Transition risk arises when banks face financial and operational challenges due to the shift toward a low-carbon economy. This includes adapting to new policies, technologies, and market demands aimed at reducing emissions, which can impact the value of loans and investments.
Many banks are addressing transition risks by financing renewable energy projects and phasing out investments in carbon-intensive industries. While these steps are crucial, they can be complex and disruptive.
For example, withdrawing support from fossil fuel projects may lead to stranded assets—resources that lose value as the world transitions to cleaner energy.