The new Taxonomy was developed by the Centre for Risk Studies, supported by AXA XL and the AXA Research Fund, to help companies categorise all risks as a first step toward prioritising those that are most critical to their businesses, and develop plans on how to minimise such risks and respond vigorously should such risks become reality.
“For this Taxonomy, a broader systemic approach that includes physical risks was needed to reflect the challenging transition that businesses and all of us must face,” says Daniel (Danny) Ralph, Professor of Operations Research at Cambridge Judge and Academic Director of the Centre for Risk Studies. “Physical risks could be catalysts to accelerate the transition to low carbon and, at the same time, they could aggravate other transition risks such as disintegration of trust between populations and governments, or geopolitical conflict over resources.”
The 6 main classes of climate transition risk identified are:
Financial risks: Economies heavily reliant on fossil fuels face complex macroeconomic challenges and trading conditions that could be influenced by carbon markets and tariffs.
Geopolitical risks: These include navigating a shortage of green-skilled workers, supply chain vulnerabilities and the potential that renewal energy projects could face shutdowns due to security concerns.
Technology risks: While advances in solar and wind energy have helped quicken the lower-carbon transition, there are heightened cybersecurity risks to infrastructure and critical systems, while (reflecting the Taxonomy’s inclusion of physical risks) “shifting weather patterns can lead to industrial accidents and costly damage to property and infrastructure”.
Environmental risks: These include increased severity and frequency of extreme weather events that pose risks to physical infrastructure and create high-risk zones, affecting insurance markets. “Rising temperature bring unique operational challenges, while environmental degradation and resource scarcity threaten food, water and energy security.”
Social risks: The success of lower-carbon transition models will depend heavily on managing the social costs of adjustment. These risks include a shortage of skilled workers, labour disputes and the adaptation of healthcare and social care systems to warmer conditions caused by climate change.
Governance risks: There are risks as non-compliance with existing or emerging climate-change regulations or accounting standards could be very costly to firms.
Each of these 6 classes then contains families and types of risk, so in all there are 141 climate transition risks arranged in a hierarchical fashion so businesses can make decisions based on this interplay of risks outlined in the Taxonomy.
Read a longer article about the Cambridge Taxonomy of Climate Transition Risks on our website
Access a series of articles on sustainability related to the COP30 climate-change summit
