What do transition risks refer to?

Transition risks specifically refer to the potential financial risks and challenges that arise as economies move towards a lower-carbon or more sustainable economy. This transition can involve the implementation of new regulations, shifts in technology, changes in market sentiment, and evolving investor expectations. As governments and organizations strive to mitigate climate change, industries that are heavily reliant on fossil fuels may face significant challenges, such as stranded assets, increased costs of compliance, and shifts in competitive advantage.

This understanding places transition risks in a unique context, as they are intertwined with innovations in energy, changes in policies, and advancements in sustainable technology. Companies that do not adapt to these changes risk losing market share or facing severe financial implications.

The other choices, while relevant to different aspects of risk management, do not capture the specific nature of transition risks. Maintaining operational continuity typically pertains to risks related to day-to-day operations rather than the broader shifts in the economy necessary to combat climate change. Changes in consumer demand could indeed be influenced by the transition to a lower-carbon economy, but they do not exclusively signify transition risks themselves. Lastly, geopolitical tensions can have impacts on various sectors, but they are separate from the dynamics of transitioning towards sustainability.

Thus, identifying transition risks as those stemming specifically from the move to a