EDHEC Vox featured a study led by researchers from Scientific Portfolio (an EDHEC Venture) examining the financial implications of climate transition risks for equity portfolios. Using a model that integrates firm-level revenue and greenhouse-gas emissions data with long-term transition scenarios, the study highlights how policy changes, technological innovation, and shifts in demand associated with the energy transition may affect portfolio valuation.

Key Financial Drivers of Climate Transition Risks

Climate risks can be categorised into physical risks and transition risks. Physical risks stem from direct climate impacts (e.g., extreme weather, sea-level rise). Transition risks arise from policy, technological and market changes required for a low-carbon economy.
For example, the introduction of carbon taxes increases costs for high-emission firms, compressing profit margins, reducing future cash flows and lowering valuations with knock-on effects for equity portfolios heavily exposed to such firms.

Long-term Scenario Analysis

The study fills a gap in existing climate stress tests by including both revenue and cost channels. It analyses an equity portfolio of 1,287 large publicly listed firms (comparable to the MSCI World) under different adverse transition scenarios

Revenue Impact Rivals Operating Expenses

While past literature has emphasised rising operational expenses (due to carbon pricing), this paper finds that losses from demand shifts (declining revenues for firms unable to adapt) often exceed cost-based losses. For instance, under a Net Zero 2050 scenario, utilities may face losses up to 58 % and energy 33 % — primarily due to demand shifts.

Green vs. Brown Activities

Within sectors exposed to transition risks (e.g., fossil fuel extraction, heavy industry), there is wide variability. Some companies may gain (up to 85 % in certain low-carbon segments), others may face steep losses (up to 57 % in high-carbon firms). This underscores that sector-level classification alone is insufficient and that firm-specific exposure matters.

Sensitivity to Scenarios

The study shows that the choice of transition scenario is a major source of variability in losses. In utilities, losses could reach 58 % in a rapid transition scenario, but only 22 % in a delayed one. It highlights the need for investors to evaluate multiple scenarios for tail-risk exposure.

Looking ahead: Bridging the Gap Between Models

The authors argue that relying solely on carbon-intensity metrics is inadequate for assessing transition risk. A forward-looking model that combines firm-specific revenue and cost channels with long-term scenarios offers a more comprehensive view.

Read the full EDHEC Vox article
👉 Climate Transition Risks and Equity Portfolios: A Scenario-Based Assessment of Financial Losses