Nature-adjusted probability of default for European small and medium enterprises

Fernanda Valente, Yujia Chen, Raffaella Calabrese, Marc Cowling and Lucia Alessi ()
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Lucia Alessi: European Commission - JRC, https://joint-research-centre.ec.europa.eu/index_en

No 2026-01, JRC Working Papers in Economics and Finance from Joint Research Centre, European Commission

Abstract: Small and Medium-sized Enterprises (SMEs) are the backbone of the European economy. However, theimpact of nature-related risks on SME creditworthiness is still largely unexplored. To address this gap,we incorporate indicators of nature-related risks - namely the Biodiversity Intactness Index, the HumanFootprint Index, and ENCORE scores - into an Extreme Gradient Boosting (XGBoost) credit scoring modelestimated on millions of securitised SME loans. Our results show that both physical and transition riskindicators significantly improve the predictive performance of SME credit models, highlighting the impor-tance of integrating nature-related risk metrics into financial risk assessment frameworks.

Date: 2026-03
New Economics Papers: this item is included in nep-ent and nep-sbm
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