Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments
This report introduces a transition risk framework aiding investors and regulators in navigating risks and seizing opportunities in the low-carbon transition. It enhances comprehension of how transition risks impact financial performance in infrastructure investments, offering a transparent, adaptable, and robust methodology for assessing the financial implications of a shift towards a low-carbon economy.
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OVERVIEW
ClimateWise has developed a transition risk framework to help investors and regulators manage risks and capture emerging opportunities from the low carbon transition. The transition to a low carbon economy carries both risks and opportunities and could unfold gradually over time or through sudden shocks. Transition risks include policy changes, reputational impacts, and shifts in market preferences, norms and technology. Transition opportunities include those driven by resource efficiency and the development of new technologies, products and services.
The framework provides an enhanced understanding of how transition risks drive the financial performance of investments in infrastructure. It identifies the circumstances under which exposure to low carbon transition risks could become material and demonstrates a transparent, adaptable and robust methodology for assessing the financial implications of a low carbon transition to the performance of investments in infrastructure over relevant time periods.
The framework is adaptable and accommodates the diversity of investors’ needs. Its use allows investors to take practical actions to mitigate their exposure to transition risks, capture opportunities and disclose their exposure to key stakeholders. Investors can use the framework to conduct an asset-level specific analysis, define the financial impact on the asset, and identify options to improve its resilience.
Investors must use the framework to incorporate the potential impacts of transition risk directly into their financial models. This allows for a granular approach to defining asset impact and allows investors to develop an in-house view based on their conviction of the probabilities linked to the key transition drivers. The framework provides a more thorough assessment and measurement of financial exposure to transition risk.
The framework is intended to provide real and practical value for chief investment officers, asset managers and owners, regulators, and the wider financial community. It aligns with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, and the ClimateWise Principles overlap considerably with the TCFD recommendations. Investors can use the framework to assess their exposure to transition risk and ensure they are complying with current and future disclosure requirements.
