The Link Between Physical and Transition Climate Risk

Journal of Portfolio Management

The authors argue that what is usually referred to as climate transition risk can be more usefully decomposed into an expectation part and a variability around this central value.

They show that there is a strong inverse relationship between the expectation component of transition costs and the expectation of physical damages and how this relationship can be estimated.

The results indicate that the uncertainty in transition costs decreases as the abatement policy becomes more aggressive (and physical damage decrease), although uncertainty remains a large portion of the expectation component.

The authors also show that, with the definition provided, their transition costs match well with the corresponding quantities from the benchmark IPCC scenarios.