GRA · Climate and Nature Financial Risk
Spatial financeWhere capital meets hazard, exposure and transition
Transition risk
Transition risk is the financial risk from the move to a low-emission economy: carbon pricing and regulation, technology shifts, changing demand and litigation. It can strand assets, cut profits in high-emitting sectors and reprice securities quickly if policy changes abruptly. This page sets out how transition risk transmits to financial institutions, how it is measured, and who decides.
How the work runs.
Climate scenario analysis
Transition risk · Bank loan book · Exercise 2
Scenario pipeline
- Select scenariosorderly · disorderly · hot house
- Pathwayscarbon price · GDP
- Sector impactsmargins
- Physical hazardsassets
- Credit parametersPD · LGD
- Portfolio losscapital
- Discloselimits
PD uplift by sector and scenario
basis points, illustrative
Expected loss path
Fig.Climate scenario analysis: example names and illustrative values, not a record or a live system.
Transition risk: how the risk develops.
Policy, technology and business-model change. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Policy reprices emissions
Carbon prices, emission standards and phase-out dates raise costs for high emitters. Firms that cannot adapt lose margins and value.
Technology shifts demand
Falling costs of renewables, batteries and electric vehicles reduce demand for fossil-based products and assets before policy requires it.
Assets strand
Reserves, plants and infrastructure may become uneconomic before the end of their expected life. Loans and investments secured on them lose value.
Disorderly paths amplify
A late, sudden transition causes sharper repricing and defaults than a gradual one. Scenario analysis contrasts orderly and disorderly paths.
A loan book under scenario families.
How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.
What is measured, and how well.
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Financed emissions | tonnes of carbon dioxide equivalent | annual | PCAF-based disclosures | ESTIMATED |
| Exposure to carbon-intensive sectors | currency and share of portfolio | annual | Bank and investor disclosures | DECLARED |
| Emissions intensity of portfolio | tonnes per currency invested or lent | annual | Disclosures | ESTIMATED |
| Carbon price coverage of emissions | share of global emissions covered | annual | World Bank Carbon Pricing Dashboard | Published statistics |
| Implied temperature rise of portfolio | degrees Celsius | annual | Vendor and internal models | MODELLED |
| Stranded asset estimates by sector | currency | per study | Scenario studies | MODELLED |
Transition and physical risk on a portfolio.
Three scenario families after the NGFS framework move a sector portfolio through carbon costs and warming damages; the transmission view follows the losses to lenders, investors, public finances and households. Scenario: named assumptions about the future, not a forecast. The map on this page shows Southeast Asia; the model itself is not tied to a place.
Controls
- Carbon price at the horizon, orderly path
- 200 per tCO2
- Delay before a disorderly transition
- 50% of horizon
- Cost passed to customers
- 50%
- Warming today above pre-industrial
- 1.30°C
- Warming per decade, current policies
- 0.25°C
- Damage coefficient
- 0.24% per °C²
- Years ahead
- 25 years
Readouts
- Worst scenario at the horizon
- −33.6% of value
Numbers, methods and sources
| Year | Orderly transition (% value) | Delayed, disorderly transition (% value) | Current policies (% value) |
|---|---|---|---|
| 0 | −0.38 | −0.38 | −0.38 |
| 3 | −2.87 | −0.53 | −0.67 |
| 6 | −5.36 | −0.68 | −0.97 |
| 9 | −7.84 | −0.84 | −1.27 |
| 12 | −10.33 | −0.99 | −1.57 |
| 15 | −12.82 | −7.12 | −1.87 |
| 18 | −15.31 | −15.05 | −2.17 |
| 21 | −17.80 | −23.00 | −2.48 |
| 24 | −20.29 | −30.94 | −2.79 |
Methods
- Climate scenario families NGFS (2023), Climate Scenarios for central banks and supervisors, Phase IV
- Climate stress test of the financial system Battiston and others (2017), Nature Climate Change 7
- Damage function Nordhaus (2017), Revisiting the social cost of carbon, PNAS 114
- Transmission channels BCBS (2021), Climate-related risk drivers and their transmission channels
- Uncertainty fan (parameter Monte Carlo) Spiegelhalter, Pearson and Short (2011), Visualising uncertainty about the future, Science 333
- One-at-a-time sensitivity (tornado) Saltelli and others (2008), Global Sensitivity Analysis: The Primer, Wiley
Data
The model runs on the teaching values set by the controls. To calibrate it for a place, read it against these admitted layers and series, which this page's map can draw:
