Impact Of Climate Transition Risk On The Credit Profile Of SMEs

An important thesis published in 2022 addressing the impact of Climate Transition Risk on the Credit Profile of SMEs.

As per the abstract, Climate change is an intensively growing problem which is forcing to increase actions to reduce Tagar#greenhouse gas emissions, the main drivers of climate change. Beyond well-known climate effects, Tagar#spillover effects could also have a large impact on the global economy and financial system.

Climate risk in risk management and supervision is divided into two types depending on their way of materializing: physical risks and transition risks. The former comes from the effects of extreme climate-related events, while the latter focuses on the arisen turbulences from the transition towards a low-carbon economy.

The aim of the paper is to analyze the impact of climate risk on a financial institution’s credit risk. The author rely on a recent technical report of the Bank of Canada to study the effect of transition risk on a portfolio of SMEs in the Spanish market, differentiated by sectors. A combination of top-down and bottom-up approaches is used to calculate changes in the Probability of Default (Tagar#PD) and Loss Given Default (Tagar#LGD) under different feasible climate scenarios. We consider a shifted Merton model to project the PDs and the Frye-Jacobs relationship to estimate the LGDs. The results obtained are similar to those reported by the BoC, although crops sector show greater impact. More specifically, the results show that in the long-term the most damaged sectors are crops, refined oil products and oil & gas, while the most resilient ones are electricity and commercial transportation.

Source:

https://www.linkedin.com/posts/gaby-frangieh-1873aa11_impact-of-climate-transition-risk-on-smes-activity-7347928283730120704-L_eW/?utm_source=share&utm_medium=member_desktop&rcm=ACoAAAtGGkQBsxwMBmX3lEJO8btihnfBCaHqTz4