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Assessing credit risk sensitivity to climate and energy shocks: Towards a common minimum standards in line with the ECB climate agenda

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  • Di Virgilio, Stefano
  • Faiella, Ivan
  • Mistretta, Alessandro
  • Narizzano, Simone

Abstract

A disordered energy transition might impact borrowers’ ability to repay and service debt; this calls for methods for integrating climate into credit risk modelling. This integration is required not only for risk management, but also for adjusting credit ratings for collateral pledged in Eurosystem monetary policy operations. This study introduces an innovative methodology to evaluate Italian non-financial firms' exposure to climate policy risks, gauging the impact of climate policies on firm-level default probability (PD). By simulating a shock to energy expenditure originating from different levels of a carbon tax, we analyze the potential impact on firms’ PD. Our method offers a comprehensive understanding of the channels through which energy shocks propagate and their implications on firms’ vulnerability. Our findings show that the impact of carbon taxation on credit risk would be contained, raising the average PD by a range of 0.6–4.1 basis points according to the different levels of carbon tax. The effect is slightly larger for the Agriculture and Services sector, while there is no clear pattern relating to firm size.

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  • Di Virgilio, Stefano & Faiella, Ivan & Mistretta, Alessandro & Narizzano, Simone, 2024. "Assessing credit risk sensitivity to climate and energy shocks: Towards a common minimum standards in line with the ECB climate agenda," Journal of Policy Modeling, Elsevier, vol. 46(3), pages 552-568.
    • Handle: RePEc:eee:jpolmo:v:46:y:2024:i:3:p:552-568
    DOI: 10.1016/j.jpolmod.2024.05.001
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    1. Ivan Faiella & Alessandro Mistretta, 2015. "Spesa energetica e competitività delle imprese italiane," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2015(3), pages 85-121.
    2. Filippo Giovannelli & Alessandra Iannamorelli & Aviram Levy & Marco Orlandi, 2020. "The In-house credit assessment system of Banca d'Italia," Questioni di Economia e Finanza (Occasional Papers) 586, Bank of Italy, Economic Research and International Relations Area.
    3. Aiello, Maria Alessia & Angelico, Cristina, 2023. "Climate change and credit risk: The effect of carbon tax on Italian banks' business loan default rates," Journal of Policy Modeling, Elsevier, vol. 45(1), pages 187-201.
    4. Irene Monasterolo, 2020. "Climate Change and the Financial System," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 299-320, October.
    5. Ivan Faiella & Luciano Lavecchia, 2021. "Households' energy demand and the effects of carbon pricing in Italy," Questioni di Economia e Finanza (Occasional Papers) 614, Bank of Italy, Economic Research and International Relations Area.
    6. Faiella, Ivan & Lavecchia, Luciano & Michelangeli, Valentina & Mistretta, Alessandro, 2022. "A climate stress test on the financial vulnerability of Italian households and firms," Journal of Policy Modeling, Elsevier, vol. 44(2), pages 396-417.
    7. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    8. Robert Vermeulen & Edo Schets & Melanie Lohuis & Barbara Kolbl & David-Jan Jansen & Willem Heeringa, 2018. "An energy transition risk stress test for the financial system of the Netherlands," DNB Occasional Studies 1607, Netherlands Central Bank, Research Department.
    9. Körding, Julia & Resch, Florian, 2022. "Common minimum standards for incorporating climate change risks into in-house credit assessment systems in the Eurosystem," Economic Bulletin Boxes, European Central Bank, vol. 6.
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    2. Di Tommaso, Caterina & Mazzuca, Maria & Pacelli, Vincenzo, 2025. "Does SDG-13 disclosure impact the performance of insurance companies?," Research in International Business and Finance, Elsevier, vol. 77(PA).

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    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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