Climate transition risk
Definition
Climate transition risk is expected to emerge from a disorderly transition to a low-carbon economy. This is defined as a situation in which climate policies and regulations are introduced late and suddenly, or technological shocks occur, that negatively affect fossil fuel and high-carbon firms' performance, and thus the value of their financial contracts. In a disorderly transition, "carbon stranded assets" could materialize for both firms and investors, potentially leading to large asset price volatility (negative for high-carbon, and positive for low-carbon firms). In this condition, investors cannot fully anticipate shocks on firms' performance and assets. Portfolio rebalancing and hedging could not be fully possible if the economic and market structure is prevalently high-carbon. Thus, investors who are exposed to fossil fuel and high carbon firms will incur losses. Losses from carbon stranded assets could then reverberate in the financial network, with implications on financial stability at the individual and systemic level.
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
