Economic and financial risk associated with the decarbonization process, distinct from physical climate risk: fossil asset depreciation, regulatory changes, liability litigation.
Climate transition risk refers to all economic and financial exposures arising from the shift toward a low-carbon economy, as opposed to physical climate risk which stems from the material effects of climate change itself. It breaks down into three main components. The first is stranded asset risk: assets that were once profitable, coal mines, refineries, combustion-engine vehicle fleets, gas distribution networks, see their value collapse under the effect of regulation, carbon taxation or shifting consumer preferences. The second is regulatory risk: new emission standards, non-financial reporting obligations (CSRD in Europe, SEC disclosure in the United States) and carbon border adjustments alter the cost and competitiveness structures of emitting sectors. The third is climate litigation risk: companies and financial institutions perceived as insufficiently engaged in the transition face legal action from shareholders, NGOs or states. For insurance, transition risk manifests primarily through the liability of exposed companies (directors and officers, professional liability) and through insurers' own investment portfolios, subject to TCFD and SFDR requirements.
Several major pension funds and life insurers were forced to write down their holdings in coal companies between 2020 and 2025, due to the acceleration of thermal plant closure policies in Europe. These write-downs generated unanticipated losses on bond and equity portfolios, illustrating the materialization of transition risk in financial balance sheets.
transition risk, risque de décarbonation, risque de stranded assets