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Definition

Climate-related transition risk Definition

Climate-related transition risk is the financial risk that policy, legal, technology, market, or reputation changes create as economies move towards lower greenhouse gas emissions.

What is climate-related transition risk?

Climate-related transition risk arises when efforts to move towards a lower-carbon economy could change your costs, revenue, asset values, access to finance, or cost of capital. IFRS S2 Appendix A groups its drivers as policy, legal, technology, market, and reputation changes. The risk is the possible financial effect, not simply the existence of a new rule or technology.

For Hong Kong reporting, the Hong Kong requirements guide explains who is covered. HKEX Appendix C2 paragraph 20(b) requires an issuer to classify each identified climate risk as physical or transition risk, while paragraphs 20(c)-(d) require a time horizon linked to the issuer's own planning periods.

Why does climate-related transition risk matter to you?

A board, investor, lender, or regulator may ask which changes could affect your prospects and when. Under IFRS S2 paragraph 9(d), the answer connects the risk to financial position, financial performance, and cash flows over the short, medium, and long term. A risk register that says only “regulation may change” does not show the affected asset, financial line, timing, or size.

For financial years beginning on or after 1 January 2026, HKEX Appendix C2 paragraph 17(2) makes Part D mandatory for an issuer that was a Hang Seng Composite LargeCap Index constituent throughout the year immediately before the reporting year. Paragraphs 24-25 ask for current and anticipated financial effects. They allow specified quantitative information to be omitted when effects are not separately identifiable, measurement uncertainty is too high, or the issuer lacks the skills, capabilities, or resources to provide anticipated figures. The issuer must then explain the omission and provide the required qualitative information.

How does climate-related transition risk work?

Start with a specific driver, then trace it through an affected activity to a financial result. For example: a carbon-related electricity charge affects hotel utility costs; a building-efficiency rule changes capital expenditure; lower demand for high-emission travel reduces room revenue; or an unsupported climate claim creates legal and reputation costs. Record the source, affected site or asset, responsible owner, time horizon, calculation, assumptions, and response.

Use more than one plausible future condition. HKEX Appendix C2 paragraph 26 requires climate-related scenario analysis for climate resilience. A scenario is not a forecast. State each assumed price, date, volume, and threshold, then test how the result changes. Keep transition and physical risks separate before combining them in financial planning.

What mistakes should you avoid?

  • Listing “policy risk” without naming the policy change, affected operation, financial line, and time horizon.
  • Calling typhoon damage a transition risk; that is a physical climate risk.
  • Presenting an internal carbon-price assumption as a current tax or published tariff.
  • Reporting only the cost of a response without showing the risk it addresses and the assumptions behind the number.

Is transition risk the same as physical climate risk?

No. IFRS S2 paragraph 10(b) separates transition risk from physical risk. Transition risk comes from economic change towards lower emissions. Physical risk comes from acute events such as storms or chronic changes such as higher average temperatures and sea levels.

What should you send when an investor asks about transition risk?

Send the approved risk register entry, driver source, affected assets or activities, time-horizon definitions, scenario assumptions, financial calculation, response owner, and review date. If a number is a range or estimate, include the formula and show where it appears in the budget, forecast, impairment review, or capital plan.

Does a climate transition plan remove transition risk?

No. A plan is your response to selected risks and targets. HKEX Appendix C2 paragraph 22(a)(iii) asks for the plan's assumptions and dependencies, or a statement that no plan exists. You still need to identify, assess, monitor, and quantify the risks that remain.

Worked example

Suppose a hypothetical Hong Kong hotel group operates four hotels that together buy 18,000,000 kWh of electricity a year. For a 2028 transition scenario, finance assumes that a hypothetical carbon price on power generation is passed through by electricity suppliers as HKD 12 per 100 kWh. This is an internal model input, not a current Hong Kong policy or tariff.

The annual cost effect is 18,000,000 kWh / 100 kWh x HKD 12 = HKD 2,160,000. The group's internal risk policy sends any annual exposure above HKD 1,500,000 to its risk committee. The scenario exceeds that threshold by HKD 660,000.

The group records a policy and market transition risk with a 2028 time horizon, links it to utility costs and cash flow, and assigns finance and facilities as owners. The calculation does not by itself prove that the risk is material for HKEX or IFRS S2 reporting; it gives management a checkable input for that assessment.

Where you'll meet it

HKEX Appendix C2 transition-risk classification and time horizonsHKEX Appendix C2, paragraph 20(b)-(d)HKEX Appendix C2 current and anticipated financial effectsHKEX Appendix C2, paragraphs 24-25IFRS S2 assets or business activities vulnerable to climate-related transition risksIFRS S2, paragraph 29(b)

Related terms

Physical climate risk

Physical climate risk is the potential for acute events or chronic climate shifts to damage assets, interrupt operations, disrupt supply chains, and change revenue, costs, cash flows, financing, or insurance.

Climate scenario analysis

Climate scenario analysis tests how your strategy, business model and financial performance could change under several plausible climate futures, including physical hazards and policy, market and technology shifts.

Climate transition plan

A climate transition plan turns a climate target into dated actions, assigned resources, governance, financial assumptions, and progress measures for changing a company's strategy and business model toward a lower-carbon economy.

Responsible Investing

Responsible investing considers environmental, social and governance information when investors allocate capital, manage holdings and use their influence to pursue stated financial objectives and, where applicable, sustainability objectives.

Sources

  • IFRS Foundation

    Appendix A definition and drivers; paragraphs 9-10 on financial effects, classification, and time horizons; paragraph 29(b) on vulnerable assets or business activities

    2026-08-19

  • Hong Kong Exchanges and Clearing Limited

    Appendix C2 paragraphs 17(2), 20, 22, and 24-26 on applicability, transition-risk disclosure, plans, financial effects, and scenario analysis

    2026-08-19

Last verified 2026-08-19

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