Department of Finance Seminar: Professor Raffaella Calabrese Biodiversity adjusted probability of default for European small and medium enterprises with Fernande Valente, Yujia Chen & Marc Cowling

Biodiversity loss, environmental degradation, and declining ecosystem services can weaken Small and Medium Enterprises (SMEs)' ability to repay loans, as recognised by the EU Biodiversity Strategy 2030 and Green Deal. While awareness of nature-related financial risks is increasing, the link between biodiversity integrity and credit risk remains unexplored. This study is the first, to our knowledge, to analyse the impact of biodiversity loss on SME default risk. We propose a transmission channel framework based on physical and transition risks, drawing from climate risk literature. Physical risks are captured using the Biodiversity Intactness Index and Human Footprint Index, while transition risks are represented by ENCORE scores, reflecting economic dependence on and impact on biodiversity. These indices are included as predictors in a discrete survival model estimated on millions of securitised loans to European SMEs (2013–2020). The empirical results show that both components of biodiversity loss significantly affect default probability and enhance the predictive performance of SME credit scoring models, highlighting the value of integrating biodiversity measures into financial risk assessments for regulators and financial institutions