supervisory measures is more extensive, yet with limited scope (Peru, Brazil, Paraguay, Mexico, Panama, Colombia, and Chile – Table 2).<sup>14</sup> For example, in December 2019 financial supervisory and regulatory authorities in Chile underwrote a Joint Declaration on Climate Change, which stated their commitment and interest in promoting adequate management of risks and opportunities associated with climate change to maintain the development and stability of the financial system.<sup>15</sup> Private sector-led initiatives to foster green/sustainable finance and mitigate social and environmental risks are more common. By the end of 2019, banking industry associations in 11 LAC countries had launched self-regulatory practices (Table 2). Across LAC, Brazil recorded the earlier steps in the sustainability agenda for the banking sector. In 1995, five major state-owned banks and the Environmental Ministry signed the _Protocolo Verde_ (Green Protocol), which sets a charter of principles for sustainable development with proposed policies and practices.<sup>16</sup> The Protocol was revised in 1998 and updated in 2009, expanding its scope to commercial banks with the endorsement of the Brazilian banking industry association.

# **3. Data and methodology**

## **Data**

To establish the stylized facts we are primarily interested in this paper, we collect data on banking sector loans and NPLs disaggregated by sector and country-province, as well as data to identify banks’ loan exposures in a country-province that was affected by a natural disaster, and the loan exposures to sectors that are transition-risk sensitive. Besides, we gather firm-level financials of firms that operate in sectors sensitive to the transition.

We collect outstanding aggregate loans and NPLs for both nonfinancial corporations and households disaggregated by economic sector and province from country authorities, i.e. financial supervisory agencies or central banks. Table 3 in the Annex presents the local authorities' data sources. All data pre-date the COVID-19 pandemic and are thus not tainted by the various support measures introduced, which may complicate the interpretation of the results. Data availability determines our sample composition. Our data set is composed of a cross section of 9 countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Dominican Republic) for the estimation of credit risk exposure to physical risks, and from 12 economies (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Mexico, Paraguay, Peru, and Uruguay) for the estimation of credit risk exposure to transition risks. Our physical risk assessment is complemented by an empirical estimation comprising a panel of five countries (Argentina, Brazil, Chile, Mexico, and Peru) over a period of 35 quarters (2011q3 and 2020q1).

Different standards adopted by the countries in our sample for classifying NPLs and banks' credit exposures to economic sectors present some challenges. Some countries such as Brazil and Chile record NPLs following international definitions of outstanding amounts with at least one

> 14 Panama is not further discussed in this document due to data limitations.

> 15 _Ministerio de Hacienda, Comisión para el Mercado Financiero, Superintendencia de Pensiones, y Banco Central de Chile. Declaración conjunta sobre el Cambio Climático._

> 16 _Banco do Brasil, Banco do Nordeste, Banco da Amazônia, BNDES, and Caixa Econômica Federal._

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