Single event transition risk: A measure for long term carbon exposure

Abstract

Although there is a growing consensus that a low-carbon transition will be necessary to mitigate accelerated climate change, the magnitude of transition risk for investors is difficult to measure exactly. Investors are therefore constrained by the unavailability of suitable measures to quantify the magnitude of the risk and are forced to use the likes of absolute emissions data or ESG scores in order to manage their portfolios. In this article, we define the Single Event Transition Risk (SETR) and illustrate how it can be used to approximate the magnitude of the total exposure of the price of a share to the low-carbon transition. We also discuss potential applications of the single event framework and the SETR as a risk measure and discuss future direction on how this can be extended to a system with multiple transition events. • The Single Event Transition Framework is formalized and the Single Event Transition Risk is defined. • The Single Event Transition Risk is calculated in terms of the measured carbon transition risk premium, under different assumptions. © 2023 The Author(s)