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Defining and addressing climate change transition risk

Discover climate change transition risk and how insurance supports your business through the shift to a low-carbon economy. Learn more.

22/05/2026 · 5 minute read

The physical risks associated with climate change — brought on by extreme weather events, low rainfall and droughts, and water scarcity — are well recognised and important. However, there is another critical dimension to consider as part of a comprehensive climate risk management approach: climate transition risk.

As companies across every industry move forward with climate transition strategies, they need to prepare for new risks and opportunities. The ability to anticipate, measure, and manage risks is a critical advantage as the transition unfolds, to both meet global climate goals and develop long-term resilience.

What is climate transition risk?

Transition risks encompass the regulatory, technological, financial, and reputational challenges that may arise from the process of shifting to a lower-carbon economy. The pace at which organisations adapt to these changes, in their efforts to reduce greenhouse gas emissions and implement renewable energy, can expose them to varying levels of risk. 

Unlike physical risks, which involve physical damage or disruption to people, property, and productivity, transition risks emerge from changes in policy, technology, market dynamics, and societal expectations. As governments, businesses, and consumers increasingly seek to prioritise and implement these changes, transition risk comes into sharper focus.  

What are the different categories of transition risk?

Transition risks can be categorised into the following four groups:

Regulatory

 

Challenges can arise from changes in regulations, carbon pricing, emissions limits, and litigation related to climate change. For example, a company may face increased costs if new carbon taxes are introduced or penalties because of failure to reduce carbon emissions. Additionally, companies that fail to meet evolving regulatory requirements for climate action and climate disclosure reporting may have restricted access to critical transition financing and insurance, as lenders and insurers increasingly incorporate climate risk assessments into their decision-making processes.

Technological

 

One of the primary challenges is the need to invest in new technologies to stay competitive and comply with evolving environmental standards. The rapid development and deployment of low-carbon technologies can render existing technologies obsolete. For instance, companies reliant on fossil fuels may face stranded assets as renewable energy technologies become more cost-effective. Companies may also face increased operational costs as they invest in lower carbon technologies.

 

Financial

 

Shifts in supply and demand for goods and services driven by changing consumer preferences or competitor innovations can impact market dynamics. For example, rising demand for the critical minerals which are essential for electric vehicle batteries may influence pricing, supply chains, and competition within the industry.

Reputational

 

Public perception and stakeholder expectations around climate responsibility can affect brand value and customer loyalty. For example, companies perceived as lagging in climate action may face backlash or divestment.

 

 

Opportunities to mitigate climate transition risks

Mitigating climate transition risk requires a strategic and proactive approach. The following four focus areas can help organisations manage and address transition risks:

Conduct a climate risk assessment to evaluate exposure to transition risks across all four categories and identify vulnerable assets and operations. Engage in regular scenario planning to model potential regulatory, technological, market, and reputational changes and their impacts on your business.

Allocate funding to develop and deploy new technologies, including low carbon energy, battery storage, green hydrogen, and carbon capture and storage.

Develop clear governance structures for climate risk management and improve transparency through sustainability reporting aligned with established frameworks.

Communicate climate strategies and strengthen collaboration between lenders, investors, the public sector, and the insurance industry. This can help better define risk profiles and cultivate development of solutions that can accelerate the flow of capital towards transition efforts. Continuously track policy developments, technological advances, and market trends to adjust strategies as needed.

By integrating these proactive steps as part of a climate transition risk management plan, organisations can better navigate the complexities of the transition to a low-carbon economy and safeguard their long-term viability.

Navigating the transition with confidence

As businesses around the world seek to adapt to and manage the effects of a changing climate, the importance of preparation and proactivity cannot be overstated. Both traditional and innovative insurance solutions are available to mitigate risks that may affect the strategic, financial, operational, liability, or geopolitical aspects of the climate transition, in order to facilitate a resilient transition to a sustainable future.

Equipped with insights from Marsh Risk specialists, innovative technology, and creative risk management solutions, you can better position your organisation to meet climate goals, adapt to ongoing changes, and build resilience amid uncertainty.

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