Transition Risk
Transition risk is a credit and market risk question dressed in climate language. The modelling problem is mapping pathway variables to the financial drivers that already sit in existing risk models.
Pathway to financial impact
Carbon prices, energy mix, and demand pathways are mapped to counterparty cost structures and revenue lines, then fed through existing PD, LGD, and valuation machinery rather than into a parallel model stack.
- Sector heat-mapping and materiality screening
- Counterparty cost pass-through and margin analysis
- PD and LGD overlays under transition pathways
- Stranded-asset and revaluation treatment
Avoiding double counting
Transition overlays must be reconciled against macro scenario effects already captured in IFRS 9 and stress testing, otherwise the same shock is counted twice.