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In this article, we’ll explain what a transition risk is, why they are important in the midst of climate change, and how your company can evade a potential transition risk.
ESG / CSR
2023-12-11T00:00:00.000Z
2023-12-11T00:00:00.000Z
en-gb
Change is always scary due to the unknown and unpredictable nature of evolution, but staying the same means there is never any room for growth – and the same goes for businesses that seek to ignore a potential transition risk.
A transition risk delineates the potential consequences that could occur if a company is not successful or fails to smoothly incorporate new business activities into their model.
As a result, some businesses may be fearful to make a necessary change, or completely ignore the prospect of a transition risk altogether – but how helpful is this in business?
In this article, we’ll explain what a transition risk is, why they are important in the midst of climate change, and how your company can evade a potential transition risk.
What are key transition risks?
Transition risks in business refer to the various risks that could occur as a result of a company making various changes to their business activities that have a direct impact on society and the environment.
“ Think of when someone places a bet on someone or something. The consequences of losing money or other valuable items may be at stake, but oftentimes – the end-result prize is worthwhile. The same goes for the benefits to be gained in transition risks. ”
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Common transition risks usually include:
Regulatory & Legal Risks – This type of transition risk refers to the consequences that could occur if companies fail to comply with upcoming or current environmental regulations. In addition to this, companies could face legal disputes for lack of compliance.
Technological Risks – This kind of transition risk refers to the possibility of technology doing more harm than good for a company. For instance, while seeking to implement more energy efficient appliances is a good idea to help reduce energy consumption – becoming too dependent on novel technology such as AI (artificial intelligence) could do more harm in the long-run.
Reputational Risks – This transition risk refers to the potential backlash a company may receive for their efforts to reduce societal or environmental impact. For example, a company may be accused of greenwashing if their new incentives and actions are not marketed appropriately.
Market Risks – This transition risk alludes to the potential loss of interest in stakeholders, customers, and investors if a business does not alter their business model accordingly. This is often one of the most imperative transition risks to pay attention to, seeing as a business needs stakeholders and investors to grow and thrive.
👉 It is important to remember that these risks are often intertwined with one another, meaning that if one risk is to occur – it is bound to impact another transition risk. As a result, companies should remain mindful of all transition risks, even if they do not think they apply to their business – seeing as investors will always view transition risks as interconnected.
What are the effects of transition risks?
The main effects of transition risks include compromising brand reputation, falling subject to legal fees or greenwashing, and the potential lack of investors moving forward.
“ However, perhaps the most profound effect of a transition risk is the impact it can have on overall business and the relationships between your clients or other stakeholders. ”
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Here are 5 facts you may not have known about transition risks:
Transition Risks Pose a Threat to Your Business – It can be easy to dismiss a transition risk as most damaging to the environment or surrounding communities, but in truth – choosing to ignore a transition risk could have a negative impact on your overall business. This is because deleterious effects to vital components of your business such as technology or market risks could reduce the amount of financial resources available to your company, and in turn – stunt your business growth.
Transition Risks Are Universal – No company, regardless of size and sector, is immune to the potential consequences of failing to recognise a transition risk. Therefore, all companies should make a habit of remaining aware of the transition risks most applicable to their business.
Measuring & Tracking Scope Emissions Can Help – One of the easiest ways to mitigate the potential negative effects of a transition risk gone wrong is to manage and reduce your scope 1, 2, and 3 emissions. This is because tracking your scope emissions can help your company to better understand where it has the most environmental impact, and ultimately allow your business to be more aware of which transition risks pose the greatest threat.
The Best Way to Avoid a Transition Risk is to Be One Step Ahead – A transition risk isn’t something that ruins your company overnight. Oftentimes, the effects of a transition risk, such as technological risks or regulatory risks – are a result of ignoring the “side-effects” of a certain behavior over a longer period of time. As a result, it’s in your company’s best interest to ensure each time a new environmental regulation is implemented or technology is being used that all protocols are followed to a tee to avoid miscommunication later on.
Various Softwares Are Used to Manage a Transition Risk – Seeking the assistance of a carbon accounting company like Greenly can help you to manage your various transition risks, as we can help you comply with environmental regulations, manage and reduce your scope emissions, and more!
👉 It is important to note that transition risks will have effect on people both inside and outside of a company, but even if the consequences are catastrophic – they can be accounted for and mitigated with careful planning.
What are the main types of transition risks?
There are four main types of transition risks – policy transition risk, technology transition risk, market transition risk, and reputation transition risk.
