Transition risk
Definition
It is expected to emerge from a disorderly transition to a low-carbon economy. Transition risk 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.
For instance, a late introduction of a carbon tax would lead to larger costs and lower profits for firms that extract, produce or use fossil fuels for their business, being fossil fuel combustion a main driver of CO2 emissions. This economic loss can translate then in a financial loss, whereby the loss in firm’s performance translates to a negative adjustment to financial assets or an inability to repay outstanding loans, eventually affecting investors through carbon stranded assets (i.e. assets whose value could decrease abruptly as a result of a phase out of fossil fuels and high-carbon activities).
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.
