Reaching the Paris Agreement targets requires a rapid shift in global energy systems, with heavy investment in fossil-free technologies. For investors, this creates significant transition risks: long-lived assets may lose value as climate policies and technologies evolve. For instance, a new LNG-powered ship could become unprofitable under a CO₂ tax.
Firms in regions with ambitious climate policies also face declining demand if higher costs drive customers toward imports. Regulators are taking notice: the NGFS, ECB, and EBA have launched stress tests and scenario models to assess climate risks, though a common framework has yet to emerge.
Our global climate-economic model, INTERSECT, co-developed with Bain & Company, provides insight into how policies and technologies shape the speed and path of the transition. It supports a rigorous, data-driven approach to measuring and managing transition risks.
Transition risks depend on how, when, and where climate policies are introduced. Faster or uneven transitions can create higher costs, stranded assets, or carbon leakage across regions. There is no single “correct” policy path, so scenario design is essential.
For example, the difference in additional CO2 reductions required in a Net Zero scenario compared to business-as-usual (STEPS) is much larger for some regions than for others.
Ambitious decarbonisation means higher carbon prices and technology shifts. Our modelling suggests that projected carbon prices may be significantly lower than those of the Network for Greening the Financial System (NGFS). Carbon prices in INTERSECT, peak at around $300-350 per tonne of CO2. These differences arise due to current assumptions and predictions surrounding technology costs.
Therefore, we conclude that transition risks concentrate in sectors that are fossil-dependent, capital-intensive, and slow to retrofit, such as shipping, aviation, and heavy industry. These sectors face the greatest exposure to asset impairments and should be focused on in detail
Banks and investors need to capture transition risks in stress tests and balance sheet analysis. Static approaches risk overestimating losses; dynamic approaches, which consider how firms adapt, are more realistic but complex. Effective risk management requires combining both.
For the few industries most exposed, model-based analysis is not enough. Dialogue with firms, regulators, and investors is needed to understand strategic choices and decarbonisation plans, ensuring risks are measured and managed in practice.
The green transition will dramatically change energy systems at a global level – but affect businesses differently
For most businesses, transition risks are modest: energy costs are a small share of total costs, low-carbon options are widely available, and retrofits are feasible.
The real focus should be on high-risk industries: fossil fuel producers, energy-intensive sectors, and energy infrastructure, where asset impairments can be significant. Here, robust stress testing requires detailed scenarios, industry-specific decarbonisation pathways, and scrutiny of how fossil and low-carbon solutions will coexist for decades.
For the largest firms, risks are best addressed through dialogue. Investors and regulators should review companies’ own transition strategies, testing whether they clearly identify risks, mitigation steps, and long-term profitability under different climate policies.
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