“ The TCFD, or Task Force on Climate-Related Financial Disclosures, depicted in this document the different types of transition risk and the way in which a company is bound to be affected if transition risks are ignored. ”
The main types of transition risks include:
Policy Transition Risk – This transition risk refers to the legal complications that could arise if companies fail to comply with the new required environmental regulations or local climate policies that pertain to their business. These risks could include a lack of detail in climate disclosures, legal battles on the behalf of an unsatisfied consumer, or the need to rapidly implement the use of energy efficient technologies in order to comply with these new regulations and policies. In addition to this, the rampant pace in which companies may be expected to adhere to these environmental regulations could have a financial impact on a company, too – seeing as not all businesses were monetarily equipped to handle such rapid expectations.
Technology Transition Risk – Cultivating a sustainable supply chain is quickly becoming one of the most imperative components to any company seeking to become more sustainable and reduce their operational costs. However, many companies are resorting to the use of new technologies such as AI to monitor and manage their supply chains – a technology that has not been tested for significant periods of time, which can leave room for marginal error. Also, not all companies will be able to financially handle implementing the new technologies desired – ultimately increasing competitiveness and consumer expectations or disappointments.
Market Transition Risk – Climate change itself has already had a profound impact on the market, but one of the most concerning risks is how supply and demand is bound to suffer in the midst of erratic temperatures and weather patterns around the world. For example, companies need to remain wary that a vital material or resource could become scarce at any given moment and be ready to act accordingly – as this will have a direct impact on their product or service, and ultimately their business.
Reputation Transition Risk – It’s well-known that consumers are starting to seek out the more sustainable choice when shopping, which means that companies that willingly choose to not hop aboard the train-to-sustainability could suffer from serious accusations such as greenwashing and even risk losing loyal customers. This means companies need to remain honest in their mission statements, intentions, and be able to back up their claims with factual evidence – or their entire business could be at stake.
👉 While these four main types of transition risks are often associated with climate change, companies should remain cognizant of the fact that they are prone to these risks with or without an ongoing global crisis. Climate change may have heightened the existence of these transition risks, but it didn’t create them.
Why is it becoming more important to pay attention to transition risks?
It is becoming increasingly important to monitor and manage transition risks, seeing as failure to do so in the midst of climate change can result in the downfall of a brand’s reputation and decreased availability of financial resources.
“ These two aspects, both of which can be affected by failing to recognise and rectify potential transition risks, are paramount for any business looking to grow or build long-term success. ”
As the world continues its newfound global effort to transition to a low-carbon economy, companies will be tasked with new environmental regulations, pieces of now compulsory technology, and changes in their respective markets. These changes are happening at an unprecedented rate, often forsaking any subtle nature – which means that companies must learn to be more proactive as opposed to reactive, especially when it comes to transition risks.
👉 Climate change has ultimately made transition risks more prominent and imperative for companies to monitor and manage – as the consequences of failing to recognise a potential transition risk could be greater in the midst of this global crisis.
How can companies avoid a transition risk?
The good news about transition risks is that while potentially catastrophic, they are avoidable – seeing as companies can implement tactics to mitigate transition risks such as setting concrete goals and other monitoring measures in place to remain proactive.
“ Many companies will choose to manage transition risks in order to comply with legal requirements, but in reality – seeking greater control over transition risks could benefit companies in more ways than one. ”
Here are a few ideas to help avoid the worst outcome of a transition risk:
Seek New Opportunities – A transition risk doesn’t have to mean a death sentence, but rather could prove as an incentive for your company to make improvements you hadn’t otherwise thought of before – such as finally installing the solar panels you’ve been meaning to do, but never found the time, money, or motivation to get it done.
Conduct a Materiality Assessment – Choosing to conduct a materiality assessment with Greenly could help your company to better understand which business operations should be adjusted and how you can improve your supply chain to reduce your environmental impact.
Create Clear Goals – Think if there was no bullseye on a target – what would you be aiming for? It’s important to set concrete goals at your company to make sure you aren’t blindsided when you need to disclose information such as your current environmental impact, and what efforts your company is taking to reduce them.
Be Honest – Even if your customers, investors, and stakeholders don’t align with your company’s current stance or efforts to tackle climate change – being transparent at least means they can’t accuse you of greenwashing. Therefore, it's important to publicly disclose any information available – such as ESG reports and your efforts to reduce your environmental impact.
Ultimately, transition risks are becoming more predominant in the midst of climate change – but with a splash of proactive thinking and the dynamic assistance on behalf of Greenly, the fear of transition risk can become a thing of the past.
What about Greenly?
If reading this article about transition risks has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
Seeking to understand how transition risks could have an impact on your business can prove difficult to understand, but don’t worry – Greenly is here to help! Click here to book a demo and get personalised expertise on how you can start to reduce your own emissions and decrease your environmental impact.
Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.
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