Region-Sector Heatmaps for Transition and Physical Risks

Executive Summary

This paper quantifies the monetary costs of transition and physical climate risks at the region-sector level, based on publicly available data from the Network for Greening the Financial System (NGFS). For transition risks, we rely on the GCAM integrated assessment model, which provides granular regional and sectoral emissions trajectories and carbon price pathways. We develop indicators such as path misalignment, budget overshoot, and abatement share, and translate them into financial costs using discounted carbon price trajectories. Region-sector heatmaps are constructed to highlight heterogeneity across countries and industries, and to illustrate which sectors contribute most to transition misalignment and costs under alternative climate scenarios.

For physical risks, we use NGFS short-term climate scenarios based on physical climate storylines of compound events, including heatwave-drought-wildfire and storm-flood episodes. These scenarios are linked to economic impacts (capital destruction, output losses, productivity shocks), and further mapped into probabilities of default and asset valuations. This provides a consistent macrofinancial framework to assess near-term physical risk exposures.

Our results reveal strong heterogeneity across regions and sectors for both transition and physical risks. Energy-intensive industries (such as steel, cement, and electricity) and resource-dependent economies face the largest transition costs, while climate hazards disproportionately increase credit risks in some vulnerable sectors (agriculture and construction) and regions (in South Asia and Latin America). The framework demonstrates the value of NGFS scenarios as a standardized, transparent, and regularly updated basis for climate-related financial risk analysis.