Transition risks

Transition risks refer to the financial losses that may arise directly or indirectly from the adjustment process towards a lower-carbon and more environmentally sustainable economy.

The transition to a low greenhouse gas (GHG) emissions economy involves various actions, such as replacing traditional fossil fuels with carbon-free sources, producing electricity with a lower carbon footprint, electrifying industrial processes, and improving energy efficiency. Additionally, it encompasses aspects such as decarbonizing transportation, waste management, combating deforestation, and promoting more sustainable food systems

All these changes are supported by new regulations, technologies, and shifts in supply and demand that can cause various shocks, both positive and negative, to businesses, public institutions, and households.

The financial system plays a fundamental role as an intermediary between savings and investment, facilitating the mobilization of funds and resources towards activities that support the green transition. Therefore, the financial system’s exposure to fossil fuel-related assets and the transition to a sustainable economy are relevant factors. Monitoring these factors helps central banks assess the financial system’s resilience to climate changes and design strategies to mitigate these risks.