What is transition risk?

Transition risk refers to the potential financial risks that arise from the shifts and changes in policies, regulations, market dynamics, and technologies as the global economy moves towards a low-carbon framework. This concept is crucial in the context of sustainability and ESG because it highlights the challenges that companies, investors, and economies might face as they adapt to new standards and expectations aimed at reducing carbon emissions and addressing climate change.

The correct choice emphasizes that these risks are primarily related to the transition process itself—how quickly and effectively entities can adapt to new regulatory environments or consumer preferences that align with sustainable practices. This can affect industries differently; for instance, fossil fuel companies may face higher transition risks as the world moves towards renewable energy sources. These risks can manifest in various ways, including potential changes in financial performance, increased operational costs, and a shift in competitive advantage.

The other options presented focus on different types of risks that are not primarily about the transition to a low-carbon economy. While natural disasters (natural disasters affecting property values) and legal risks (associated with environmental compliance) are important considerations in the broader ESG framework, they do not specifically capture the idea of transition risk as it relates to shifts in market and regulatory landscapes caused by the move toward sustainability. Similarly, the investment risks