- Urban extents Natural Earth
- Seaports Natural Earth
- Past year, daily temperature (ERA5 via Open-Meteo) Open-Meteo.com (CC BY 4.0), Copernicus ERA5 (C3S/ECMWF) · register open-meteo.public-pages
- Surface air temperature, daytime (AIRS) NASA AIRS · register nasa.gibs.context-live-layers
Across the six pillars, led by Nexus Consortium
- Experiments Labs
- Built in Climate and Nature Financial Risk in Foundry
- Tested at Climate and Nature Financial Risk in Universe
- Codified in Climate and Earth Systems in Standards
- Published in Climate and Nature Financial Risk in Reports
- Taught in Faculty of Earth and Environmental Sciences in Academy
Where the evidence comes from.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| World Bank Carbon Pricing Dashboard | Carbon taxes and emissions trading systems by jurisdiction | CC BY 4.0 |
| PCAF financed emissions database and standard | Emission factors and methods for financed emissions | Free to read, PCAF terms |
| IEA World Energy Outlook and Net Zero scenarios | Energy transition pathways | Proprietary; summaries free, data under IEA licence |
| Transition Pathway Initiative assessments | Company management quality and carbon performance | Free to read, terms to check |
| Climate Action 100+ and company disclosures | Corporate transition plans and targets | Free to read, terms to check |
Trace a shock in transition risk to the balance sheet.
Assembled from the Nexus Standards area profile Climate adaptation and transition risk: the shocks it names, the systems and sectors that carry the loss, the controls that dampen it and the data that observe it. Pick an initiating shock and step through the cascade to see which exposures it reaches and where losses could concentrate. The Map view places the run on an example geography with open data. Every weight is a stated assumption. An exercise, not a forecast, a valuation, a rating or investment advice. To model a place of your own choosing, open the full System Builder.
Hazards
- Sea-level rise
- Heatwave
- Windstorm
- Flash flood
- Meteorological drought
- Groundwater depletion
- Widespread power outage (set off downstream)
- Large forest disturbance (set off downstream)
- Wildfire (set off downstream)
- Extreme fire weather (set off downstream)
- Heat-driven grid stress (set off downstream)
- Agricultural drought (set off downstream)
- Flash drought (set off downstream)
- Snow drought (set off downstream)
- Ground-level ozone episode (set off downstream)
- Debris flow (set off downstream)
- Hydrological drought (set off downstream)
- Peat and underground fire (set off downstream)
Systems and couplings
- Climate adaptation and transition risk
- Climate risk standards Mechanism
- Financial and economic risk standards Cascade
- Energy risk standards Feedback
- Water risk standards Maladaptation risk
Controls
NS-0Constitution and principlesNS-3Risk record UNIs (grammar, legacy crosswalk, allocation authority)NS-9Contextual UNIs (deployments, instances, programme instances)NS-10Policies and clauses (machine-readable obligations: definition, binding, evaluation and enforcement)NS-11Verification and monitoring (evidence, attestations, zero-trust conformance observation)NS-14Conformance and crosswalk to external standardsNRS-X1Climate change risk and adaptationNRS-T16AI agents and autonomous decision systems riskNRS-H65Hazard family: Planetary boundary transgressions (NHS-1 planet.boundary)NRS-I7Intelligence applications: grounded retrieval, reasoning and decision supportNRS-K20Domain pack profile: Climate adaptation (DOMAIN-020)NRS-K21Domain pack profile: Climate mitigation carbon (DOMAIN-021)
Observation
- CMIP6 climate projections (Copernicus Climate Data Store) (listed for reference)
- NGFS Scenario Explorer (listed for reference)
- ERA5 reanalysis (Copernicus Climate Data Store) (listed for reference)
- World Bank Open Data and World Development Indicators API (listed for reference)
- Number of countries with nationally determined contributions, long-term strategies, national adaptation plans and adaptation communications
- Number of countries that adopt and implement national DRR strategies in line with the Sendai Framework
Example geography
- Pacific Island states: 150 hexagonal cells
- Night lights tonight, outages (VIIRS Day/Night Band), NASA GIBS
- Surface air temperature, daytime (AIRS), NASA GIBS
- Rain rate, last half hour (IMERG), NASA GIBS
- Surface water through cloud, 30 m (OPERA DSWx-S1 radar), NASA GIBS
Who decides, and what the evidence serves.
