An Exploration of Climate-Related Financial Risks for Credit Guarantee Schemes in Europe

This paper assesses the vulnerability of credit guarantee schemes to the physical and transitionrisks related to climate change. Based on unique sectoral and spatial data from 29 European credit guarantee schemeslinked to a range of vulnerability metrics, the paper identifies guarantees-at-risk, builds a transition riskscore to rank sectors at risk, and conducts a stylized stress test to assess potential financial losses that creditguarantee schemes could incur under adverse climate-related scenarios. The results show that about one-third of creditguarantee schemes’ guarantee portfolios is toward sectors that have high exposure to a disorderly energy transition.European credit guarantee schemes are also exposed to a broad range of climate-related physical risks, especiallywildfires, coastal floods, and river floods, with 24–31 percent of outstanding guarantees toward sectors that haveelevated exposure to climate change and weather variability. Finally, for transition and physical risk scenarios, theannual expected loss on the guarantee portfolio could increase by EUR 181 million and EUR 128 million,respectively. The results suggest that credit guarantee schemes could start integrating climate-related financialrisks into their risk management frameworks.