Note: Average deviations for 2010–23 compared with the 1976–2005 reference period for the average temperature (Panel A) and the number of days with temperatures above 35°C (Panel B), by department.
Chart 2 illustrates this contrast and shows why an overly aggregated measure of climate risk can mask highly different local situations, particularly as the analysis is carried out at a more granular geographical level than simply by department. To assess businesses’ exposure accurately, it is necessary to distinguish between the location of premises, the nature of the temperature shock, and the sectors that may be more or less vulnerable depending on the type or intensity of exposure.
Some sectors are more vulnerable than others
It is also worth examining the sectoral heterogeneity of credit responses. Growth in outstanding loans in sectors such as trade and transport, accommodation and leisure, manufacturing and mining, appears to be affected by both chronic warming and episodes of extreme heat. In other sectors, such as real estate, construction, or services, outstanding loans are more affected by acute episodes.
Our sector-level impact assessment, which takes into account the economic conditions common to both exposed and unexposed firms, suggests that part of the credit slowdown stems from an adjustment in the supply of bank credit. These findings are consistent with recent research conducted in other contexts, such as Aguilar-Gomez et al.
Financial indicators might not yet fully capture such risk
One finding is particularly significant for the analysis of banking risk: when we take companies’ credit ratings into account, the impact of exposure to temperatures remains virtually unchanged. Traditional financial ratings therefore do not appear to take full account of this aspect of climate risk.
This may indicate that banks are using additional information, or that they are already adopting, at least partly, a forward-looking approach. A company with satisfactory financial ratios but which is exposed to rising temperatures may find its business affected in the future. In this case, historical financial data may not necessarily be sufficient to assess future risk.
Climate change does not affect businesses – or the banks that finance them – in the same way. For banks, our findings suggest that a forward-looking and more granular assessment of climate risk should be integrated into credit analysis and the monitoring of their portfolios.
Overall, faced with high temperatures, banks are significantly reducing the distribution of their lending, albeit still to a limited extent. However, the net impact on credit growth could change if there were increased funding for adaptation investments.