What are "transition risks" in the context of climate risk?

Transition risks refer specifically to the uncertainties and potential financial impacts that arise from the shift toward a low-carbon economy. This encompasses a wide array of factors including regulatory changes, technological advancements, market dynamics, and shifts in investor sentiment as society moves toward sustainability and aims to mitigate climate change effects.

As countries and businesses start implementing policies to reduce greenhouse gas emissions, industries may face new regulations requiring compliance with stricter environmental standards. These regulatory changes can significantly alter operational models and affect profitability, resulting in transition risks for companies that may not adapt quickly enough.

Moreover, the transition to renewable energy sources can lead to market shifts, affecting the demand for traditional fossil fuels. Companies that rely heavily on these energy sources may find their market value diminishing as investments and consumer preferences shift toward greener alternatives. This is a core element of transition risks, as the timing and magnitude of these changes can be difficult to predict, impacting financial performance and strategic planning.

For these reasons, the correct understanding of transition risks highlights their focus on the economic implications of moving towards a low-carbon economy rather than just the physical consequences of climate change or the direct impacts of environmental policies on social conditions.