Flooding impacts UK firms, increases termination risk
A new Bank of England working paper reveals that flooding significantly increases business termination risk for small and medium-sized UK firms. The study also finds large negative impacts on revenue, employment, and assets for surviving businesses.
Mapping the flood risk landscape
The paper utilizes a novel dataset combining granular business premises information with flood maps and financial records to identify flood risk concentration.
It finds firm-level exposure is significantly influenced by sorting dynamics, with larger premises facing higher odds of being located in medium to high-risk areas and historically flooded locations.
Exposure is concentrated in specific regions and natural resource-intensive sectors, reflecting structural features like watercourse density and water as a production factor.
Survival analysis shows a marked, short-lived increase in termination risk for small and medium firms in the year of flooding, with no comparable rise for large firms.
Among surviving firms, floods cause sharp one-year declines in turnover, employment, and total assets, followed by only partial recovery over three years.
Losses are largest for large firms and those in natural resource-related sectors.
UK's largest physical climate risk
Flooding represents the UK's largest source of physical climate risk, imposing average costs of £2.2 billion per year.
Nearly one in ten UK business premises are located on floodplains, exposing them to events that damage assets and interrupt operations.
Climate change is expected to increase the frequency and intensity of extreme weather, making understanding corporate exposure and performance impacts crucial for regional resilience and productivity.
The Bank of England's Climate Biennial Exploratory Scenario projects substantial future losses for insurers under a no-additional-action scenario, with losses highly concentrated across a small share of postcodes.
Development on floodplains has expanded over the past three decades, mirroring a global trend, leading to locational 'lock-ins' for firms.
Granular data, universal lessons
This study provides crucial granular data on a long-underestimated risk, offering a robust empirical foundation for policy.
While its focus on England and Wales limits broader applicability, the findings on firm-level vulnerability are universally relevant for climate risk assessment.
Policymakers should integrate these insights into regional resilience strategies and financial stability frameworks.