Glossary
Climate and transition
What is transition risk?
The risk that policy and technology strand your asset.
Carbon pricing, efficiency mandates and shifting demand can make a profitable business uninvestable long before it becomes unprofitable. It arrives through refinancing markets first.
A worked example
A gas plant earning $60m a year emits 1m tonnes of CO2. If the carbon price reaches $100 a tonne, that's $100m of new cost every year, and the plant loses money even though nothing about the plant itself changed.
Where it catches you in the game
- High-carbon books get harder to refinance as challenge runs progress.
It comes up most on the asset management desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what transition risk does to your returns.