Climate Transition Risk
Transition risks are the financial risks arising from the shift to a low-carbon economy — policy changes, technology disruption, market shifts, and reputational risks. ESRS E1 requires comprehensive identification and disclosure of transition risks across short, medium and long-term horizons.
Transition risks are the financial risks arising from the shift to a low-carbon economy — policy changes, technology disruption, market shifts, and reputational risks. Policy and legal risks: Carbon pricing, emissions trading schemes, energy efficiency regulations, product standards, and litigation risk from failing to disclose or act on climate risks.
The four categories of transition risk
Policy and legal risks: Carbon pricing, emissions trading schemes, energy efficiency regulations, product standards, and litigation risk from failing to disclose or act on climate risks.
Technology risks: Substitution of existing products/services by lower-emission alternatives, costs of transition to lower-emission technology, failed investment in new technologies.
Market risks: Changed customer behaviour and preferences toward lower-emission products, increased cost of raw materials driven by climate policy, evolving investor mandates excluding high-emission sectors.
Reputation risks: Stigmatisation of industry sectors, shifting consumer preferences, criticism from civil society — particularly for companies perceived as blocking climate action.
Scenario analysis for transition risks
ESRS E1 requires scenario analysis for transition risks — typically using an orderly transition scenario (Paris-aligned, immediate policy action) and a disorderly transition scenario (delayed action followed by abrupt changes).
The NGFS (Network for Greening the Financial System) provides the most widely used climate scenario framework, with six scenarios ranging from 'Net Zero 2050' (orderly) to 'Hothouse World' (no additional climate policy).
For transition risk specifically, the orderly vs disorderly distinction is critical: orderly transition has lower transition risk and higher physical risk; disorderly transition has higher transition risk (sudden policy changes, stranded assets) and also higher physical risk.
Quantifying financial effects under E1-9
ESRS E1-9 requires quantification of anticipated financial effects from climate-related risks and opportunities — both physical and transition.
For transition risks, this typically includes: potential revenue impact from carbon pricing on operations; capital expenditure required for low-carbon technology transition; potential stranded asset values if business model is disrupted; cost of regulatory compliance (emissions permits, efficiency upgrades).
Quantification can range from qualitative ranges (high/medium/low) to full financial modelling. The level of precision is proportionate to materiality — highly material transition risks require more rigorous quantification.
Frequently asked questions
What is a stranded asset in the context of transition risk?
A stranded asset is an asset that suffers unexpected or premature write-downs, devaluations or conversion to liabilities due to the energy transition — e.g. fossil fuel reserves that cannot be economically extracted given carbon prices, or coal plants that become uneconomical as renewable energy costs fall.
How do we assess transition risk if we do not use fossil fuels?
Even companies without direct fossil fuel exposure face transition risk: supply chain carbon costs passed through in prices (Cat 1 Scope 3), customer behaviour shifts toward low-carbon products (Cat 11 use of sold products), and reputational risk from perceived inaction on climate.
Do we need a consultant for ESRS E1 transition risk analysis?
For initial screening, internal teams can identify and categorise transition risks using NGFS scenarios and sector guidance. For quantification and financial modelling, specialist climate risk consultants or data providers add significant value and reduce assurance risk.