What is transition risk?

What Is Transition Risk?

Transition risk is what happens when your property portfolio doesn’t keep up with a fast-changing world.

Banks and portfolio managers are exposed, often quietly, through the outdated buildings on their books. These buildings tend to be energy-inefficient, expensive to operate, unattractive to tenants, and increasingly misaligned with tightening climate regulations. As a result, they carry financial risk, regulatory risk, and valuation risk.

This is transition risk: the exposure that comes not from physical damage, but from being on the wrong side of policy, performance, and preference.

What’s the difference between a brown asset and a green asset?

In the context of climate and transition risk, brown assets are buildings that lag behind on energy performance. They typically have poor energy ratings (like EPC E, F, or G), higher emissions, and no clear plan for improvement, making them vulnerable to regulation, declining value, and costly retrofits. These are the properties most at risk of becoming stranded as climate standards tighten.

Green assets, by contrast, are buildings that meet high sustainability standards. They’re energy-efficient, aligned with climate benchmarks like CRREM or the EU Taxonomy, and are usually the result of clear data and upgrade pathways. For banks, green assets reduce portfolio risk and open the door to better financing terms, regulatory advantages, and improved climate reporting.

Should I be worried about transition risk?

Short answer? Yes. Because regulation is catching up, and so is the market (aka your competitors). Buildings with poor energy performance are already being penalised in loan terms, insurance costs, and tenant demand. Add to that new rules from the EU and national regulators that require clear disclosures, better data, and proof of action, not assumptions.

Holding risky buildings isn’t just a climate concern for the ESG team. It’s a profitability problem for your entire bank.

De-risking is just good business

With a brown building on your books, you can either wait and pay for it later, in lost value, impaired assets, or downgraded loans, or you can act early and improve both the asset and its risk profile.

That’s where building upgrades come in.

Upgrading existing buildings is almost always more cost-effective, faster, and more sustainable than building new ones. It also preserves the core value of the asset while aligning it with emerging standards like CRREM (which charts decarbonisation pathways) and PCAF (which measures emissions data quality).

For lenders, this means smarter decisions. For asset managers, it means lower transition risk and higher long-term performance.

What now?

Transition risk is already shaping how portfolios are valued, financed, and regulated. But the good news is: it’s manageable.

With the right data, the right plan, and the right tools, outdated buildings can be upgraded into lower-risk, future-proof assets.