Transition Risk?

EcoVision
Nov 10
2 min read

ESG transition risk is one of the most important (and sometimes misunderstood) parts of climate and sustainability risk management. Here’s a clear summary:

🌱 What is ESG Transition Risk?

Transition risk refers to the financial and operational risks a company faces as the economy moves from a high‑carbon to a low‑carbon or even net‑zero future.

While “physical risks” come from the direct impacts of climate change (acute or chronic: storms, floods, heat, etc.), transition risks arise from changes in policies, technologies, markets, and social expectations linked to climate action.

So, it’s the business disruption caused by the transition itself — not by climate events.

Key Drivers of Transition Risk

Category	Examples	Business Impact
Policy & Regulation	Carbon taxes, emissions caps, disclosure rules (e.g., HKEX ESG Code, EU CBAM)	Higher costs, stranded assets, compliance burden
Technology	Adoption of low‑carbon or green tech (EVs, renewables, process electrification)	Obsolete equipment, retraining needs, capital expenditure
Market & Economic Shifts	Changes in demand for fossil fuels, green consumer preferences	Revenue decline, supply chain redesign
Investor & Financing Pressure	ESG screening, green investment mandates	Higher financing costs for carbon‑intensive sectors
Reputation & Legal	Litigation, stakeholder activism, or brand backlash	Loss of clients, market share, or valuation

Example (Hong Kong Context)

The government’s 2050 net‑zero target and Clean Air Plan mean energy, logistics, and property sectors must upgrade operations.
For instance, a transport company relying on diesel fleets faces transition risk when carbon taxes or  EV  standards make its business model more expensive, unless it invests early in cleaner alternatives.
Banks and insurers also reassess credit exposures based on the borrower’s decarbonization strategy.

How Transition Risk Fits in ESG

Risk Type	What It Covers
Environmental – Transition Risk	Policy, regulation, tech, market change from decarbonization
Environmental – Physical Risk	Floods, storms, heatwaves, rising seas
Social / Governance Risks	Labor, ethics, diversity, data privacy, etc.

Most major frameworks (TCFD,  ISSB  S2,  HKEX  ESG  Code  2024) now require companies to disclose transition risk scenarios and management responses.

✅ In Short

Transition risk = the cost  and  disruption of adapting to a low‑carbon world. It influences strategy, asset values, and access to capital — and is now a core part of ESG and climate‑related financial disclosures.

References & Additional Readings: 1. https://cnsd.gov.hk/en/climate-ready/climate-targets-of-hk/