consequences originating from both transition and physical risks that affect directly providers and users of funds. this will be a powerful and much - needed complement to the use of the fiscal and environmental instruments that are needed to fight against climate change. in practical terms, climate risk can probably be captured in the traditional financial risk categories ( credit, market, liquidity or reputational risks ). however, several crucial limitations and challenges are coming to light when trying to measure these risks. in particular, there are few sufficiently deep and harmonised databases to analyse and understand the potential effects of physical and transition risks. data granularity is particularly important given the high heterogeneity of the potential impacts. and, while we are working hard to improve available information, we lack sufficient historical depth to be able to use the past as a guide to estimate future developments. in addition, there is no previous experience of structural changes of this magnitude, which also require a very long - term perspective, and where the presence of non - linearities and irreversible tipping points are likely, conditioning the methodologies to be used. and there is limited research, and accompanying data, that explore how climate risks feed into the financial risks faced by banks. in this context, many supervisory and / or prudential authorities are opting to use stress tests and scenario analysis. as a result, we should accept that efforts to translate climate - related risks into quantifiable financial risks are in their early stages. and we will have to step up our efforts to address these problems and limitations. it ’ s also crucial that these efforts are coordinated at the global level, given the global dimension of the risks and the potential spillovers that can arise through interconnections between the real and financial sectors. in this regard, in the case of banks, at the basel committee on banking supervision ( bcbs ) level we are planning to conduct a “ gap analysis ” to identify areas in the current basel framework where climate - related financial risks may not be adequately addressed or are not captured. this gap analysis will be comprehensive in nature, and will cover regulatory, supervisory and disclosure elements. building on the analysis, we plan to explore practical solutions to address any identified gaps. in addition to a set of principles or guidelines on effective supervisory practices for assessing climate - related financial risks, the committee will explore whether any policy measures under the regulatory framework should be taken, and how the basel committee could support international efforts related to the development of globally

( ii ) the sizeable exposures of the financial sector to this form of risk ; and ( iii ) the presence of externalities. the financial sector is exposed to these physical risks through several channels. physical risks are of course relevant for the valuation of real estate assets, the main collateral of bank loans. physical risks also matter when assessing the ability to pay of borrowers involved in p. bolton, m. kacperczyk, h. hong and x. vives ( forthcoming ), “ resilience of the financial system to natural disasters ”, iese business school and cepr. see the financial stability board ( november 2020 ) : the implications of climate change for financial stability. sectors that could be particularly affected, such as agriculture or tourism. capital destruction could also be very important. furthermore, since not all geographies would be equally affected, the migration of activities and of the population in some areas will increase, generating an impact on the financial sector as well. precisely to prevent these risks increasing further, acting to prevent the materialisation of climate change is essential. however, such interventions, and the accompanying changes in consumer and investor sentiment in favour of a greener economy, may also create their own particular risks to the financial sector. indeed, the transition towards an environmentally sustainable economy implies a sweeping change in production technologies and a reallocation of activity across sectors and companies. actually, such restructuring will mean that, in the short run, some sectors will increase their profits while others will incur losses, with obvious implications for the financial system and its stability. in this case, for estimating transition risks, the most relevant factors are the carbon footprint and the environmental impact of the sectors and companies to which financial firms are exposed. in this context, and as part of our main responsibility to guarantee the stability of the financial system, we - regulatory and supervisory authorities - must ensure that the materialisation of climate risks does not endanger financial stability. therefore, we must make sure that financial firms address these risks. in particular, we should contribute to identifying climate - risk drivers and their transmission channels, to the adequate measurement of the economic and financial impact of the different risks, and to the definition and development of the potential mitigation and riskreduction measures. if we succeed in incorporating these risks into the decisions of the financial sector, this will translate into a change in the relative prices of financial instruments. and, in turn, that will help to internalise those