Transition risks

Risks  that  result  from  a  misalignment  between  an  organisation’s  or investor’s strategy and management and the changing regulatory, policy or societal landscape in which it operates. Developments aimed at halting or reversing   damage   to   the   climate   or   to   nature,   such   as   government measures,  technological  breakthroughs,  market  changes,  litigation  and changing consumer preferences can all create or change transition risks.

Transition risks are specific challenges that companies and investors face in the context of the shift towards a low-carbon economy. These risks arise from the necessity to adapt to new regulatory requirements, technological developments, and changing market conditions, which are shaped by the urgency to combat climate change. Despite their relevance, transition risks are often underestimated, leading to significant financial and operational consequences.

The classification of these risks typically occurs in four categories: political and legal risks, technological risks, market risks, and reputational risks. Political and legal risks can arise from new legislation such as carbon pricing, which burdens existing business models. Technological risks stem from the necessity to integrate innovative, low-emission technologies, which may render existing products obsolete. Market risks often result from changing consumer preferences or rising raw material prices. Reputational risks can have negative impacts on a company’s image and cost both customers and investors.

The financial impacts of transition risks are significant: companies may face asset devaluation, higher operating costs, and potential declines in revenue. Industries such as energy production, the automotive sector, and heavy industry are particularly vulnerable, but financial institutions also bear risks through their investments and loan portfolios that are anchored in climate-sensitive areas.Proactively addressing transition risks is supported by the implementation of effective ESG risk management strategies. Companies should regularly review regulatory developments, invest in sustainable technologies, and create transparency in reporting environmental impacts. By early identification and targeted management of these risks, companies can secure their future viability and contribute to achieving global sustainability goals.