Climate and Nature Financial Risk prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Bank and insurer boards | How to manage exposure to high-emitting sectors | Exposure, financed emissions and scenario results |
| Asset owners and managers | How transition risk enters portfolio and stewardship choices | Company transition evidence and scenario analysis |
| Prudential supervisors | Whether transition risk is captured in risk management and capital | Supervisory expectations and exercise results |
| Governments | How credible and predictable transition policy is | Policy records and market reactions |
Outputs this topic produces
- Guide to transition risk channels and sector exposure
- Method note on financed emissions and data quality scores
- Brief on orderly and disorderly transition scenarios
- Questions for boards on transition plans
What transition risk means for exposure, loss and capital.
The exposure, loss, scenario and capital views a risk officer, supervisor or ministry of finance would ask for, with the frameworks they report against. Structures follow supervisory and actuarial practice. Values are illustrative: never prices, ratings or advice.
Scenario pathways
How transition risk could be stressed under the scenario families central banks and supervisors use.
| Scenario family | Transition risk | Physical risk | What a stress test asks |
|---|---|---|---|
| Orderly | Early, gradual policy | Lower | Can the book absorb a steady repricing? |
| Disorderly | Late, abrupt policy | Lower to medium | What breaks under a sudden repricing and credit migration? |
| Hot house world | Limited policy | High and rising | Where do physical losses concentrate in collateral and insurance? |
What analysts ask about transition risk.
- Which sectors and activities are most sensitive to carbon prices, regulation and technology change?
- How quickly could policy tighten, and how disorderly could the shift be?
- Can firms adapt their business models, and at what cost?
- How do transition effects spread through supply chains and portfolios?
Stranded assets and shifting values.
Policies such as carbon pricing, emissions standards and fossil-fuel phase-outs raise costs for emissions-intensive activities. Falling costs of low-carbon technologies, such as renewables and batteries, change competitive positions. Assets whose value depended on continued high-carbon use may be written down early, becoming stranded.
Transition risk is strongly shaped by timing. A gradual, predictable transition gives firms and investors time to adjust; a late, abrupt one can cause sudden repricing. Transition also creates opportunities and new risks, for example in the supply of critical minerals.
Analysing transition exposure.
- 01
Sector sensitivity analysis
Assessing how policy and technology changes affect sectors, using financial economics and macro-finance. Sector averages hide large differences between firms.
- 02
Emissions-based metrics
Using emissions and intensity data as proxies for exposure. Proxies miss adaptive capacity and indirect effects.
- 03
Transition scenarios
Exploring policy and technology pathways, with scenario design and stress testing. See Scenario analysis.
- 04
Transition plan analysis
Reviewing firms' stated plans at sector level. Plans may not be credible or delivered.
How it is studied, and what the methods cannot say.
- 01Scenario design and stress testingTranslating NGFS scenarios · Short-term climate scenarios · Dynamic balance sheetsApplied here
- 02Financial economics and macro-financeCredit risk transmission · Market pricing studies · Cross-sector transmissionApplied here
- 03Climate and atmospheric scienceHazard projections for portfolios · Tail and compound hazards · Scenario physical variablesApplied here
Questions and answers.
What are financed emissions?
What is a stranded asset?
What is a disorderly transition?
Is transition risk only about fossil fuels?
Does the platform assess firms' transition plans?
Why does an orderly transition matter?
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