Climate Change Transition Risk

From Open Risk Manual

Definition

Transition Risk reflect that fact that transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations

Transition Risks can be segment as follows:

  • policy and legal actions
  • technology changes
  • market responses, and
  • reputational considerations.

Policy and Legal Actions

The Political Risk associated with and financial impact of climate-related policy changes depends on the nature and timing of the policy change.

Legal Risk (in climate-related risk context) is climate-related litigation claims being brought before the courts by property owners, municipalities, states, insurers, shareholders, and public interest organizations. Reasons for such litigation include the failure of organizations to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks

Technology Changes

To the extent that new technology displaces old systems and disrupts some parts of the existing economic system, winners and losers will emerge from this “creative destruction” process. The timing of technology development and deployment is a key uncertainty in assessing technology risk.

Market Responses

Shifts in supply and demand for certain commodities, products, and services as climate-related risks and opportunities are increasingly taken into account.

Reputational Considerations

Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy.