Rainchecks and Risk: Climate Shocks, Policy Transitions and SME Credit Dynamics

ABSTRACT

Small and medium enterprises rely heavily on bank credit. They also have the fewest tools to deal with climate risk. Using a panel of 45 countries from 2007 to 2022, we study how climate risk and the Paris Agreement shape SME bank lending. Climate‐related disasters are associated with lower SME credit, with post‐event estimates indicating a persistent contraction, although marginal evidence of differential pre‐treatment dynamics warrants caution in interpreting the event‐study results. Higher structural climate vulnerability is associated with lower SME lending, while greater readiness supports it and part of each effect operates through realised disasters (11% of the vulnerability effect and 24% of the readiness effect). Following ratification of the Paris Agreement, SME credit contracts by roughly 0.58 log points after a short lag, with the decline sharper in more vulnerable countries and weaker where readiness is stronger. The results point to a consistent tightening of SME credit in response to both physical climate risk and transition‐related policy commitments, with clear implications for how governments and lenders can smooth the credit impact of climate shocks and policy transitions.