Integrating climate risk into credit risk : An approach for Belgian SMEs

Details

Supervisors

Devolder, Pierre

Faculty

Faculté des sciences

Degree label

Master [120] en sciences actuarielles, à finalité spécialisée

Abstract

Climate change is a phenomenon that has been widely documented and can’t be denied any longer. If nothing is done, climate change is likely to have severe consequences a.o. sea level rise, more frequent and severe floods, droughts and heatwaves. Government and other organisations are taking measures to limit the magnitude of climate change a.o. by reducing the GHG emissions. Climate change and the measures taken to limit it generate climate risk. In the field of risk management, the climate risk which is made of transition risk as well as physical risk must be taken into account. The former is related to the consequences of a transition to a greener economy, while the latter is linked to a surge in occurrence and intensity of extreme events. The financial sector is increasingly impacted by the transition towards a low-carbon world. Consequently, the objective of this work is to quantify the effect of climate risk on the default probability of Belgian SMEs. As this work has already been done for large companies, it is important to target SMEs, which represent an important part of the European economy. This evaluation will be done by using a logit model to translate climate risk into financial impact through the balance sheet and income statement of an SME. Through this case study, we will analyse the impact of several transition scenarios on the probability of default of an SME in the agricultural sector.