Transition Risks are concerned with the challenges and uncertainties that organizations and industries face as they navigate the process of transitioning from traditional, often carbon-intensive, practices to more sustainable and environmentally responsible alternatives. These risks are particularly relevant in the context of the global shift towards cleaner energy sources and the decarbonization of various sectors and encompass a wide range of potential issues but especially including Transition Pathway Risks. The importance of energy transition pathways are paramount if Net Zero and other targets are to be met and while developing and implementing transition pathways carries its own set of risks, including potential delays, inadequate planning and the failure to meet decarbonisation targets, they are only a subset of Transition Risks. Broadly, these result from designing and operating energy transition pathways but also include:
- Regulatory Risks: Changes in government policies, laws, and regulations can significantly impact organisations’ transition plans. Additional costs, changes in operations or market access may result.
- Technological Risks: The development and deployment of new technologies involve uncertainties such as technical glitches, performance issues and the need for ongoing innovation.
- Operational Risks: Adapting to new processes and technologies may lead to operational disruptions, which can affect productivity, safety and the ability to meet customer needs.
- Supply Chain Risks: Transition risks can also affect the supply chain, particularly if companies rely on partners or suppliers who are slow to adapt to new environmental standards.
- Market Risks: Transitioning to new technologies or practices can alter market dynamics. Organisations may face challenges related to shifting consumer preferences, supply chain disruptions or fluctuations in demand for traditional products and services.
- Financial Risks: Investments in new technologies and sustainable practices may have associated financial risks. This includes potential stranded assets, increased capital expenditures and changes in the valuation of companies based on their carbon footprint.
It’s important for organizations to recognize and actively manage these transition risks as part of their broader risk management strategy. Effective risk management in the context of energy transition and decarbonization is essential for achieving long-term sustainability and success in an evolving business environment. RMRI’s risk engineers and analysts have wide experience in the identification and evaluation of the major hazards and threats which create transition risks.
For further information about RMRI or how we can help you manage your risks in the energy transition, please contact us.