Climate transition risk
The economic and financial risk arising from decarbonization, distinct from physical climate risk: write-downs of fossil fuel assets, regulatory changes, liability litigation.
Climate transition risk covers the economic and financial exposures that arise from the shift to a low-carbon economy. Physical risk, by contrast, comes from the material effects of climate change. The first strand of transition risk is stranded assets: coal mines, refineries, combustion-engine vehicle fleets or gas distribution networks that were once profitable see their value collapse under regulation, carbon taxation or shifting consumer preferences. Next comes regulation itself. New emission standards, non-financial reporting obligations (CSRD in Europe, SEC disclosure in the United States) and carbon border adjustments change the costs and competitiveness of emitting sectors. Then there is climate litigation: shareholders, NGOs or states sue companies and financial institutions seen as doing too little on the transition. Insurers are exposed on two sides, through the liability of the companies concerned (directors and officers, professional liability) and through their own investment portfolios, which are subject to TCFD and SFDR requirements.
Several major pension funds and life insurers had to write down their holdings in coal companies between 2020 and 2025, as Europe sped up the closure of thermal power plants. The write-downs produced losses on bond and equity portfolios that long-term return projections had not anticipated: transition risk had reached the balance sheet.
transition risk, decarbonisation risk, stranded assets risk
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