The Bank of Italy published a research paper proposing a new methodology to estimate how climate transition risk affects the one-year probability of default of Italian non-financial firms, by linking firms’ credit risk to costs and revenues arising from the European Union Emissions Trading System (EU ETS). The approach builds a dataset combining EU ETS information with firms’ market and financial data, reflecting that emissions above (below) allocated allowances generate additional costs (revenues) that can affect creditworthiness. It then uses stochastic simulations of EU ETS futures price volatility and extreme-event risk analysis of their distribution to generate scenarios and assess how the resulting emissions cost or revenue feeds through to firms’ balance sheets. The findings suggest the methodology can measure transition-risk impacts on credit quality more accurately than an approach based on Network for Greening the Financial System scenarios, and for some firms the analysis also implies an improvement in credit quality; it also aligns transition-risk measurement with the 12-month horizon commonly used in credit assessments and supports more timely updates.
Bank of Italy 2025-05-16
Bank of Italy publishes methodology to model transition-risk-adjusted default probabilities for Italian corporates
The Bank of Italy released a paper introducing a method to estimate climate transition risk's impact on the one-year default probability for Italian non-financial firms. This approach integrates EU Emissions Trading System data with firms' financials to assess credit risk through emissions costs and revenues. The findings indicate improved accuracy in measuring transition-risk impacts on credit quality compared to existing methods, aligning with the 12-month credit assessment horizon.