continue to rise (“hot house”), in line with NGFS climate scenarios.<sup>5</sup> These assessments have that under a short-term, three-year disorderly transition risk scenario and the two physical risk scenarios—flood risk and drought and heat risk—the combined credit and market risk losses for the 41 banks providing projections would amount to around €70 billion (ECB 2022).

**Measuring climate risks in European CGSs portfolios is relevant for public policy and fiscal risks.** CGSs are a traditionally important policy tool to ease access to finance for SMEs in Europe, with several studies demonstrating their financial and economic additionality (see Neuberger 2020 for a review of the literature). Financial sustainability is a necessary though not sufficient condition for CGSs to achieve financial and economic additionality. Therefore, measuring (and eventually managing) climate-related financial risks is an important step towards improving the performance of CGSs and hence potentially strengthening the effectiveness of public policy. Measuring climate-related financial risks is also important for mitigating fiscal risks, given that CGSs represent a contingent liability for many governments in Europe.

# 3. Data and methodology

**The aim of this paper is to explore the vulnerability of European CGSs to climate-related financial risks.** To this end, we collect unique exposure data from 29 CGSs across Europe on their sectoral and spatial disaggregation of guarantee portfolios. We then link the CGS portfolio data to a set of sectoral and spatially disaggregated transition and physical risk vulnerability indicators, which allows us to identify the portfolio shares at risk per indicator. We also identify sectors that are most relevant for CGSs to focus on by creating a transition risk score which combines exposure with GHG intensity. Finally, we conduct a stylized stress test to assess potential financial losses that CGSs could incur in adverse climate-related scenarios.

**Exposure data is collected through a survey among AECM members while vulnerability data has been obtained from a range of other sources.** Outstanding guarantees with sectoral and spatial breakdowns have been collected from 29 CGSs that together administered EUR 278 billion of outstanding guarantees as of December 31, 2020. Our sample covers 84 percent of the total outstanding guarantee volume of AECM members, which totaled EUR 330 billion in 2020 (AECM 2020). However, not all CGSs provide breakdowns of their guarantees into sectors and regions with equal granularity. For 1-digit sectors (NACE1) and 2-digit sectors (NACE2) our sample covers 82 percent and 35 percent of the total outstanding guarantee volume of AECM members, respectively. For regions at the second administrative level (NUTS2), our sample covers 42 percent of the total outstanding guarantee volume of AECM members. All exposure data is as of end-2020 and thus includes volumes under the extensive COVID-19 support programs. For the risk assessment we map CGSs’ exposure data to vulnerability data to assess the amount of exposure at increased risk. We obtain vulnerability data from a variety of sources and at different levels of aggregation. Table 1 provides a summary of the collected vulnerability data.

> 5 See https://www.ngfs.net/ngfs-scenarios-portal/.

7