the average effect on collateral used in monetary policy operations is negligible, posing no significant constraint on Italian banks' refinancing capacity under current conditions.
A foundation for future risk assessment
This paper provides a robust methodology for integrating climate-related physical risks into credit risk models, addressing critical data gaps by geo-referencing firm-level exposures.
However, its reliance on historical hazard maps means the findings might underestimate future impacts given the projected increase in frequency and severity of extreme events.
For financial institutions and supervisors, the clear evidence on insurance's mitigating role offers a concrete avenue for enhancing resilience and refining risk management practices.