We assess the impact of climate-related physical risks on the one-year probability of default (PD) of Italian non-financial firms, focusing on hydrogeological risks such as floods and landslides. We compile a dataset combining firms’ financial data with the geographic location of their operational units, matched to hazard levels. We derive for each firm: i) a discrete risk indicator; ii) a PD adjusted for hydrogeological risks, calculated by rewriting the financial statement items so as to incorporate the expected loss due to hydrogeological risk. Our analysis shows that 38 per cent of firms are exposed to hydrogeological risks, with notable regional and sectoral differences. On average, exposure leads to a small increase in PD and limited economic impact, with negligible effects on collateral used in monetary policy operations. However, firms in high-risk areas suffer a higher drop in creditworthiness. Insurance coverage mitigates this effect across the entire sample, reducing the PD impact by half on average. These findings reflect current conditions. The expected increase in the frequency and severity of extreme events in the near future could amplify the negative effects on firms’ credit profiles.