European companies are at risk of great financial strain because of increasingly common climate-driven flooding events, a study showed.
What's happening?
The study of small and medium-sized firms in Belgium, Italy, and Spain found that the physical risk of floods also threatens the financial well-being of businesses and banks, as PreventionWeb reported.
A flood can slow or prevent a loan from being repaid, and smaller companies are more at risk since they have limited resources to turn to for backing. This is partly because banks charge higher interest rates in flood-prone areas. The authors also pointed out that severe floods can change lenders' perception and assessment of flood risk.
This is especially problematic in Europe because floods are one of the most prevalent and damaging natural disasters. A diagram of the countries showed that much of each was exposed and vulnerable to flooding.
"The higher loan default probabilities materialise even two years after the hazard, consistent with evidence that the deterioration of firm performance brought about by flooding is rather persistent," Luca Barbaglia, Serena Fatica, and Caterina Rho wrote.
"Moreover, we also uncover an indirect channel whereby loans originated in the aftermath of flood episodes are more likely to end up in arrears and, eventually, default. This result holds even as we account for the occurrence of floods during the loan lifetime.
"This intrinsic fragility suggests that banks engage in excessive risk-taking or relax their credit standards when they grant post-disaster recovery lending."
Why is flood risk important?
Rising global temperatures caused by humans' use of dirty energy sources such as coal and gas are causing floods, droughts, wildfires, and other extreme weather events to occur more frequently and with greater intensity.
And because the pollution released by the burning of dirty energy remains in Earth's atmosphere for hundreds of years, even if we were to complete the green transition tomorrow, we would still suffer the effects of industrialization long into the future.
That's why businesses and individuals are not only trying to scale back their harmful practices but also plan to work around their consequences.
What's being done about rising flood risks?
The study authors stated the need to implement policies that protect businesses, financial institutions, and the economy from the effects of rising global temperatures. Identifying, monitoring, and reporting on the risks are key, they wrote.
Broadly, we can all work to lessen the chance that natural disasters will sink any one company or area. Governments — and especially corporations and the wealthy — must make these changes their priority, as individuals are doing their part by switching to electric vehicles, curbing the consumption of plastic, and finding ways to reduce the impact of prominent pollution-producing sectors such as the agriculture industry.
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