The carbon content of Italian loans

ABSTRACT

There is a growing emphasis on the possibility that climate-related financial risks – such as an abrupt transition to a low-carbon economy – might increase the financial vulnerability of borrowers with consequences for lenders and, eventually, on the financial system as a whole. This article presents a first insight on the carbon content of business loans in Italy, comparing three methods of identifying the most exposed sectors. According to our estimates, the exposure of the Italian financial system in 2018 ranged between 8 and 10.2 per cent of banks’ total assets. This information is the starting point from which to evaluate, within a climate-scenario framework, how different climate policies could influence the stability of the banking sector.

KEYWORDS:

• Climate change
• financial stability
• climate stress test
• transition risk

JEL CLASSIFICATION:

• Q54
• G21
• G28

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 A stranded asset is defined as an asset ‘which loses significant economic value well ahead of its anticipated useful life, as a result of changes in legislation, regulation, market forces, disruptive innovation, societal norms, or environmental shocks’ (Generation Foundation 2013). Moreover, any other productive use is not possible, i.e. the investment is irreversible (Van der Ploeg and Rezai 2020). One example is the possibility that part of fossil fuels reserves become unburnable under stricter climate policies (McGlade and Ekins 2015; ClimateWise 2019; TCFD 2019). For example, McGlade and Ekins (2015) estimate a share of global unburnable reserves in order to comply with the Paris Agreement: this share is one third for of oil, 50 percent for natural gas and 80 percent for coal. More recently, Cui et al. (2019) estimate that in order to limit temperature rise to 1.5°C, we should stop the construction of new coal power plants today and shutdown the existing ones in the next 20 years.

2 According to the latest estimates by the Italian Government, in the coming years, Italy will have to spend up to €26 billion to face multiple hydrogeological risks (ItaliaSicura 2017) and global warming is estimated to raise significantly the probability of large floods in the long run (Alfieri et al. 2015).

3 Moreover, while extreme sea level events are projected to increase their frequency at least annually in many locations by 2100, in the case of Italy this will happen by 2040, well in advance (SROCC 2019).

4 This share will possibly increase in the future: for example the 2017 Italian National Energy Strategy established the closure of all its 9 coal-powered power plants (8 GWe) by 2025, with an estimated cost of more than €16 billion.

5 Oil and gas companies account for 9 per cent of the Italian FTSE-MIB capitalization.

6 See, for example, Berg, Koelbel, and Rigobon (2019).

7 Time series on countries’ GHG emissions, with details on sector and gases, are available at the UNFCCC website.

8 We use Eurostat table ‘env_ac_ainah_r2’ for air emissions accounts and ‘nama_10_a64’ for value-added.

9 NACE Rev. 2 (ATECO 2007 in Italy) classification has a hierarchical structure consisting of first level sections (alphabetical code), second level divisions (two-digit numerical code), third level groups (three-digit numerical code) and fourth level classes (four-digit numerical code) – Eurostat, NACE Rev.2, Statistical classification of economic activities in the European Community.

10 CO2e expresses the impact of different greenhouse gases in terms of the amount of CO2 that would create the same amount of warming. Each gas is converted using its global warming potential (GWP), which describes its total warming impact relative to CO2 over a set period, usually a hundred years. GHG emissions include CO2, CH4, HFC, NF3, SF6, N2O and PFC.

11 Carbon intensities of valued added at sectoral level are only available up to 2016.

12 If the sum of all loans is over €30,000, then all loans, including those below this threshold, are reported.

13 Our dataset is made up of around 1,200 observations (9 years, 63 NACE sectors, 2 types of financial institution – banks vs. other financial institutions).

14 This is especially true for large corporations, which can easily resort to other sources of funding such as equity or bonds.

15 For a more comprehensive comparison, see Aiello and Manzelli (2020).

16 At present, the quality of the information in the Central Credit Register at a more detailed sectoral level is more difficult to assess and beyond our scope.

17 If one prefers to focus on one of the two components (e.g. the environmental information), it is possible to use a weighted average of the rankings.

18 Between 2010 and 2018 these are: A01, C10-C12, C13-C15, C23, C24, D, E37-E39, F, G46, G47, H49 and I. C19 between 2010 and 2011; C20 between 2012 and 2018; C28 only in 2015. For the legend of the sectors see the Appendix.

19 According to ECB evaluations, banks’ portfolio exposure to CPRS (equity and bonds only) for the euro area as a whole is around 1 per cent of total holdings (ECB, 2019).

20 The new targets of the European Green Deal imply a significant reduction of the emissions: between 2020 and 2030 Italy should double its efforts, reducing its yearly emissions by 16 MtCO2e, compared to 7 MtCO2e for the previous target.

21 In 2017 Italy total emissions were 105 Mt lower than the reference year (1990), a reduction by 20.44 per cent (UNFCCC, - link)

22 Italy has planned to shut-down its coal-powered power stations by 2025; the Italian cars are among the most efficient in Europe with a significant penetration of natural gas in the transport sector (including the plan to use biogas and to extend gas use in tracks and shipping); there is a big potential for improving energy efficiency and renewable deployment in the building sector.