The impact of climate risk on corporate credit risk

Figures & data

Figure 1. Financial risks from climate risk drivers.

Source: Adapted from BCBS (2021a).

Figure 2. African countries (shaded red) that will be severely affected by rising temperatures due to climate change. The remainder will also, inevitably, be impacted, but not as severely.

Source: Mapchart (2022) and author inputs.

Figure 3. GDP per capita deviation from a GDP per capita baseline scenario (in which climate change does not affect macroeconomic development) resulting from continued global warming for Southern African countries until 2050. (a) scenario in which global warming is below +2°C and (b) scenario in which global warming exceeds 2°C by 2050 and exceeds +4°C by 2100. Shaded regions represent a 68% statistical confidence interval (i.e., one standard deviation).

Source: authors’ calculations and Baarsch and Schaeffer (2019).

Figure 4. Simulated share prices for a 60% share price shock occurring halfway through a ten-year simulation cycle, due to (a) a physical climate risk event in which volatilities post the even do increase by 10% and (b) a transition climate risk event in which equity volatilities do not increase after the event. Note the same vertical scale for comparison.

Source: Author’s calculations.

Figure 5. Simulated lognormal distributions (side and plan view) of share prices for a 40% share price shock occurring halfway through a ten-year simulation cycle, due to (a) a physical climate risk event and (b) a transition climate risk event.

Source: Author’s calculations.

Figure 6. Simulated share prices for 40% share price shocks occurring at two-year intervals through a ten-year simulation cycle, due to physical climate risk events.

Source: Author’s calculations.

Figure 7. Scaling factor increase in PD for $-20\%$, $-40\%$, $-60\%$ and $-80\%$ equity price shocks for (a) a physical climate event for credit grades AAA through BBB, (b) a physical climate event for credit grades BBB- through CCC/C, (c) a transition climate event for credit grades AAA through BBB and (d) a transition climate event for credit grades BBB- through CCC/C.

Source: Authors’ calculations.

Figure 8. Time decay of a 60% climate change shock on the implied PD of an A- credit.

Source: Author’s calculations.

Figure 9. Scaling factor to be applied to unshocked obligor PDs for (a) physical and (b) transition related climate events as a function of shock size and unshocked PD. Again, note the same vertical scale for comparison.

Source: Author’s calculations.

Table

List of acronyms
BCBS	– Basel Committee on Banking Supervision
EAD	– exposure at default
EBA	– European Banking Authority
EDF	– expected default frequency
EL	– expected losses
ESG	– environmental, social, governance
GBM	– geometric Brownian motion
GDP	– gross domestic product
IPCC	– Intergovernmental Panel on Climate Change
KMV	– Kolmogorov Merton Vasicek
LGD	– loss given default
PD	– probability of default
UL	– unexpected losses
UNCTAD	– United Nations Conference on Trade and Development
UNEP	– United Nations Environment Programme
VaR	– Value at Risk

BCBS., 2021a. Climate-related risk drivers and their transmission channels. Available from: https://www.bis.org/bcbs/publ/d517.pdf, accessed 17 Apr 22

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Mapchart. 2022. Available from https://www.mapchart.net/africa.html, accessed 17 Apr 22

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Baarsch, F., & Schaeffer, M. 2019. Climate change impacts on Africa’s economic growth. United Nations Economic Commission for Africa report, African Development Bank Group. Available from: https://www.afdb.org/sites/default/files/documents/publications/afdb-economics_of_climate_change_in_africa.pdf, accessed 13 Feb 22

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