Assessing the chronic physical risks of climate change for the financial sector: A case study from Mexico's central Bank

Mexico's Central Bank conducted a comprehensive climate risk assessment using a suite of global models to evaluate physical and transition risks. We focus on chronic physical risks, using a spatially explicit integrated assessment model that differentiates between urban and non-urban areas, capturing local climate impacts. Two complementary assessments are presented. First, we construct an index ranking the exposure of commercial bank loan portfolios based on local hazard, exposure and vulnerability measures. Second, we evaluate sectoral climate-related liability risk by attributing domestic/international economic damages from emissions using social-cost-of-carbon estimates. Results reveal a strong concentration of chronic physical risk in central Mexico, highlighting the relevance of spatial granularity. We find substantial sectoral liability risks, particularly in the utilities and transportation sectors, driven largely by international damages. By incorporating multiple damage functions and probabilistic climate projections, we illustrate the uncertainty in impact estimates. Under a Current Policies scenario, economic losses could exceed 35% of Mexico's GDP by 2100 and surpass $20 trillion in present value, when accounting for the urban heat island effect. Paris-aligned scenarios substantially reduce these losses. This study emphasizes the usefulness of methods that exploit detailed, spatially explicit measures to improve estimation of exposure and liability risk of economic sectors.