The Bank of Italy published a research paper setting out a methodology to quantify how climate-related transition risk affects the one-year probability of default of Italian non-financial firms, using exposures arising from the EU Emissions Trading System. The framework builds a granular dataset that combines EU Emissions Trading System (EU-ETS) information with market and corporate financial data, treating emissions above free allocated allowances as an additional cost and emissions below allowances as potential revenue that can affect creditworthiness. It generates EU-ETS price scenarios through stochastic simulations of futures price volatility and an extreme-event risk analysis, then maps the resulting costs or revenues into firms’ financial statements to estimate impacts under different price paths. The paper reports that the approach yields a more precise assessment of transition-risk effects on creditworthiness than one based on Network for Greening the Financial System (NGFS) scenarios and results in rating upgrades for a small number of firms, while aligning transition-risk measurement with the standard 12-month credit risk assessment horizon and enabling regular rating updates.
Bank of Italy 2025-05-16
Bank of Italy publishes methodology to model transition risk-adjusted probability of default for Italian non-financial firms
The Bank of Italy released a paper on assessing climate-related transition risk's impact on the one-year default probability for Italian non-financial firms, using EU Emissions Trading System data. The framework combines EU-ETS data with market and corporate financial information, simulating price scenarios to evaluate creditworthiness. This approach offers a more precise transition-risk assessment than NGFS scenarios, resulting in some rating upgrades and aligning with the standard 12-month credit risk assessment horizon.