Climate transition risk

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Climate change - financial risks.

The Bank of England defines climate transition risk as financial risks that could arise from adjusting to a lower-carbon economy.

Climate transition risks are distinct from the direct physical risks of climate change, such as more frequent and severe extreme weather events.

Climate transition risks and opportunities
  • Policy and legal changes including changes relating to energy generation, renewable energy targets, sustainable land use and water efficiency.
  • Technological advancements in renewable energy, battery storage and electrification of transport, aviation and agriculture.
  • Change in demand for products and commodities, including fossil fuels and lithium, leading to market risk.
  • Reputational risk arising from shareholder, consumer or investor concerns, reflecting the transition in views regarding fossil fuels.
Actuaries Institute of Australia Climate Change Working Group.

What are the climate transition risks?
"Transition risks can occur when moving towards a less polluting, greener economy. Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business. It’s not that policies stemming from deals like the Paris Climate Agreement are bad for our economy – in fact, the risk of delaying action altogether would be far worse. Rather, it’s about the speed of transition to a greener economy – and how this affects certain sectors and financial stability.
One example is energy companies. If government policies were to change in line with the Paris Agreement, then two thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors like coal, oil and gas.
The move towards a greener economy could also impact companies that produce cars, ships and planes, or use a lot of energy to make raw materials like steel and cement."
Bank of England - Climate change - What are the risks to financial stability?

See also

External link