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Nature-adjusted probability of default for European small and medium enterprises

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Abstract

Small and Medium-sized Enterprises (SMEs) are the backbone of the European economy. However, theimpact of nature-related risks on SME creditworthiness is still largely unexplored. To address this gap,we incorporate indicators of nature-related risks - namely the Biodiversity Intactness Index, the HumanFootprint Index, and ENCORE scores - into an Extreme Gradient Boosting (XGBoost) credit scoring modelestimated on millions of securitised SME loans. Our results show that both physical and transition riskindicators significantly improve the predictive performance of SME credit models, highlighting the impor-tance of integrating nature-related risk metrics into financial risk assessment frameworks.

Suggested Citation

  • Valente Fernanda & Chen Yujia & Calabrese Raffaella & Cowling Marc & Alessi Lucia, 2026. "Nature-adjusted probability of default for European small and medium enterprises," JRC Working Papers in Economics and Finance 2026-01, Joint Research Centre, European Commission.
    • Handle: RePEc:jrs:wpaper:202601
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    File URL: https://publications.jrc.ec.europa.eu/repository/handle/JRC143388
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