Transition Risk

As governments and societies act to reduce greenhouse gas emissions, some businesses and assets will lose value while others gain. Transition risk captures the potential losses for those negatively affected.

Main sources of transition risk include policy changes, such as carbon taxes, emissions limits and bans on certain products; technological change, such as cheaper renewable energy and electric vehicles making older technologies uncompetitive; shifts in market demand and consumer preferences; and reputational damage for companies seen as contributing to climate change.

For example, a company that owns coal-fired power stations faces transition risk if a carbon price makes coal power uneconomic or if regulations require plants to close early. A car maker slow to develop electric vehicles may lose market share.

Transition risk can lead to stranded assets, which lose value before the end of their expected lives. The size of transition risk depends on how quickly and how smoothly the transition happens. A sudden, disorderly transition would likely cause larger losses than a gradual, predictable one. Regulators and investors increasingly require companies to assess and disclose these risks.