Did we open the flood gates? climate risk and infrastructure loans probability of default

I provide a novel approach to estimating asset-level expected damage from flooding for 952 airports, ports, and power plants globally. This study contributes to the understanding of climate risks in infrastructure finance by focusing on the impact of flood damage on loan default probabilities—a critical aspect for investors and policymakers managing climate adaptation in high-risk areas. Using multivariate regression models with sectoral and geographic controls, I find that the expected damage from flood increases the probability of default on infrastructure project finance loans and that the presence of stringent flood adaptation standards decreases it. A standard deviation increase in the expected damage from flood increases the probability of default by one percent, while the presence of enforced flood adaptation standards leads to a 4 percent decrease in the probability of default. I find that the effect of expected damage from floods is higher for long-maturity loans, as well as projects including financial risk mitigation mechanisms such as Power Purchase Agreements. I also find that flood adaptation standards decrease probability of default only when these are enforced. The presence of non-enforced flood management policies leads to an increase in probability of default. These findings have important implications for project finance as an instrument to finance infrastructure and infrastructure as a distinct financial asset class.