4  Economic losses from climate-related extremes in Europe, European Environment Agency, February 2022. 1  European Commission estimates, in its 2020 report,5 that a global temperature increase of 3°C could result in an annual welfare loss of around 1.4% of GDP in Europe, with the greatest impact arising in southern Europe. Meanwhile, transition risks relate to the costs that may arise during the transformation of the economy needed to mitigate climate change and minimise the impact of the physical risks. The implementation of public policies necessary to achieve these objectives, the development of less contaminating technological innovations and changes in consumer preferences in favour of lower-emission goods and services will lead to a reallocation of resources between sectors. If this is not a sufficiently smooth process there could be significant economic disruption. Channels of transmission to financial institutions Financial institutions are exposed to the above-mentioned risks both directly and indirectly. This issue has been addressed by various studies and institutions. For example, in the banking field, the Basel Committee on Banking Supervision (BCBS) published a paper in April 20216 dividing transmission channels into two groups: microeconomic and macroeconomic. Microeconomic channels refer to the effect that the above-mentioned risk factors may have on institutions’ counterparts (borrowers). Macroeconomic channels refer to the negative effect that physical and transition risks may have on economic growth, which would also affect financial institutions. To illustrate these channels, transition risks may, for instance, arise from the introduction of green taxes, which would raise energy costs.

However, the same Central Bank analysis indicates that reallocating resources beyond the shorter term, recovering the historical investment/GDP ratios and resuming the increase of participation rates of women in the labor force could allow the country to attain trend growth of about 3.5% per year. This suggests that the Chilean economy still has considerably headroom to grow. The challenges 24. Speeding up growth with price stability in Chile still faces some important challenges. First and foremost, closing the current output gap would require recovering productive investment that has remained particularly weak over the last four years. Part of this is due to a substantial drop in investment in the mining sector, but gross capital formation in sectors other than mining has also faltered. While recent data points towards an increase in machinery imports, a more substantial change would require an improvement in business expectations that have remained in negative territory for some time. 25. The possibility of raising potential growth beyond the figures quoted above relies mainly on: (1) increasing human capital accumulation through increased labor participation, raising working skills above the already projected levels or the migration of workers with the competences required by the Chilean system; and (2) making productivity improvements via enhancing companies’ efficiency, lowering production and trading costs, and changing output composition toward more competitive and productive sectors, while advancing in terms of innovation and technological development. 26.