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The Impact of Climate Transition Risks on the Brazilian Financial Sector

Author

Listed:
  • Michel Alexandre
  • Angela Modica Scala
  • Alessandro Caiani
  • Gilberto Tadeu Lima

Abstract

In this paper, we propose a methodology for computing the impact of climate transition risks on the financial system. The novelty of our analytical approach is that it accounts for indirect impacts stemming from inter-sectoral linkages (on the real sector side) and interbank loans (on the financial sector side). Our proposed methodology is carried out in three sequential steps: physical capital stranding due to a shock on a carbon-intensive economic sector (the mining fossil sector), potential direct losses experienced by the financial sector caused by its loan exposures to the real sector, and indirect potential losses due to interbank exposures. Applying this methodology to a rich Brazilian financial dataset alongside with reputable international input-output databases, we show that (i) the sectors with the highest rates of stranding physical capital vary with the model used to compute such stranding, (ii) the distribution of the individual direct and indirect losses are well-fitted by a power law, and (iii) the aggregate potential loss, both direct and indirect, declined during the period assessed in this study (2015-2022).

Suggested Citation

  • Michel Alexandre & Angela Modica Scala & Alessandro Caiani & Gilberto Tadeu Lima, 2025. "The Impact of Climate Transition Risks on the Brazilian Financial Sector," Working Papers Series 633, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:633
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    References listed on IDEAS

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