Our results should be considered a conservative estimation as natural disasters could become more frequent and intense in the future. This is a global trend that has been widely documented in previous studies (see Masson-Delmotte and Moufouma-Okia 2019, United Nations 2015, IPCC 2012), and is particularly relevant for the LAC region (OCHA 2020). Therefore, the results of a historical impact analysis of natural disasters in the financial system should not be necessarily interpreted as predictors of future events outcomes. Along these lines, Bolton et al. (2020) describe the risk of “green swans” – a low probability-high impact scenario of "extremely financially disruptive events that could be behind the next systemic financial crisis."

# **Transition risks**

Transition risks can materialize through bank holdings in CO2-intensive and environmentally damaging industries and assets. The literature on transition risks is mostly focused on so-called “stranded assets”, i.e. assets that lose economic and financial value due to stricter regulations to reach climate goals, rapid changes in carbon neutral technology and changes in behavior of consumers and markets (Delis, de Greiff, and Ongena 2019; Bos and Gupta 2019). In the shortrun, banks may face write-offs on loans to polluting companies who face additional costs or cannot comply to regulations. In the long-run, stranded assets can materialize as a less carbonintensive development path is chosen.

Although the transition to a low-carbon and sustainable economy implies adjustment costs, especially in the short-term, those are outpaced by long-term benefits. According to a recent study (WRI and NCE 2020), in the face of the current COVID-19-induced economic slowdown, a transition towards a greener and carbon-neutral economy could add US$ 535 billion to Brazil's GDP by 2030 compared with a business-as-usual scenario. This can be achieved by prioritizing low-carbon, integrated infrastructure, promoting industrial innovation through green investments, and implementing deforestation-free, high-productivity agriculture. Similarly, Groves et al. (2020) show that the Costa Rica National Decarbonization Plan may bring US$ 41 billion in net benefits to the Costa Rican economy between 2020 and 2050 through, among others, energy savings, reduced transportation costs, improvements in ecosystem services and agricultural yields.

All LAC countries have ratified the Paris Agreement, committing to curb greenhouse gas (GHG) emissions in the coming years. Nationally determined contributions (NDCs) are at the heart of the Paris Agreement, embodied by each country to reduce national emissions and adapt to the impacts of climate change.<sup>33</sup> All countries under analysis have specific GHG target emissions as part of their NDCs. Exceptions are El Salvador and Bolivia, which specify their mitigation contributions in terms of actions.<sup>34</sup> Comparison of NDC stringency across countries is difficult to assess (Pauw et al. 2018). Yet, Brazil’s NDCs are known to be one the most ambitious by committing to reducing GHG emissions by 37 percent and 43 percent by 2025 and 2030, respectively, compared to the estimated emissions for 2005 (Kossoy 2018). Colombia also has very ambitious targets, including a 51 percent GHG emission reduction by 2030.<sup>35</sup> Besides, Costa Rica’s NDCs submitted in 2020 to the UNFCCC positions the country as one of the few economies,

> 33 Due to simultaneous efforts to achieve NDC targets, transition risks may also be correlated across countries. 34 See World Resources Institute.

> 35 _<u>Actualización de la Contribución Determinada a Nivel Nacional de Colombia (NDC)</u>_

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