“Transition risks” arise from changes in policy, technology, or consumer behavior that lead to a lower-carbon economy. These physical and transition risks could materialize as traditional financial risks to supervised institutions, including through increased credit, market, operational, reputational, and liquidity risk.
We are already seeing financial institutions responding to climate-related risks by encouraging borrowers to adapt to and manage the risks associated with a changing climate, responding to investors’ demands for climate-friendly portfolios, and funding critical private-sector initiatives to move toward more climate-friendly business models.